Safe Harbor for Borrowers Who Received PPP Loans in Principal Amount Less than $2 Million

On May 13, 2020, the SBA issued its much anticipated guidance (copied below) as to how the SBA will evaluate whether applicants for a CARES Act Paycheck Protection Program (“PPP”) Loan have certified in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” All applicants that received loans in principal amount less than $2,000,000 will automatically be considered to have made the certification in good faith.  For loans greater than $2,000,000, the worst that SBA will do is deny forgiveness for the entire PPP Loan thereby requiring full repayment by the borrower, but there will be no penalties or sanctions. The guidance does not mention a repayment period or interest rate for the loans that are denied forgiveness, but we would assume that the previous terms (maturity set at two years from the date the PPP Loan is made and 1% interest) would continue to apply.

Although guidance indicates a less aggressive approach by the SBA to evaluate certification, borrowers should still consider documenting the process the company undertook to determine the need to apply for a PPP Loan (e.g., by ratifying resolutions or otherwise).

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, 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. (emphasis added)

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(emphasis added).  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(emphasis added).   SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

James Ryan
Service Affiliation
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