COVID-19 Resources

New PPP Loan Guidance: Borrower Certification Requirements and New Safe Harbor

Written by Adam West, CPA on May 20, 2020

It was no surprise that the first $349 billion of PPP funds were exhausted in just two weeks. Demand for the second wave of PPP funding, $310 billion approved by Congress on April 23, 2020, has slowed down considerably. As it has been widely reported, there was a public outcry when many small businesses missed out on the first wave of PPP funding. This prompted the U.S. Small Business Administration (SBA) and the Department of Treasury (Treasury) to issue new guidance that, at times, appeared to introduce a new need-based test to the borrower economic uncertainty certification.

The SBA released FAQ #31 reminding all borrowers “to carefully review the required certification that the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA instructed borrowers that this certification must be made in good faith after “taking 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.”

This instruction, coupled with statements made by public officials, led many borrowers to question whether they were eligible for the PPP, despite the fact they felt the current economic uncertainty made the loan request necessary to support their ongoing operations.

To the relief of many borrowers, on May 13, 2020, the SBA provided much needed guidance by updating its Frequently Asked Questions and adding FAQ #46, which provided clarity on the SBA’s view of the borrower certification requirements and a new safe harbor for applicants with PPP loans less than $2 million.

According to FAQ #46, “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.” The SBA stated that “borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. If the 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.”

The SBA went on to say, “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.”

The full text of FAQ #46 is listed below.

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

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.  

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.  

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. 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. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.” 

We recommend that borrowers continue to maintain contemporaneous documentation to support the loan request and document eligible PPP expenses during the eight-week covered period.

(We’ve put together a tracking document here).

If you have questions about PPP loans and the new developments mentioned above, contact your Warren Averett advisor, or request one of our team members to reach out to you.

This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.

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