The Paycheck Protection Program (“PPP”) loan was intended to sustain small businesses and preserve employees’ jobs by helping cover essential operating expenses so businesses could stay afloat and retain employees during the COVID-19 shutdown.
When banks started accepting applications shortly after the program opened on April 3, 2020, there were many ambiguities regarding who should qualify for the program, and in computing the maximum loan amount. None of these ambiguities slowed the rush to file applications and the funds from the first round of funding ran out in days. The second round of funding opened on April 27, 2020 and remains open at the time of this publishing.
On April 28, 2020 Treasury Secretary Steven Mnuchin issued a warning that the Treasury Department will be conducting audits and spot checks to verify that those who received loans through the program were eligible to apply.
The question of eligibility arises from the certification in good faith that ‘current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.’ The meaning of ‘necessary’ is unclear and now directly in question. If the loan is deemed not ‘necessary’ criminal fines of up to $1,000,000 and imprisonment for up to thirty years can be imposed.
The Treasury Department has addressed questions on the good faith certification through their FAQ originally issued on April 28, 2020, which continues to be updated. For any companies unsure if they would qualify if audited, the SBA announced a grace-period for businesses that do not ‘need’ the loan via ‘Question 45’. Companies who return the loan proceeds by May 14, 2020 (extended from the original date of May 7, 2020) can avoid any criminal consequences related to taking a PPP loan unnecessarily. This grace period has since been extended via ‘Question 47’ through May 18, 2020. This extension of time to return the loan proceeds is to allow borrowers the opportunity to review the guidance issued May 13, 2020.
If there is any uncertainty whether upon audit of your PPP loan application that your business would not meet the certification in good faith, you may want to consider returning the loan proceeds by May 18, 2020. If the loan proceeds are returned within this grace period, you will be deemed by the SBA to have made the required certification in good faith.
The guidance that should be reviewed carefully before making this decision was issued on May 13, 2020. In their answer to ‘Question 46’ the Treasury Department has provided a safe harbor, whereby any borrower that 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 has determined that the 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 borrower that obtained larger loans.
In addition to this, guidance is also available for borrowers with loans greater than $2 million that do not meet the safe harbor threshold. If the SBA determines in the course of its review that a borrower was not eligible for the PPP Loan, the 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 then repays the loan after receiving such notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination.