SBA Announces New Safe Harbor for Recipients of PPP Loans Under $2M; Clarifies Potential Penalties for Inaccurate or Bad Faith Certification of Need

Updated on May 14, 2020*

On May 13, the Small Business Administration (SBA), in consultation with the Treasury Department, released a new FAQ regarding the SBA’s review of the Paycheck Protection Program’s (PPP) good faith borrower certification that in light of the current economic uncertainty caused by the COVID-19 crisis, the loan is necessary to support the borrower’s ongoing business operations (the need certification) and the potential penalty for failure to make such need certification in good faith.

Prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content and revisions to previously released guidance.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act, which are collected and published in the Kramer Levin COVID-19 Legal Resource Guide, can be found here: COVID-19 Legal Resource Guide.

Overview

• New Safe Harbor for Loans Under $2 Million: Borrowers that, together with their affiliates, received PPP loans with an original principal amount of less than $2 million, will be deemed to have made the need certification in good faith, and the SBA will not focus its finite resources on conducting an audit of such need certifications.
• Penalty for Inaccurate Certification of Need: For borrowers of loans in excess of $2 million who are determined upon SBA review to have misrepresented their need, the SBA will seek the immediate repayment of the loan in full with no forgiveness. While it’s not stated in the FAQ, we would expect such immediate repayment to include accrued interest. Only those borrowers who fail to repay the loan when requested by the SBA as a result of the audit, or who challenge the SBA’s determination of inadequate need, may then be subject to direct SBA administrative action or referrals by the SBA itself to other government agencies.
• Best Practices Update: Despite the SBA’s announcement that it will limit its review to larger loans and will limit the remedy sought with respect to larger loans where borrowers are determined not to have an adequate basis for need, we continue to suggest that all PPP borrowers create a contemporaneous record of their need analysis (including alternative sources of capital not significantly detrimental to the borrower’s business) and follow an internal review process of such need determination.

New SBA Safe Harbor for Loans Under $2M

As summarized in our prior alerts, the SBA recently extended to May 14 the deadline for a recipient of a PPP loan that applied prior to April 24 to take advantage of the SBA’s amnesty safe harbor and return its loan in full if such recipient subsequently reconsidered its PPP need certification and determined in light of subsequent SBA guidance it may have misunderstood or misapplied the need certification.

On May 13, the SBA released FAQ #46, creating a new safe harbor for PPP borrowers that, together with their affiliates (applying the affiliation rules presented in the SBA’s April 15 interim final rule, which we summarized here), received PPP loans with an original principal amount of less than $2 million (irrespective of the date of their PPP loan application or loan disbursement). Such borrowers will now be deemed to have made their need certification in good faith, and the SBA will not expend any of its finite resources on conducting an audit of such need certifications for loans of less than $2 million.

This new safe harbor does not amend the previously established amnesty safe harbor (which amnesty period ends on May 14). Rather, in light of the approaching deadline, FAQ #46 clarifies that borrowers that, together with their affiliates, received PPP loans with an original principal amount of less than $2 million may rely on the new need certification safe harbor that such certification will not, itself, be audited by the SBA. It is important to note that borrowers with loans greater than $2 million may still have an adequate basis for making their need certification, but such determination will be made upon review by the SBA.

FAQ #46 reiterates that all PPP loans in excess of $2 million, and other PPP loans as the SBA may deem appropriate (which would include loans of less than $2 million), will be subject to review by the SBA for compliance generally with program requirements set forth in the SBA guidance and PPP Borrower Application Form. While not entirely clear, the language in FAQ #46 suggests that in the course of such broader review of any loans as the SBA deems appropriate, the SBA may include an examination of the need certifications of PPP borrowers with respect to loans of less than $2 million, which could result in a determination that need was not adequate, despite the newly created safe harbor. We believe the more likely interpretation is that loans of less than $2 million will be subject to review only for eligibility other than the need certification.

Penalty for Inaccurate Certification of Need

Notwithstanding the creation of the new need certification safe harbor for loans of less than $2 million, FAQ #46 reiterates the previously announced audit of loans in excess of $2 million, as well as other PPP loans as the SBA may deem appropriate. However, FAQ #46 now provides that for borrowers of loans in excess of $2 million that are determined upon SBA audit to have an inadequate basis for need, the SBA will seek the immediate repayment of the loan (which we would assume includes accrued interest as of such time) in full with no forgiveness. Only those borrowers that fail to repay the loan when requested by the SBA as a result of the audit, or who challenge the SBA’s determination, may then be subject to direct SBA administrative action or referrals by the SBA itself to other government agencies. As noted above, while FAQ #46 is not entirely clear, we expect the SBA’s intention is to review loans of less than $2 million only in limited circumstances where the SBA determines such review is appropriate, and if reviewed, the SBA will honor the need certification safe harbor in respect of that particular borrower certification.

It is important to note, however, that the new guidance does not preclude a prosecutor from initiating a civil or criminal enforcement investigation or action against a borrower, even one that returns its loan, based on information obtained from sources other than an SBA referral. Nor does it preclude False Claims Act suits by whistleblowers. Compliance with the new guidelines will likely help borrowers defend such claims, and it may make the assertion of such claims less likely. But the guidance set forth in FAQ #46 does not rule out those claims.

Notwithstanding the lack of additional SBA enforcement or referral for borrowers that return their loan (with interest) upon an SBA determination of inadequate need, PPP borrowers that have received loans in excess of $2 million should still reevaluate their need certifications in light of the SBA’s guidance of the past several weeks and can still take advantage of the amnesty safe harbor by returning their loan by May 14 if they believe that they may no longer qualify for the PPP in light of such recent SBA guidance on the need certification, including those borrowers that may have difficulty repaying the loan with accrued interest if the SBA determines need was not adequate.

Those PPP borrowers that sought to avoid SBA scrutiny and the potentially harsh civil and criminal penalties that could result from false need certifications, and have already elected to return or deny receipt of their loan prior to the amnesty safe harbor deadline of May 14, may consider reapplying for a PPP loan in light of the SBA announcement today of a new need certification safe harbor for loans under $2 million and the SBA’s decision to limit the penalty for making an inaccurate need certification to the return of the loan with interest and loss of forgiveness (but without precluding possible civil and criminal claims brought by outside government agencies based on information they may obtain from sources other than SBA referrals).

* Subsequent to publishing this Alert, the SBA released new FAQ #47 extending to May 18 the safe harbor for the return of loans by borrowers who have reconsidered their need certifications, in order to give all borrowers additional time to consider the new guidance and need certification safe harbor released in FAQ # 46 and summarized in this Alert. In this regard, we note that the text of FAQ #47 does not recite the SBA’s previous guidance limiting access to the loan return safe harbor only to borrowers who applied for a PPP loan prior to April 24. This suggests the safe harbor for return of PPP loans by borrowers who determine based on recent guidance that they have misunderstood or misapplied the need certification is available to all borrowers irrespective of their actual date of PPP application.