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SBA’s Updated PPP Safe Harbor Reduces Compliance Risk

by Lauren Kramer Sujeeth and Stephen L. Bacon

Today, borrowers who have received Paycheck Protection Program (PPP) loans can breathe a sigh of relief: the Small Business Administration (SBA) announced yesterday it will deem the necessity certification on any loan application for under $2 million to have been made in good faith, and it will not pursue enforcement actions against borrowers of over $2 million who are later found to have made an incorrect certification, as long as they repay the loan in full.


The History of the PPP Loan’s Necessity Certification Requirement

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide emergency assistance and healthcare response for individuals, families, and businesses affected by the coronavirus pandemic. The SBA received funding and authority through the Act to establish the new PPP loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency. Section 1102 of the CARES Act required PPP loan applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations of the Applicant.”

This certification requirement has been the source of widespread confusion and varying interpretations, for which the SBA has provided little guidance. After the initial funding for the PPP was exhausted in early April and the media began to scrutinize and, in many cases, deride those recipients perceived to be “too big” to need a small business loan, the SBA published its first guidance regarding the necessity certification. On April 23, 2020, the SBA published a list of frequently asked questions (FAQs) clarifying that borrowers needed to examine “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” in order to make the requisite certification in good faith. See PPP FAQ, Question 31. The SBA also established a safe harbor for borrowers who may have misunderstood the certification requirement: if the borrower repaid the loan by May 7, the SBA would deem it to have made the certification of necessity in good faith. Id.

On April 29, 2020, SBA added a new FAQ regarding this necessity certification. This FAQ stated that SBA would “review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application” to determine, among other things, whether the necessity certification was accurate. See PPP FAQ, Question 39.

With the May 7 deadline looming, and no additional guidance from SBA available, borrowers began to get nervous. On May 5, 2020, the SBA extended the safe harbor period until May 14 and suggested that additional guidance would be issued prior to the new deadline. See PPP FAQ, Question 43. An interim final rule codifying this guidance was published on May 8, 2020.

Yesterday, on the eve of the extended safe harbor deadline, SBA finally posted its updated guidance to include a more robust safe harbor for PPP loans under $2 million. See PPP FAQ, Question 46. For any loans under $2 million, the borrower “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” For loans greater than $2 million, if SBA finds 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.”  Importantly, however, “[i]f 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.” Finally, SBA extended the safe harbor repayment deadline until May 18. See PPP FAQ, Question 47.


What Borrowers Can Learn Based On This New Guidance

The new safe harbor provides reassurance to smaller borrowers with relatively limited resources who may have been on the fence about whether it was necessary to obtain a PPP loan. It reflects a recognition on the part of SBA that borrowers with loans under this threshold are less likely to have access to sources of liquidity. Moreover, these borrowers no longer face the potential that they will be confronted with an expensive audit and risk False Claims Act liability based on the necessity certification. The $2 million threshold also reflects the reality that SBA will focus its audit efforts on larger loans.

Larger companies should also be comforted by the new guidance. While SBA has provided little information about what documentation is sufficient to form the basis of the certification, the new guidance will allow those borrowers to avoid punishment in most situations where the necessity of a loan is debatable, as long as the loan is repaid if SBA determines it was not necessary.

SBA’s latest guidance is a step in the right direction towards reducing the uncertainty and compliance risks associated with PPP’s certification requirement. Nevertheless, it remains unclear how SBA will actually identify instances where a PPP loan was not “necessary” under the CARES Act. SBA will need to publish additional guidance to flesh out exactly how this determination will be made during its review and audit of PPP loans.

If you have questions regarding PPP compliance or other legal issues, the team of attorneys at Rogers Joseph O’Donnell is here to assist you. We have formed a taskforce dedicated to helping businesses navigate the ever-changing legal and regulatory landscape during this unprecedented time.


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