ALERT: PPP Borrowers Can Return Funds by May 7 Without Penalty
An open letter to our Clients and Friends:
During the last week, the Paycheck Protection Program (PPP) has been the focus of national media reports, the Secretary of the Treasury, the U.S. Small Business Administration (SBA) and even the President of the United States.
This alert summarizes the “good faith” certifications required by the PPP loan program and addresses and explains recent statements and guidance made and issued by the Secretary of the Treasury and the SBA. This includes the SBA’s supplemental interim final rule to support its supplemental guidance issued on April 23, 2020.
If you received, applied for, or are considering applying for a Paycheck Protection Program (PPP) loan, you may have some concerns about recent news. Specifically, you may be concerned about PPP eligibility, forgiveness, and government scrutiny. We want to help you stay updated on these PPP developments and provide a couple suggestions.
As background, the PPP loan application includes two critical certifications that the authorized representative of the loan applicant must make. Specifically, the representative of the applicant is required to certify that:
“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
“The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”
As the language quoted in the second bullet point above indicates, the risk of making an inaccurate certification includes potential criminal liability for fraud.
As PPP funding ran short and public opinion shifted, there have been important new developments:
On April 23, US Treasury issued FAQ #31, which states, in relevant part: “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. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that ‘Current 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.” FAQ 31 further states, “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 28, Treasury Secretary Mnuchin announced the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”
On April 28, Treasury issued FAQ #37, which makes it clear that the above-quoted statements in FAQ #31 apply to all businesses.
Key area of enforcement: Does the business need the loan?
Loans under the PPP program are intended to keep struggling businesses afloat during the COVID 19 crisis. The PPP application thus requires a certification that the "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."
While the PPP interim rule did not define necessity, it appears that Congress envisioned supporting companies that may not survive given their limited capital access. This does not mean that the business had to demonstrate likely foreclosure to qualify. Nor does the business need to demonstrate that the business had no other means of obtaining credit. Treasury expressly stated that it was waiving "the usual SBA requirement that [the applicant] try to obtain some or all of the loan funds from other sources."
Although applicants were not required to seek credit elsewhere or otherwise show likely closure before applying, SBA and enforcement agencies will likely be scrutinizing the perceived need for the funding. Post-issuance reviews seem likely to focus on whether the applicant had enough cash reserves, had access to capital from related sources, issued projections showing limited impact during the COVID-19 crisis, or was otherwise in a strong financial position prior to applying for the loan or loan forgiveness.
Whether a company had enough capital to weather the COVID-19 crisis does not necessarily turn on whether it is public or private, as each case must be assessed individually. That said, SBA's non-binding comment does provide insight into the enforcement mindset that is forthcoming.
In its supplemental FAQs issued on April 23 and April 28, SBA urged borrowers to "review carefully the required certification" regarding necessity of the loan. SBA's interim final rule provides borrowers a "limited safe harbor" window of opportunity until May 7, 2020, to return funds that in retrospect they should not have received. SBA indicated it would deem the original certification as made in good faith – in other words, ignore the mistaken certification and forego civil, or even criminal, enforcement down the road – if the funds are returned within that time frame.
If borrowers ultimately elect to retain the funds, they should take affirmative steps now to document their need. Collecting and maintaining records of the company's employee count and hour requirements, pre-COVID-19 operations and subsequent decline, cost of and access to capital, cash on hand, budget forecasts and other metrics of financial performance will help to lessen the inevitable enforcement scrutiny down the road. It may make sense as a prudent practice to prepare an internal memorandum summarizing the nature of the current economic uncertainty – both current and foreseeable – that makes the PPP loan request necessary to support ongoing operations.
Such an analysis might consider the consistency of current and future revenue from business activity, net assets of the business and the availability of cash reserves, access to alternative sources of financing and capital markets, and how detrimental it would be to the company to access these alternative resources. This contemporaneous documentation of the company's justification for seeking a PPP loan – if current, accurate and complete – could provide helpful support for the company's good faith basis for making the "necessity" certification, if this is questioned in the future.
We know this is an important issue and many of our clients are looking for guidance and reassurance.
Unfortunately, nowhere does the current guidance contain the level of detail necessary to address these issues with any degree of certainty. This is incredibly frustrating, as borrowers hear threats of SBA audits, fraud charges, and bad publicity, but they lack clear rules to guide decisions.
So, what should your organization do? While there is much uncertainty around how these requirements will be enforced, we know one critical piece for all borrowers is documentation of your rationale for the loan application certifications. The newly issued guidance indicates the authorized representative of the borrower should be able to assert, in good faith, that the PPP loan was needed after considering at least these factors:
The borrower’s current activity;
The borrower’s access to other sources of liquidity sufficient to support its ongoing operations; and
An evaluation of whether these other options, if any, could be implemented in a way that was not significantly detrimental to the borrower’s business.
If you are audited by the SBA, it will likely be very important to establish that you considered each of those factors in good faith. Beyond that, if you have concerns about the loan application certifications and your eligibility to receive a PPP loan, you may want to involve an attorney who can help you evaluate your options and the corresponding legal implications.
Do not delay taking action, as the May 7, 2020 date to make a decision as to whether to keep or return the funds will be here before you know it.
Whether it is the requirements of the PPP or another topic, we would be pleased to speak with you. We also invite you to leverage our COVID-19 Resource Center. As always, we appreciate the opportunity to serve you and wish you the best during this challenging time.
Note: All information contained herein is effective as of the date of this letter. Guidance is changing quickly and may have been altered since the date of this letter.
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