New Guidance Issued: Required Support for Borrower “Certifications of Necessity” for Paycheck Protection Program Loans
Applicants for Paycheck Protection Program (“PPP”) loans are required to make a good faith certification that “current economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant.” Following several high-profile media stories about how large publicly traded companies were able to obtain PPP loans, on April 23, the Small Business Administration (“SBA”) and the Treasury issued updated FAQs with additional guidance regarding this certification of necessity.
FAQ 31 states that borrowers must make the certification of necessity 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 also provides a limited “safe harbor” for borrowers who are uncertain about their ability to make or support a certification of necessity by providing that, “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 the SBA to have made the required certification in good faith.”
On April 24, the Treasury issued new Interim Final Rules (“IFRs”) that formalized FAQ 31, including the safe harbor provision. On April 28, 2020, Treasury Secretary Steven Mnuchin announced that the government will be performing a “full audit” of every loan over $2 million, prior to forgiveness. As of April 16, 2020, there were at least 25,000 loans of that size.
Although FAQ 31 and the IFRs were apparently issued in response to negative publicity regarding PPP loans made to large public companies, FAQ 31, the IFRs and the audit plan announced by Secretary Mnuchin are not limited to large or publicly traded companies. In light of the heightened scrutiny on borrowers’ certifications regarding the necessity of their loans, it is advisable for borrowers – especially those with loans in excess of $2 million that are subject to audit – to review their circumstances and assess whether loans are “necessary” under the guidelines provided by FAQ 31, or whether the borrower should consider returning the PPP proceeds before the expiration of the “safe harbor” period on May 7.
If a borrower decides to keep the loan proceeds, the borrower must be prepared to explain why current economic conditions make a PPP loan necessary to support the borrower’s ongoing operations, after taking into account the borrower’s current business activities and whether the borrower has access to other sources of liquidity that are both sufficient to support ongoing operations, and not significantly detrimental to the business. The borrower should also be prepared to present documentation to support its explanation. That documentation can be in the form of an internal memorandum, a report to its Board of Directors or an attachment to the application for forgiveness, but in each case, supporting records should be included.
If you need additional information about FAQ 31 or help determining appropriate documentation to support your certification and respond to potential SBA requests for relevant information and documents, contact our attorneys through our website at www.www.smlaw.com or call (707) 524-1900. We are here to help.
Spaulding McCullough & Tansil LLP