SBA Announces Much-Anticipated Guidance on Safe Harbor Repayment of PPP Loans

It is too late apply under the CARES Act Paycheck Protection Program, but another chance to borrow has been rolled out under new legislation.

Businesses impacted by the COVID-19-related stay-at-home orders have turned to Paycheck Protection Program (“PPP”) loans, authorized by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to help weather the current unpredictable business environment. The Small Business Administration (“SBA”) Borrower Application Form for a PPP loan requires certification by the applicant that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

On April 23, 2020 the SBA and U.S. Treasury Department reminded borrowers of this required certification and stated that borrowers who did not make the certification in good faith will nevertheless be deemed to have given the certification in good faith if the loan is repaid in full by May 7, 2020 (the “safe harbor”).

On April 29, 2020 the SBA and Treasury announced that it would review all PPP loans in excess of $2 million, in addition to other loans “as appropriate,” to ensure that they are limited only to eligible borrowers who have an actual need for the loan. The SBA further stated that additional guidance relating to the safe harbor would be forthcoming. On May 5, 2020 the safe harbor repayment deadline was extended to May 14, 2020.

On May 13, 2020, one day before the safe harbor repayment deadline, the SBA and Treasury finally released the promised guidance on how it would review good faith certifications made on applications for PPP loans. Under the new guidelines, “[a]ny borrower that, together with its affiliates, 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.” This provides a welcome sigh of relief for borrowers who have received PPP loans of less than $2 million, since it removes the possibility of these borrowers’ loans being automatically reviewed by the SBA. Such borrowers can now move forward with economic certainty knowing that their certifications are automatically considered to have been made in good faith.  For larger borrowers who have received loans of $2 million or greater, the new guidance clarifies some aspects of how the loan review will be conducted.

First, the a borrower’s loan amount will be considered “together with its affiliates”—meaning that borrower entities that are related, either due to common ownership (i.e., brother-sister entities) or through parent-subsidiary structures, will each be reviewed if the collective loan amounts exceed $2 million, despite being comprised of loans that are individually below the threshold.

Second, the SBA and Treasury state that the SBA will examine whether borrowers who took loans in excess of $2 million had an “adequate basis [for making the certification] based on their individual circumstances in light of the language of the certification and SBA guidance.” If, based on this subjective standard, the SBA finds that a borrower did not have an adequate basis, it will require repayment of the entire PPP loan and will inform the lender that the borrower is not eligible for loan forgiveness.

Finally, if the SBA’s review does yield a finding of “no adequate basis,” and upon notification thereof, the borrower repays the loan in-full, then the SBA will not pursue any further administrative enforcement or make referrals to other agencies related to the loan request. Effectively, this means that borrowers of $2 million or more who are uncertain of whether to repay can take a wait-and-see approach. If a borrower is eventually notified that it is deemed to have not given the required certification in good faith, there will be no repercussions for such borrower if it repays the entire loan balance with interest.  That being said, any borrower who currently knows or believes that its loan certification was not given in good-faith should make the full repayment by the safe harbor deadline because the SBA and Treasury have not explicitly stated that fraudulent or other wrongful behavior will go unpunished even if the loan is repaid in full upon demand therefor.

Borrowers with PPP loans totaling less than $2 million may breathe a sigh of relief.  Borrowers of $2 million or more may wait for an SBA loan review and repay the PPP plus interest, without penalty, if the SBA requires.  Should you have specific questions about your PPP loans or other related matter, please contact your Carlile Patchen & Murphy LLP attorney.

¹ As of May 13, the safe harbor was extended until Monday, May 18, 2020