The SBA released new guidance today on the topic of FAQ31 with FAQ46 (captured below in full). The guidance comes just one day before the 5/14/2020 deadline for PPP borrowers to return loan proceeds in full if they are concerned over the FAQ31 attestation language expansion.
This guidance has been anxiously awaited by all borrowers, but particularly by those with loans in excess of $2 million which will be subject to mandatory audits previously announced by the Treasury Secretary. In addition, many borrowers are well underway with expending their loan proceeds on approved uses including staffing decisions based on the receipt of the PPP loan.
Loan Amounts under $2 million
This new guidance has some very positive outcomes for most borrowers. Primarily, if the loan amount is less than $2 million (when taking into account affiliation rules of related companies that may have received separate loans), the borrower(s) is/are automatically granted Safe Harbor in regards to the expanded attestation question in FAQ31. In other words, borrowers no longer need take into account access to other sources of liquidity or consider the detrimental impacts to the business of using this liquidity. This will provide a sigh of relief for most small businesses that received these loans.
Loan Amounts over $2 million
It has been noted that over 25,000 borrowers nationwide received loans over the $2 million threshold. These borrowers may still seek Safe Harbor if they return the loan by tomorrow (5/14/2020), but for most that elect to keep the loan, they will still be subject to a mandatory audit. The SBA noted that if borrowers choose not to seek Safe Harbor they may still have a case for keeping the loan proceeds.
It is unclear if this SBA audit is to occur within the 60 days after the borrower provides the necessary support to request loan forgiveness (as is provided for within the Cares Act) or some period much longer. Assuming it is within 60 days, the first test will be to determine if the borrower is eligible for any forgiveness at all, under the expanded attestation in FAQ31 and now FAQ46. If the SBA deems that the borrower fails this test, then this new guidance below indicates that the SBA will not "pursue administrative enforcement or referrals to other agencies" so long as the loan is paid back upon receiving notice from the SBA of this determination. In addition, the Bank is still entitled to its SBA guarantee of the loan.
If it is determined that the borrower is not eligible for forgiveness, this determination would occur after the covered period is over. For borrowers who took large loans to maintain or rebuild payrolls and who may have already spent all or most of the loan proceeds on approved expenses, the question is: how much time is there to pay the loan back? It is unclear at this time if it is due immediately upon SBA request or face "administrative enforcement" or whether the borrower would have the full 2 years to pay back the loan.
Even with this additional guidance, questions remain: Is the SBA trying to force borrowers with access to cash and available lines of credit larger than the PPP loans to use those funds to pay back the loans? Will the decision be a simple math equation in the audit or will the company-specific circumstances be the determining factor in deciding forgiveness? It is very unclear how the auditors will make this determination, but documentation of how the borrower meets the expanded attestation is as important as ever for these larger borrowers. Equally important may be the need to maintain access to liquidity in an amount of the PPP loan that was already spent. For those borrowers that do not have enough liquidity to pay back the PPP loans that they spent as intended, will they automatically pass this attestation test and be offered forgiveness? That remains to be seen.
Here is the FAQ46 from the guidance today, 5/13/2020
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.
(20) For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).
(21) Question 46 published May 13, 2020.
