Was My PPP Loan “Necessary”? Updated SBA Guidance on Loan Certification

By Jeff Cronn, Drea Schmidt, and Ferdinand Ruplin

Over the past few weeks, many of our clients who have received Paycheck Protection Program (“PPP”) loans have expressed concern about whether they had adequate basis to certify that their PPP loan request was necessary to support ongoing business operations  (which we discussed in our previous client alert).

On May 13, 2020, the Small Business Administration (“SBA”) updated its FAQ Guidance to clarify how the SBA will review a borrower’s certification regarding the necessity of its loan request.

Importantly, the updated FAQs note the following:

  1. Any borrower that, together with its affiliates, 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; and
  2. For borrowers that have received more than $2 million, if the 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, the 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 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.

In short, businesses that received less than $2 million in PPP loan funding are automatically deemed to have met the certification requirement. The updated FAQ further provides that “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.” The guidance strongly suggests that PPP borrowers that received less than $2 million in funding are unlikely to be audited by the SBA.

For businesses that received a PPP loan for more than $2 million, in the event that the SBA determines that the business failed to meet the certification requirement, such business will not be subject to any enforcement action so long as the loan funds are promptly repaid.

The SBA’s latest guidance comes just one day prior to the SBA’s previously announced May 14, 2020 safe harbor deadline, under which borrowers who returned their PPP loan funds would be deemed to have made the certification in good faith. Late on May 13, the SBA further extended the May 14 safe harbor deadline for repayment to May 18, 2020.

This is not the first time that the SBA has issued important guidance at the last minute prior to its own mandated deadline. As you may recall, the SBA issued its initial guidance on the PPP loan program on April 2, 2020, just one day before lenders were allowed to begin accepting PPP loan applications.

If you have any questions regarding your PPP loan, contact your primary Tonkon attorney.

Tonkon Torp corporate finance attorneys Jeff Cronn (503.802.2048, jeff.cronn@tonkon.com), Ferdie Ruplin (503.802.2029, ferdie.ruplin@tonkon.com), Drea Schmidt (503.802.5703, drea.schmidt@tonkon.com), and Betsy Judd (503.802.5769, betsy.judd@tonkon.com) are also available to answer your questions on these matters.

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