On April 23, 2020, the U.S. Small Business Administration (“SBA”), in consultation with the Department of the Treasury, issued additional guidance for borrowers and lenders, in the form of Frequently Asked Questions (“FAQs”), concerning the implementation of the Paycheck Protection Program (“PPP”), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”). In particular, FAQ #31, which may impact your organization, articulates a standard that will likely be applied retroactively to all borrowers that applied for and received PPP loans. Specifically, the FAQ states in pertinent part that “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.” Further mandating that “all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant’” by taking “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operation in a manner that is not significantly detrimental to their business.” If a borrower fails to satisfy the requirements of the certification, pursuant to the updated guidance, the borrower “will be deemed by SBA to have made the required certification in good faith” if they repay the loan in full by May 7, 2020 (“Safe Harbor”).
For your reference, the full text of FAQ #31 is set forth below:
“Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
On April 24, 2020, the SBA published a Third Interim Final Rule which supplements the previously posted interim final rules with additional guidance related to sections 1102 and 1106 of the CARES Act, further discussing the Safe Harbor provision contained in FAQ #31, stating:
“5. Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request
Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.”
If you have any questions regarding whether these provisions apply to your PPP application or loan, it is critical that you contact your attorney for legal advice pertaining to the application of FAQ #31 and the Third Interim Final Rule Section 5 as soon as possible to determine how this recently issued SBA guidance could impact your organization.
This communication is intended as a notification of further guidance issued by the SBA and should not be construed as an indication that an applied for, pending, or approved PPP loan does or does not qualify pursuant to the requirements of FAQ #31.
Citrin Cooperman will continue our webinar series on the Paycheck Protection Program next week with representatives from the law firm Crowell & Moring, LLP, on Thursday April 30th, from 12 PM - 1 PM, who will discuss this topic in detail.
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