SBA, Treasury to Evaluate Borrowers’ Eligibility for PPP Loans Amidst Criticism of Large Companies Obtaining Funds

NOTICE – This article has not been updated to reflect new legislation passed by Congress on December 21, 2020.  That legislation could significantly affect the content of this article.  We plan to update this article during January 2021 to reflect the impact of the new legislation.

April 29, 2020

Mike Batts, CPA

Following criticism of large and high-profile companies obtaining forgivable loans under the Paycheck Protection Program, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza have announced their intent to scrutinize borrowers for eligibility.  Mnuchin and Carranza have stated their intent to perform a “full review” of every PPP loan in excess of $2 million in addition to other loans as appropriate.  They have also stated that borrowers who determine that they were not eligible for a PPP loan may repay the funds by May 7, 2020 and not be penalized.

In an official statement issued on April 28, Mnuchin and Carranza commented:

We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan.  To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.  Regulatory guidance implementing this procedure will be forthcoming.

Secretary Mnuchin has also made reference in public comments to the possibility of criminal charges for borrowers who falsely represent their eligibility for PPP loan funds.

In a “Frequently Asked Questions” document published by the SBA, a Question and Answer (#31) was added on April 23, 2020, stating the following:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Some readers and observers commented that the Q&A reprinted above was intended primarily for large, publicly traded companies.  However, an additional Q&A (#37) was added to the document on April 28, 2020, stating the following:

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31. [Refers to Q&A #31 reprinted above.]

These statements, combined with the lack of clarity on the standards for eligibility, are causing anxiety among PPP borrowers.

The CARES Act, which established the Paycheck Protection Program, included no specific requirements for liquidity or financial health for borrowers to be eligible for PPP loans.  The only provision addressing an organization’s need for the funds in the CARES Act was (and is) a requirement that a PPP loan applicant make a “good-faith representation” that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

The economic uncertainty that existed as of the application date for most PPP loan applicants continues to exist today.  Nonprofit organizations generally have been and are being adversely affected economically.  Houses of worship have been prevented from assembling their congregations for weeks.  Nonprofit schools and many other types of nonprofit organizations have been required to close their facilities, cancel programs, and otherwise reduce the scope of their operations.  And the unknown nature, extent, and duration of the economic impact on people throughout our country and the world means that ongoing giving levels by donors and other sources of revenue and support are highly uncertain.

What does all this mean for nonprofits that have obtained PPP loan funds?

We have been expecting guidance from the SBA and/or Treasury for weeks related to many unanswered questions in connection with the loan forgiveness process.  We anticipate that the guidance, when issued, will address the matter of loan eligibility with more specificity.  As of the writing of this article, such guidance had not yet been published.

Regardless of whether and to what extent official guidance provides any more clarification on the subject of PPP loan eligibility, in light of the developments described above, we believe it is prudent for all PPP loan borrowers to document their basis for making the representation that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”  Documentation should take into consideration factors such as:

  • The nature of the overall economic uncertainty nationally and globally and the unknown extent and duration of the adverse economic impact

  • Physical impact on the organization’s operations, gatherings, meetings, etc.

  • Required closures, shutdowns, etc.

  • Actions the organization has taken to mitigate the economic impact of the COVID-19 pandemic on the organization

  • Uncertainties about the timing for resuming operations safely

  • Surveys and other data regarding the impact of the COVID-19 pandemic on giving and revenue levels for similar types of organizations

  • The organization’s own experiences with impact on revenues

  • Projections and forecasts for ongoing revenues under various scenarios (addressing the fact that the organization’s future revenues are uncertain and continuing adverse economic conditions could have a lagging negative impact on the organization’s revenues)

  • Estimates of potential staff reductions and/or pay decreases that would apply if PPP funds were not available

  • Risk of permanent loss of employees if they are laid off/furloughed or if their pay is reduced

  • Information about staff reductions and/or pay cuts by similar organizations

  • Impact of loss on investments

  • Availability and adequacy of cash reserves

  • Availability of lines of credit

  • Impact on the organization of using its available cash reserves and/or lines of credit – including documentation of any reasons that utilizing such funds could be detrimental to the organization (e.g., using borrowed funds such as lines of credit to fund regular operating expenses with no known source for repayment is not a safe financial practice and could be detrimental to the organization and its ability to retain and continue the pay of employees; reducing cash reserves to an unacceptably low level could be detrimental to the organization and its ability to continue paying employees in light of the continuing significant economic uncertainty)

  • Other factors that are relevant in documenting the organization’s basis for making the required representation

If an organization has applied for or obtained PPP loan funds and is concerned about its position with respect to eligibility, the organization should consult legal counsel for guidance.

In addition to legal considerations, an organization that has obtained or applied for a PPP loan may wish to consider the possibility of public, media, or social media criticism of the organization’s participation in the program.  Recent media accounts and public statements by Treasury officials have highlighted concerns about certain large companies that obtained PPP loans.  It is our understanding (although not abundantly clear) that certain information about PPP borrowers may be made public as a matter of law, including possibly the identity of the borrower and the amount borrowed.

Nonprofit organizations may wish to evaluate the possibility of public disclosure of their participation in the PPP loan program and determine whether such disclosure would affect their decisions regarding participation in the program, pursuing loan forgiveness, or repaying the PPP loan proceeds.



This publication is designed to provide accurate information regarding the subject matter covered. It is provided with the understanding that the material contained herein does not constitute legal, accounting, tax or other professional advice. If such advice or assistance is required, the services of a competent professional should be sought. This document is copyrighted. All rights reserved. Infringement of the copyright may result in civil liability. For permission to reprint, please contact us.