SBA Releases New FAQ on “Necessity” Standard and Good Faith Obligation

On May 13, 2020, the SBA released new guidance in consultation with the Department of the Treasury. The guidance is set forth below:

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,20 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.2

What this means is that any borrower who received loans of less than $2 million will be presumed to have made their certification in good faith. The SBA will not likely second guess a borrower’s determination as to the certification and their interpretation of the terms “economic uncertainty”, “necessary” or “ongoing operations”. This is good news for borrowers, because the vague standard was creating a great level of discomfort. Now there exists some level of certainty for smaller borrowers.

Also helpful in the new guidance is that upon review by the SBA, regardless of the loan size, if the SBA disagrees with your certification at a later date, they will not pursue an enforcement action or refer your application to the Department of Justice or another agency as long as you repay the loan. I can only assume that the SBA would still make referrals for outright fraud.

This guidance should help smaller borrowers sleep a little better. The only risk that I see remaining are public relations risk and repayment risk for borrowers that have received less than $2 million.

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