SBA Updates FAQs: PPP Safe Harbor Extended to May 14

On Behalf of Odin, Feldman & Pittleman, P.C. | May 6, 2020 | Business law, COVID-19

The Small Business Association (SBA) late yesterday, May 5, issued additional guidance on the Paycheck Protection Program, the lifeline extended to small businesses under the financial relief package known as the CARES Act. As previously reported, the PPP loan application requires applicants to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”   Then on April 23, the SBA issued FAQ 31 stating “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.”  SBA further provided that any borrower that applied for a PPP loan prior to the issuance of the April 23 guidance, who then repays the loan in full by May 7, 2020, will be given safe harbor and deemed by SBA to have made the required certification in good faith.

The new guidance issued yesterday (in the form of a new FAQ – FAQ 43) extends the safe harbor deadline by a week to May 14 and says that it will issue a revision to its interim final rule explaining how it will review “necessity” certification prior to the new deadline. Affected borrowers considering returning PPP funds are strongly urged to do so before May 14, 2020, but may want to wait to make a final decision after reviewing the additional guidance promised.

The lack of clarity in eligibility requirements, along with FAQ 31 and evolving guidance by the SBA, has caused considerable concern among borrowers, raising questions about whether companies should return funds already received. Borrowers, upon applying for a PPP loan, certified in good faith as to their eligibility and need for the funds. Those borrowers will likely be required to make subsequent certifications and present back-up documentation to the government regarding their initial eligibility and need for the loan, along with representations about, among other things, ongoing compliance with the loan requirements.  Government enforcement often ramps up after national emergencies, and this pandemic will be no different.  On March 20, 2020, the DOJ announced that “Attorney General Barr [had] directed all U.S. Attorneys to prioritize the investigation and prosecution of Coronavirus-related fraud schemes.” Treasury Secretary Steven Mnuchin said on April 28, 2020, that companies receiving PPP loans in amounts of $2 million or more will be subject to full audits, potentially before the loans are forgiven. He also stated that spot checks will happen for smaller loans.

In addition to potential audits, both the initial and subsequent certifications will be subject to scrutiny and could prompt both criminal and civil liability, including liability under the False Claims Act, if ultimately found to be untrue or misleading.  Accordingly, now is the time for any business applying for government assistance to ensure:

  • the accuracy of required certifications, and to know exactly what is being certified;
  • comprehensive analysis was conducted and documentation exists to support the borrower’s initial certifications, including analysis and/or documentation of working capital, revenue, net income or net loss, lack of (or limited access to) liquidity or additional capital, historical results vs current results, adjusted forecasts, etc.;
  • public and internal statements by company representatives, including to shareholders, employees and customers, for example, are consistent with representations made to the government;
  • the applicant’s efforts to restore and/or maintain its workforce, compensation and benefits;
  • compliance with the loan terms and any subsequent certifications and/or claims made to the government; and
  • accurate documentation showing continued compliance with any follow-on requirements for retaining the loan, obtaining loan forgiveness or submitting subsequent certifications.

For small businesses, the risks may be too great and may ultimately deter them from accepting a PPP loan; for others, a PPP loan may be the life raft they need to make ends meet during this pandemic storm. While the new FAQ offers some limited guidance, it provides no objective test or metrics and many questions remain outstanding. Because the government’s audit and fraud recovery efforts will undoubtedly increase in the future, businesses that have not already submitted an application should carefully evaluate whether they can make the “necessity” certification in good faith. Borrowers that submitted their applications prior to April 23 should revisit the necessity certification in light of the latest SBA guidance, and if the borrower is uncertain about its ability to make the necessity certification, it should give serious consideration to repaying the loan before the May 14 safe harbor deadline. If a borrower makes the necessity certification, it should take affirmative steps now to document its need and prepare and maintain detailed records and analyses supporting its determination and use of the loan proceeds.

Contact any member of the OFP COVID-19 Response Team with questions or concerns specific to your organization.

Disclaimer: The information contained herein is provided for informational purposes only and should not be construed as legal advice on any subject matter. This information contained herein is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. Any information contained in this article is not intended to be a substitute for legal counsel. No one should act or refrain from acting on the basis of any content included in this article but should instead seek the appropriate legal advice on the particular facts and circumstances at issue from a properly licensed attorney. The author expressly disclaims all liability in respect to actions taken or not taken based on any of the contents of this article. This article contains general information and may not reflect current legal developments.