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SBA PPP Loans: New Guidance Regarding PPP Economic Need Certification Adds Uncertainty

on Wednesday, 29 April 2020 in Covid-19 Information Hub

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act apportioned $349 billion to the “Paycheck Protection Program,” (“PPP”) which authorizes small business loans guaranteed by the Small Business Administration (“SBA”). 

To be eligible for funding, the CARES Act and SBA PPP loan application require, among other things, that each applicant certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

Ultimately, due in part to the relaxed eligibility requirements, PPP loan applications were submitted by many more businesses than the original appropriation could accommodate, resulting in a depletion of the funds within a few short weeks.  As a result, many otherwise eligible businesses were unable to obtain funding under the original appropriation.    

On April 24, 2020, President Trump signed the Payroll Protection Program & Health Care Enhancement Act, which authorized an additional $310 billion in PPP funding. On the same day, the SBA released new guidelines aimed to address eligibility for “large employers” to take PPP loans, including FAQ #31 to its Paycheck Protection Program Frequently Asked Questions1.

FAQ #31 asks, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The SBA answered that all borrowers must adhere to the CARES Act standard, adding that borrowers must take “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.”  The SBA did not provide any guidance as to what constitutes a “large company” or an “adequate source of liquidity” or what “significantly detrimental to the business” means in this context. 

Relatedly, on the same day, the SBA issued a Fourth Interim Final Rule noting the same certification standard; however, it did not provide any further clarification on the issue. The Fourth Interim Final Rule further provides that any borrower that repays the PPP loan by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.

The FAQ and Fourth Interim Final Rule indicate that the borrower must consider whether it has the resources to support its immediate operations. Many borrowers, prior to this latest guidance, took the position that while they did not have an immediate need for funding to support payroll, they expected their revenue to drop in the coming weeks or months; therefore, the application was justified. FAQ #31 states that borrowers must evaluate their need “under the standard established by the CARES Act and the PPP regulations at the time of the loan application.” (emphasis added).

According to the New York Times, on April 28, Treasury Secretary Steven Mnuchin stated the administration would audit any borrower that received more than $2 million in PPP funds and that borrowers may face criminal liability for making certifications that were untrue. 

While the applicability of this latest guidance in practice remains uncertain, borrowers and lenders should be cognizant of these new interpretations of previous standards. Borrowers should, at a minimum, maintain written documentation evidencing their justification for PPP funding and closely adhere to the restrictions on uses of the funds during their covered period. 

If you have any questions regarding the SBA PPP loans, or other aspects of the CARES Act, please contact a Baird Holm LLP attorney.

1 The FAQs continue to be updated on nearly a daily basis. 

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