PPP Loans Less Than $2 Million Deemed Certified in Good Faith; Larger Loans Get Penalty Relief But Remain In Cloud of Repayment Uncertainty

On Wednesday, May 13, 2020, just a day before the deadline to recertify or repay Paycheck Protection Program (“PPP”) loans (previously discussed here), the Small Business Association (“SBA”) made good on its promise to provide further guidance as to what circumstances necessitate repayment with its release of FAQ 46. The new FAQ asks the following question:

“How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The first part of the SBA’s answer reveals a safe harbor for borrowers of PPP loans with an original principal amount of less than $2 million. Borrowers who received loans below this threshold will be deemed to have certified in good faith that the loan was necessary because they “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The SBA also admitted that it has bigger fish to fry, as removing these borrowers from the PPP loan pool will allow it to “conserve its finite audit resources and focus its reviews on larger loans.”

As for the $2 million-and-above borrowers, the FAQ goes on to say that they may still have an adequate basis for making the required good-faith certification depending on their circumstances. If, however, the SBA determines by its review that a borrower lacked an adequate basis for its PPP loan, the SBA will seek repayment of such loan and notify the lender that the borrower is ineligible for loan forgiveness. Further, the SBA will not take administrative enforcement action to collect repayment or make referrals to other agencies if the borrower voluntarily repays the loan after receiving notification from the SBA. The SBA did not offer a specific timeframe within which repayment would prevent administrative enforcement.

Borrowers who did receive loans of $2 million or more should consider setting aside enough funds to make a repayment should the SBA require it, though one wonders whether the SBA could use retention of such reserves as a basis to question the necessity—and hence the qualification—of the loan. That seems like an unfair catch-22, motivating “larger” small businesses to stop paying employees after the PPP measuring period ends. We hope the SBA will provide more clarification to help these businesses avoid that dilemma and to encourage businesses to continue deploying funds to keep their workforces in place after the PPP measurement period ends.

The SBA also released FAQ 47 later in the day on May 13, which automatically extends the repayment date to Monday, May 18, 2020. The stated reason for this extension is “to give borrowers an opportunity to review and consider FAQ 46.” The practical significance of FAQ 47 as it relates to the necessary-ness certification is unclear, given the penalty relief provided by FAQ 46.