Paycheck Protection Program: SBA Clarifies How It Will Apply a Borrower’s Good-Faith Certification Concerning the Necessity of a PPP Loan Request

May 13, 2020

By Robert T. Smith, Katherine C. Campbell

With the Thursday, May 14 deadline for repayment of Paycheck Protection Program loans under the previously announced safe harbor looming, earlier today the U.S. Small Business Administration issued FAQ #46 to address how it will apply the required borrower certification regarding the need for a PPP loan. The CARES Act requires that borrower’s certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  

The SBA’s prior guidance on this requirement have generated more uncertainty and unease regarding the PPP loan program than perhaps any other issue. That guidance, for example, imposes vague standards requiring borrowers to consider “their 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.” Many companies, both public and private, have already repaid their loans. On Wednesday, May 6, the SBA extended the safe harbor repayment date from Thursday, May 7 to Thursday, May 14.    

In FAQ #46 the SBA states that for loans of less than $2 million, the borrower will be deemed to have made the certification concerning the necessity of the loan request in good faith. This threshold is based on SBA’s view that smaller companies are less likely to have access to adequate sources of liquidity in the current economic environment as compared to borrowers that obtained larger loans. The $2 million threshold is applied to the borrower and each of its affiliates as determined under 13 CFR 121.301(f). The FAQ notes that a borrower with loans exceeding $2 million may still have an adequate basis to make the required certification depending on the circumstances. 

If the SBA determines that a borrower improperly made the certification, then SBA will seek repayment of the loan and inform the lender that the loan is not eligible for forgiveness. The borrower may then still avoid enforcement action by the agency if it repays the loan after receiving notice of SBA’s determination. Importantly for banks, the FAQ confirms that the improper certification will not affect the SBA’s loan guarantee.  

Please contact one of the attorneys listed above if you have any questions regarding the Paycheck Protection Program.

Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters. 

Katherine C. Campbell is an associate in the Litigation Practice Group at Friday, Eldredge & Clark. She serves as litigation counsel for individuals and businesses in complex business and commercial disputes.

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.