SBA Issues Additional Guidance on PPP “Necessity” Certification – No Extension of Safe Harbor Deadline of May 14, 2020

COVID-19 Update

Date: May 13, 2020

Key Notes:

  • The safe harbor deadline for return of PPP loans remains May 14, 2020.
  • Borrowers with PPP loan amounts of less than $2 million (tallied across all affiliates) will be deemed to have made the “necessity” certification in good faith.
  • For borrowers with PPP loans greater than $2 million, if the SBA deems their “necessity” certification not to have been made in good faith, those borrowers may repay the loan, and if they do, the SBA will not pursue penalties or refer the matter to other agencies.

Our prior client updates, Paycheck Protection Program Loans and Certifying “Necessity”: New Guidelines Highlight Potential Civil and Criminal Exposure Related to Obtaining PPP Loans and SBA Extends Safe Harbor Deadline from May 7 to May 14, 2020 for Return of Paycheck Protection Program Loan Funds and Promises Additional Guidance on the “Necessity” Certification Prior to New Deadline, detailed the additional guidance issued by the Department of the Treasury regarding the required certification of need for Paycheck Protection Program (PPP) loans, Treasury’s intent to audit all recipients of PPP loans of $2 million or more and the potential civil and criminal liability that borrowers could face if it is determined they failed to certify in good faith that their PPP loan request is “necessary.” The Small Business Administration (SBA) has now issued its promised new guidance on the required certification of need. However, the new guidance did not extend the safe harbor deadline for return of PPP loan proceeds and that deadline remains May 14, 2020.

The new guidance provides two primary rules. First, borrowers with loans of less than $2 million dollars (aggregated with affiliates) will be deemed to have made the required certification of necessity in good faith. Accordingly, the SBA will not be reviewing or evaluating the certification of need made by borrowers with PPP loan amounts of less than $2 million dollars. That $2 million threshold will be calculated by adding together all PPP loans received by a borrower and any other borrower deemed to be an affiliate based on prior guidance and existing SBA regulations (see CARES Act: Paycheck Protection Program – Forgivable Loans for Small Businesses).

Second, while borrowers with loan amounts of more than $2 million will still be subject to an audit to determine compliance with all PPP requirements, if the SBA determines that the “borrower lacked an adequate basis for the required certification concerning the necessity of the loan request,” the SBA will notify the borrower and the lender and seek repayment of the loan. If the borrower repays the loan upon receipt of that notice, the 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.” The guidance further clarifies that any determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee. Accordingly, it appears from this new guidance that, so long as the borrower repays the loan upon notice that the SBA has determined the borrower’s necessity certification was not made in good faith, the SBA will not pursue any further civil or criminal fines or penalties. These limited penalties are specific to review of the necessity certification only, and do not appear to apply to other false statements in the loan application or misuse of PPP funds. Similarly, the SBA’s notice that they will not pursue penalties or refer the matters to other governmental authorities does not necessarily insulate borrowers from all liability from other sources.

While the guidance does not specifically state what the repayment terms would be in the event the SBA requests repayment after an audit, borrowers could fairly assume that a prompt, lump-sum payment, including all accrued interest, would be required. The guidance speaks in terms of loans less than or greater than $2 million, but we recommend any borrower with a loan in the exact amount of $2 million prepare for an audit and assume it will not receive the benefit of the deemed good faith certification of need.

This additional guidance also does not provide borrowers with aggregate loans in amounts in excess of $2 million any further guidance as to what the SBA will consider when evaluating whether the certification of need was made in good faith. Accordingly, all recipients of PPP loans in the amount of $2 million or more (including all loans to affiliates) should carefully consider the ramifications of retaining PPP loan funds as outlined in our prior client update. These recommendations include close review of the Treasury Interim Final Rules on the PPP and related guidance, and reconsideration of the necessity of the PPP loan in light of all available guidance by the borrower’s management and board. In doing so, loan recipients should clearly document their analysis and rationale supporting the necessity of the loan, taking into account the borrower’s current business activity and its ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business. Failure to certify necessity in good faith will give rise to denial of PPP loan forgiveness.

Keep Abreast of What’s Next

Thompson Hine is staying abreast of continuing developments related to the CARES Act and the PPP. Please visit our COVID-19 Task Force page for details on this and other information and resources.


For more information, please contact:

Jennifer L. Maffett-Nickelman

Riccardo M. DeBari

Suzanne C. McNabb

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