Law Bulletin | May 13, 2020

New Guidance for PPP Loan Holders Concerned About the Certification of Necessity

In our May 1, 2020 Bulletin, we reported on the Small Business Administration’s increased scrutiny of Paycheck Protection Program (“PPP”) borrowers’ certifications that their PPP loans were “necessary,” and Treasury Secretary Mnuchin’s announcement that the SBA will audit every loan over $2 million.  With this news, many businesses became concerned about their ability to demonstrate the necessity of their loans, and in turn, are considering whether they should keep the loans or return them pursuant to the safe harbor provision included in FAQ 31, which allows borrowers to return their loans by May 14 (an extension of the original May 7 deadline).

This morning, the SBA/Treasury issued updated Frequently Asked Questions for Lenders and Borrowers (“FAQs”), adding much needed guidance regarding the certification of loan necessity.  In a move that will greatly relieve the many PPP borrowers who have been trying to decide if they should return their loans before the May 14, 2020 deadline, FAQ 46 provides a new safe harbor for all loans with a principal amount of less than $2 million.  Pursuant to FAQ 46, borrowers with loans of less than $2 million will be deemed to have made the certification concerning the necessity of their loan request in good faith.  Accordingly, when they apply for forgiveness of their loans, borrowers with PPP loans of less than $2 million will not be required to explain or document their need for the loan.

FAQ 46 explains that the SBA determined that this safe harbor is appropriate because borrowers with loans of less than $2 million are less likely to have access to alternate, adequate sources of funds.  More tellingly, perhaps, FAQ 46 notes that given the large volume of PPP loans, this new safe harbor will allow the SBA “to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”

FAQ 46 also has good news (albeit not quite as good) for borrowers with loans greater than $2 million, providing that although such loans will be subject to SBA review, borrowers may still have an adequate basis for making the required good-faith certification, regardless of the amount of the loan.  Also, if the SBA determines that a borrower lacked an adequate basis for the required certification, the SBA will seek repayment of the outstanding PPP loan balance and the loan will not be forgiven, but as long as the borrower repays the loan, the SBA will not seek civil penalties or pursue criminal charges against the borrower.

In sum, pursuant to FAQ 46: (1) borrowers with loans of less than $2 million will be deemed to have made the required certification regarding the necessity of the loan in good faith; and (2) borrowers with loans greater than $2 million will have their loans reviewed, but if the SBA concludes that such a borrower did not have a sufficient basis for making the certification of necessity, the SBA will not seek civil penalties or pursue criminal charges as long as the borrower repays the loan.

If you need additional information about the FAQs 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 or call (707) 524-1900.  We are here to help.

Terry Sterling

Spaulding McCullough & Tansil LLP