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May 15 2020

SBA Provides Guidance Regarding Good Faith Certification of PPP Loan Requests

By: Michael J. Huff

The Paycheck Protection Program, a lending program created by the CARES Act for purposes of providing borrowers relief from the financial impacts of COVID-19, requires each borrower to make a good-faith certification that the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the borrower. 

In a Q&A released on April 23, the Small Business Administration (“SBA”) indicated that businesses need to take 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 before making the required certification.  The SBA further indicated it is unlikely that a public company with substantial market value and access to capital markets would be able to make the certification in good faith.  Companies which make the certification need to be able to demonstrate to the SBA the basis for the certification.

This Q&A left significant questions in the marketplace, with borrowers being unsure what constituted “uncertainty” which would make the loan “necessary” from the SBA’s perspective and what access to liquidity was disqualifying because it would not be detrimental to the business, especially given the provision in the CARES Act that provides a borrower does not need to be unable to obtain credit elsewhere, which is the requirement typically applicable to the SBA loans.

On May 13, the SBA provided additional guidance regarding how the SBA will review borrowers’ good-faith certification regarding the necessity of their loan request.  As a threshold matter, the SBA created a safe harbor where borrowers who received PPP loans in an original principal amount of less than $2 million will be deemed to have made the certification regarding the necessity of the loan request in good faith.  While affiliation rules apply to this safe harbor, most borrowers who qualified for PPP will benefit from this safe harbor.

The SBA has indicated it will review loans of $2 million or greater for compliance with requirements set forth by the SBA to determine if the borrower had an adequate basis for making the certification.  If the SBA determines a borrower lacked an adequate basis for the certification concerning necessity of the loan, the SBA will seek repayment of the loan.  If the loan is repaid, the borrower will not face an administrative enforcement action by the SBA.  Thus, an ineligible borrower may be able to avoid penalties imposed by the SBA, although, as indicated above, uncertainty continues to exist regarding some of the standards the SBA will use to analyze the good faith certification made by a borrower receiving a loan of $2 million or greater.

Contact your Mika Meyers’ attorney to discuss concerns related to eligibility for PPP loan.