Changes to the PPP Loan Certification Requirements

On April 21, 2020, Congress passed the Paycheck Protection Program and Health Care Enhancement Act which, among other things, added more funding to the Paycheck Protection Program (“PPP loans”).

Then, on April 23, 2020, the Small Business Administration (“SBA”) released answers to frequently asked questions regarding the PPP loans, and in particular, released Question 31 regarding the necessity requirement of the PPP loan for businesses.

Question 31 and its Answer issued by the SBA are as follows:

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7 will be deemed by SBA to have made the required certification in good faith.

This guidance issued by the SBA is most likely in reaction to the negative press given to larger publicly traded companies such as Ruth’s Chris Steakhouse, Shake Shack, Potbelly and even the L.A. Lakers. While these companies with market values in the millions were obtaining the PPP loans from the Federal Government, smaller “mom and pop shops” were shut out and unable to apply for the loan before the funds ran out.

But, it should be remembered that the design of the PPP loans were to incentivize employers to keep employees on their payroll and not terminate or furlough employees or reduce salaries. In return, the government promised forgiveness of the PPP loan, essentially promising to pay eight weeks of the employees’ salaries, while also assisting with rent, utilities and interest on mortgages.

Additionally, the PPP loans were to provide liquidity to businesses for eight weeks in an effort to trigger the economy. Many businesses applied for the PPP loan for these reasons and in reliance upon the government’s forgiveness of the loan thereafter.

In large part, the public companies that obtained PPP loans did in fact comply with the CARES Act in making their applications. Negative press and public outcry have enabled members of the government to respond.

Review of Applications for PPP Loans over $2 million:

The SBA has suggested in the above Answer to Question 31 that the businesses should consider other sources of liquidity available to them before applying for a PPP loan program. U.S. Secretary of the Treasury Steven Mnunchin announced on April 28, 2020 that the SBA will be reviewing all PPP loan applications for loans more than $2 million dollars to determine whether the certifications made were made in good faith by the borrowing business. The consequences for failing to meet the requisite criteria propounded by the SBA are currently unclear.

Should businesses now doubt whether they meet the good faith certification that the PPP loan monies were necessary at the time of the application given the businesses other assets or sources of liquidity, businesses have until May 7, 2020 to return the loan monies without any penalty.

However, a significant issue posed by Question 31 is determining the benchmark against which each borrower’s “need” is going to be reviewed and/or tested. No standard of financial need is set forth in the CARES Act or the SBA Interim Final Rule as it relates to the PPP loans. In fact, the regulations regarding forgiveness have not yet been issued. The PPP loan program was not intended to be based entirely upon “need,” but was intended to act as an incentive to businesses to keep employees on the payroll and without reduction of salary. In fact, as the Answer to FAQ 31 itself reminds us, the CARES Act suspended the normal SBA 7(a) loan program requirement that borrowers prove they do not have an alternative access to credit.

What PPP Borrowers Should Do in light of the SBA Question 31 Guidance:

 

The negative press about a select few of the PPP loan borrowers together with the issuance of Question 31 by the SBA invites those borrowers to consider whether retention of the PPP loan monies is in fact worth any risk created by the modified requirements of “necessity” as set forth in Question 31.

 

Some businesses will respond to these new certifications by expending their working capital or leveraging their businesses to support their existing staffing levels. Some businesses may start laying off employees or reducing salaries rather than apply for a PPP loan given the uncertainty by which forgiveness will be approved. For most businesses, Question 31 does not change anything.

 

But for those businesses that are concerned about the impact of the review the SBA will be making of each loan application for a loan over $2 million dollars, we recommend that those businesses concisely document the factors used by the business (in light of the requirements of Question 31 and the CARES Act) to determine that the PPP loan monies were in fact necessary.

 

Such factors could include any of the following:

 

  1. Whether or not the business would have had to reduce staff and payroll costs without the PPP loan and forgiveness;
  2. Limitations on access to working capital or other liquidity options;
  3. Inability to borrow funds from other lenders or sources;
  4. Any interruption of business due to COVID-19 or anticipated interruption of business;
  5. Uncertainty about whether the business would remain open and operational—whether as it relates to a COVID-19 outbreak in the business or whether the business would be mandated to be closed by a governmental authority;
  6. Retaining employees on the payroll and competing with expansions to the unemployment wages;
  7. How the business is presently impacted (at the time of application) which could include impacts to the anticipated budget for the year;
  8. Any other steps taken by the business to reduce risk or preserve its own capital.

It is important to remember that the PPP loan was designed to assist borrowers to survive the erratic and unpredictable changes to our economy in light of a global pandemic. It was Congress’ intent to keep Americans on the payroll and incentivize employers to do so with the promise of forgiveness. Each application should be reviewed by the SBA and Treasury in light of this.

 

 

Erin M. Tyreman

Contact attorney Erin M. Tyreman with questions.