SBA and the Department of Treasury Issue New Guidance Regarding Eligibility for Loans Under the Paycheck Protection Program
On April 29, 2020, the SBA and the Department of Treasury (DOT) published the additional guidance regarding the certification of “necessity” a company makes on its application for a loan under the Paycheck Protection Program (PPP) of the Cares Act.
On its application, borrowers must certify in good faith that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
After Congress passed the Paycheck Protection Program and Health Care Enhancement Act, which, among other things, increased PPP funding by $310 billion, and following public backlash in response to certain public companies receiving large PPP loans, the SBA and the Department of Treasury (DOT) issued several updates to the PPP frequently asked questions page, adding Questions/Answers 31, 37, and 39, as follows:
31. 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. (Emphasis added).
37. 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.”
39. Question: Will SBA review individual PPP loan files?
Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, 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. Additional guidance implementing this procedure will be forthcoming.
On April 24, 2020, the SBA issued a Fourth Interim Final Rule, creating a limited “safe harbor” as to the certification of “economic need,” providing that any borrower that applied for a PPP loan prior to the date of the rule and repays the loan in full by May 7, 2020, will be deemed to have made the certification as to “economic need” in good faith. On May 5, 2020, the SBA published FAQ 43 acknowledging the uncertainties of the “good faith certification” and extending the repayment date for the safe harbor to May 14, 2020. There is no need to apply for this extension. FAQ 43 also states that the SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Given these developments, businesses who have or plan to apply for a PPP loan should reevaluate the certification of necessity made in the application to ensure the certification complies with the new guidance. Further, current and potential borrowers should remain up-to-date with respect to additional guidance that may be issued prior to May 14 and thereafter.