May 13, 2020
Thomas E. Rutledge
Member, Stoll Keenon Ogden, PLLC
The Paycheck Protection Program (“PPP”) and the conditionally forgivable loans being provided to employers have garnered significant attention since it was revealed that some of loans were made to publicly-traded companies and private ventures such as the LA Lakers. Commentators bemoaned that the limited funds appropriated for PPP loans were made available to such large ventures when prototypical “small business” were not able to participate. While some of that pressure on participation has been reduced (the second funding tranche has not yet been exhausted), objections to participation by larger companies has not abated.
On April 28, Treasury Secretary Mnuchin, in the course of an interview with CNBC, announced that every recipient of more than $2 million of PPP funds will be audited and smaller loans would be randomly audited. Since then we have awaited guidance as to those audits. That guidance was issued this morning.
Expanding on a FAQ maintained by the Department of the Treasury, question / answer 46 was added, it providing:
46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request? (released May 13)
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.
A Few Takeaways
First, by means of the footnote in FAQ 46, the affiliate rules as applied to PPP borrowers has been affirmed. In effect, no relief has been provided as to those rules, and the position of borrowers who have either not made an application or who have been considering returning borrowed funds because of an affiliate analysis is not altered.
Second, in the prior guidance borrowers of less than $2 million in PPP loans were subject to random review. Under the guidance provided today those borrowers are deemed to have satisfied the obligation to certify as to the need for the PPP loan proceeds.
Third, previously Treasury has said that if a PPP borrower returned the funds by May 14, no questions would be asked, and the borrower would be deemed to have in good faith certified as to the need for the funds. Now, if a borrower returns the funds upon a determination on audit that the borrower lacked a good faith basis to make certification, the SBA will not pursue administrative enforcement or make a referral for action to another agency.
But Uncertainty Remains
Notwithstanding this guidance, there remain any number of uncertainties, even for borrowers of less than $2,000,000.
First, for borrowers whose applications included either incorrect information or outright falsehoods, civil and criminal liability is still a possibility. Charges have already been brought against borrowers who overstated the number of employees at the restaurant; the correct number was zero.
Second, we still do not know who will perform the audits and on what timeframe. There have been suggestions that the SBA would in effect deputize the lender to perform the audit as part of the forgiveness determination. FAQ 46 does not address who will perform the audit. If they are to be performed by the SBA’s limited staff, then a PPP loan, even if forgiven, may be subject to repayment one, two or many years after the lender determines that it should be forgiven. Companies are going to have a contingent liability to both keep in mind and to reflect on their financial statements.
Third, we still do not know anything about the substance of the audit. On what basis will the auditor assess the borrower’s good faith certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Is “good faith” to be and remain a subjective standard, or will an objective element be added in the final audit standards?
Fourth, the scope of the “safe harbor” for borrowers is limited to actions initiated by the SBA. The PPP application identifies several criminal statutes that are violated if the applicant provides false information, including 18 U.S.C. § 1001 (making false statements to federal officials) (punishable by imprisonment of not more than 5 years and/or a fine of up to $250,000), 15 U.S.C. § 645 (misrepresenting size status) (punishable by imprisonment of not more than two years and/or a fine of not more than $5,000), and 18 U.S.C. § 1014 (making false statement to banks in connection with loan application) (punishable by imprisonment of not more than thirty (30) years and/or a fine of not more than $1,000,000). There is as well the possibility of an action under the federal False Claims Act (“FCA”) to prosecute fraud in connection with SBA loan applications. 31 U.S.C. § 3729 et seq. The FCA also allows for private persons to file suit for violations of the FCA on behalf of the government (qui tam actions). How the “safe harbor” will be applied vis-à-vis any of these statutes, and whether and how the SBA will respond to qui tam actions brought by private citizens and their attorneys, remains to be seen.
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.
If you would like to discuss the Paycheck Protection Program, the opportunities therein for your business, or other business-assistance programs available during the COVID-19 pandemic, please contact SKO’s SBA Loan Team led by Jamie Brodsky (502-568-5473) and Brad Keeton (502-568-5439).
Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.
 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).