CLIENT ALERT: SBA Eases Scrutiny of Paycheck Protection Program Loans

By , Published On: May 13, 2020

Today, the Small Business Administration (SBA) issued new guidance relaxing anticipated scrutiny that borrowers were expecting under the Paycheck Protection Program.  In connection with a Paycheck Protection Program loan, a borrower must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

On April 23, the SBA issued guidance which caused consternation among borrowers—namely, that “[b]orrowers 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.”  The SBA also stated that it would review every loan greater than $2 million to assess whether the borrower met this certification.

This left borrowers in an uneasy position as future scrutiny appeared likely—yet guidance from the SBA regarding how a borrower should analyze their need-based certification was lacking.  Today, the SBA issued additional guidance that serves to soften its prior statements.  In FAQ 46, the SBA announced a “safe harbor” that would apply to loans under $2 million.  The SBA will deem a borrower’s certification to have been made in good faith for any loans (including affiliates) under $2 million.

With regard to loans over $2 million, the SBA will still review and may require repayment, but it will not refer individual cases to the Department of Justice or other agencies, so long as the borrower repays the loan in full upon notification by the SBA.  This guidance does not entirely eliminate the potential risk, as the Department of Justice, or a whistleblower, may separately pursue an action in connection with a false certification, however it does serve to reduce that risk.

We anticipate further guidance from the SBA will be coming on the forgiveness process, and we will update you accordingly.

For more information on PPP loans, please do not hesitate to contact FTLF attorneys: