On Wednesday, May 13, 2020, the Treasury Department added Question 46 to the Frequently Asked Questions regarding the Paycheck Protection Program (“PPP”). Question 46 and its answer are printed below. Click here for a link to the full FAQs.

This question clarifies the process for certifying that the PPP loan is needed to support the ongoing operations of the applicant due to current economic uncertainty. As noted below, for loans of less than $2,000,000 to a borrower and its affiliates, a borrower will be deemed to have made the required certification concerning the necessity of the loan request in good faith, and no further action or additional standard of review is required at this time.

For borrowers with more than $2,000,000 in PPP loans, the SBA has stated that these loans will be reviewed by the SBA to determine that the loan is in compliance with all rules. For those concerned that there might be penalties if the SBA determines that the loan request was not made in good faith, the SBA also clarified that if that determination is made after the SBA review, although the loan will not be subject to forgiveness, if the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

This clarifies some uncertainty that had been raised by the Treasury that they were looking into further clarifying the circumstances where a borrower which has adequate access to liquidity (namely publicly held companies) should not be seeking PPP loans. As you may know, May 18, 2020, is the deadline to return any loans without penalty if you believe that you have not made the certification in good faith.

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, 20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.