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Paycheck Protection Program (PPP) Loan Audit Update – May 13, 2020

On May 13, 2020, the U.S. Small Business Administration provided an update to the PPP Frequently Asked Questions with the inclusion of Question 46: “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

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On May 13, 2020, the U.S. Small Business Administration provided an update to the PPP Frequently Asked Questions with the inclusion of Question 46: “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

On May 13, 2020, the U.S. Small Business Administration provided an update to the PPP Frequently Asked Questions with the inclusion of Question 46:

Question 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, 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.

Takeaways for Question 46

  • PPP loans under $2 million will not be audited.
  • All affiliated PPP loans will be consolidated for audit purposes. For example, if there were four affiliated companies with a $500,000 PPP loan each, the total PPP loans of the affiliated group would equal $2 million, therefore each loan would be subject to audit.
  • The SBA did not formally define current economic uncertainty which makes the PPP loan request necessary to support the ongoing operations. It appears that their audits will be based on individual facts and circumstances for each borrower.
  • Borrowers and affiliated borrowers with loans in excess of $2 million should be prepared to support their need of a PPP loan with documentation. If you have any questions on what would satisfy the ‘current economic uncertainty which makes the loan request necessary to support the ongoing operations’ requirement, please consult with your legal counsel.
  • The SBA softened its administrative enforcement threats to borrowers.

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Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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