The SBA Expands the Safe Harbor for PPP Loans and Extends The Repayment Deadline to May 18, 2020

On May 13, 2020, SBA issued new guidance with respect to a borrower’s good faith certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” as well as extending the safe harbor deadline for repaying PPP loans to May 18, 2020.  FAQ Nos. 46 and 47.  (The full text of these FAQs appear below.) In reviewing PPP loans with respect to a borrower’s certification of the need for the loan, SBA announced that it will apply the following safe harbor:  “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 cited three reasons for establishing this safe harbor:  (1) borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment; (2) it will promote economic certainty as borrowers with more limited resources endeavor to retain and rehire employees; and (3) given the large volume of PPP loans, it will enable SBA to conserve finite audit resources and focus audits on larger loans where compliance reviews may yield higher returns.

While emphasizing that borrowers with loans greater than $2 million that do not satisfy the safe harbor may still have an adequate basis for their good faith certification, FAQ No. 46 also refers to SBA’s previous statement that it will review all PPP loans in excess of $2 million, and other PPP loans as appropriate, for compliance with program requirements.  If the SBA review finds that a borrower lacked an adequate basis for its certification of economic necessity, it will seek repayment of the outstanding PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, then SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning economic necessity of the loan request.

What does this mean?

First, PPP borrowers who receive less than $2 million are presumed to have made their certifications of economic necessity in good faith.

Second, in the absence of other circumstances warranting review, PPP borrowers who receive less than $2 million will not have their applications for loan forgiveness subject to review for economic necessity by SBA.

Third, the safe harbor is afforded to borrowers that, “together with their affiliates,” received PPP loans with an original principal amount of less than $2 million.  This language is footnoted with the statement that “a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).”  Careful reading of the text suggests, therefore, that the safe harbor applies only insofar as the aggregated loans of a borrower and its affiliates are less than $2 million.  In other words, if a borrower received $1.5 million in loan funds, and its two affiliates each received $1 million, neither the borrower nor the affiliates would be eligible for the safe harbor.

Fourth, both the safe harbor and the protection from administrative enforcement or referral to another agency if the loan is repaid are limited to the certification of economic necessity, and not to the other certifications, including eligibility, that are required in the application.  Neither the safe harbor nor the safety afforded by repayment of the loan apply to other factors, such as the failure to factor affiliation rules, or false statements or fraud in the application.

Fifth, at least with respect to the certification of necessity, which is “based on the borrower’s individual circumstances in light of the language of the certification and SBA guidance”, it appears that SBA is currently inclined to be flexible.  Thus, borrowers who do not qualify for safe harbor protection, and whose necessity certifications are later found to be lacking, may obtain a reprieve from further government action by repaying the funds.

With the expansion of SBA’s safe harbor regarding the economic necessity of PPP loans, the SBA also announced in FAQ No. 47 that it is automatically extending the deadline to repay loans received by borrowers from May 14, 2020 to May 18, 2020. If a PPP loan is repaid by this extended date, the borrower’s certification as to economic necessity will be deemed to be made in good faith.

The full text of FAQ Nos. 46 and 47 is as follows (https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf):

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

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: 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.

47. Question: An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?

Answer: Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.