Further SBA Guidance on Necessity Certification for PPP Loans

by Aman Badyal, Andrew D. McCarthy

Small Business Administration (SBA) guidance published on May 13, 2020 adds clarity to the “necessity” certification that borrowers were required to make when applying for Paycheck Protection Program (PPP) loans.  According to this guidance, borrowers that received PPP loans of less than $2 million will be deemed to have made the necessity certification in good faith.  As to borrowers with loans greater than $2 million, if the SBA notifies the borrower that the SBA has determined that the borrower lacked an adequate basis for the necessity certification, the borrower will be able to avoid enforcement action by repaying the loan.

Background

Every PPP loan application requires that the borrower certify that current “economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  In April 2020, Treasury Secretary Steven Mnuchin and the SBA announced that the SBA would audit select PPP loans, including all loans in excess of $2 million.  These audits will include an examination of whether the aforementioned necessity certification was made in good faith.  Our previous post on this topic is available here.

SBA Guidance

Borrowers are likely to find the following two portions of the May 13 guidance especially significant:

Safe harbor for <$2 million borrowers: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

Notice-and-cure opportunity for other borrowers: “SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

Our Observations

As the necessity certification is rather subjective, many PPP borrowers were rightfully concerned over potential second-guessing by the SBA.  Borrowers with loans of less than $2 million should take comfort in this new guidance.  PPP borrowers with loans of $2 million or more can avoid enforcement actions by repaying loans in the event of an audit.  However, because the funds will likely be spent prior to an audit, larger borrowers must still consider the prospect of a review of whether the loans were “necessary” and factor that into their spending plans.  These borrowers would also be well advised to document their company’s need for liquidity and the impact of Covid-19 on their industries in general.  As a final note, borrowers should be advised that the May 13 SBA guidance does not bind other federal agencies.