Updates as of May 6: the SBA extended the date for borrowers seeking to repay PPP loans from May 7 to May 14. Issuing an updated FAQ (FAQ #43), the date was extended effective immediately. The SBA indicated in its response the following: “SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.”
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES”). The CARES Act was enacted to provide emergency assistance to individuals, families, and businesses affected by the Coronavirus (COVID-19) pandemic. CARES offered funding and authority to the Small Business Administration (SBA) to modify existing loan programs and to establish a new loan option, the “Paycheck Protection Program” (“PPP”), to assist businesses impacted by COVID-19. Therefore, these loans are 100% guaranteed by the SBA, and the CARES Act provisions further state that an organization’s PPP loan could be forgiven if the loan proceeds are used for specified purposes.
Certain requirements normally accompanying SBA-guaranteed loans were waived under the CARES Act, including the SBA’s “credit elsewhere requirement” (defined as follows).
“SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources. SBA requires the lender or CDC [certified development companies] to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar An Analysis of Lenders’ Compliance with SBA’s Credit Elsewhere Requirement 2 purposes and periods of time. Submission of an application to SBA by a lender or CDC constitutes certification by the lender or CDC that it has examined the availability of credit to the applicant, has based its certification upon that examination, and has substantiation in its file to support certification.”
Additional documentation that is normally mandated for an SBA-guaranteed loan, such as personal financial statements and business plans, were also waived for PPP loans. The loan application was abbreviated to reduce the time involved to complete it. Additionally, no personal guarantees were expected (which is generally a requirement for SBA loans) to reduce risk placed on borrowers. The loan application process was expedited in general, allowing for lenders to start submitting applications to the SBA portal just one week after the CARES Act became law.
As you might expect, PPP loans drew much attention and interest from many businesses. The Treasury Department and SBA provided guidance as quickly as possible to assist businesses and lenders in applying for these loans, although not every item was addressed. There were several certifications required by a borrower when he or she applied for a PPP loan. One of the certifications a borrower made in their application was that the “current economic uncertainty makes the loan request necessary.” No specific guidance was provided initially as to how this term would be applied. Thus, the subjective nature of this term and lack of guidance allowed for broad interpretation of this provision.
Generally, eligible borrowers were encouraged to apply as quickly as possible due to the funds being depleted and the opportunity being lost. As we know now, that was a reality as the initial round of funding was fully depleted requiring the President and Congress to pass additional legislation to provide more funding.
Borrowers that applied and received loans also considered the forgiveness provisions of this loan program against obtaining capital by borrowing from a bank or other financing source or obtaining capital from investors. The forgiveness provisions made the PPP loan very attractive but were based on further uncertainty of when federal, state, and local governments would lift restrictions. Unfortunately for many organizations that reduced their workforce temporarily, taking receipt of these funds started the clock on an eight-week “covered” period to calculate the loan forgiveness amount. For many businesses, this timeframe does not match up with when the restrictions are lifted. Thus, they are faced with the difficult decision of bringing workers back earlier than planned to avoid additional indebtedness once the eight-week period expires. These variables created additional uncertainty and were difficult for most borrowers to navigate.
This certification has been highlighted in recent days with several high-profile cases, including some well-known publicly traded companies and not-for-profit organizations with access to capital from public financing or large endowments. Several of these organizations applied for and received PPP loans, but since then, have returned the funds or declined to accept the loans. Shortly after reports of these entities receiving PPP loans, public comments followed from Treasury and SBA officials, as well as additional guidance specifically on this certification.
The SBA and Treasury Department have issued various forms of guidance on the PPP loan since its enactment as part of the CARES Act. One such guidance is an FAQ issued by the SBA with updates on a variety of PPP provisions. Question 31 in this FAQ was issued on April 23, 2020 and provided the following:
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 review carefully the required certification that “current 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, 2020 will be deemed by SBA to have made the required certification in good faith.
The SBA’s answer to question to FAQ 31 has caused concern among many borrowers to revisit their loan application as well as question whether there was a sufficient level of uncertainty to request a PPP loan to support its ongoing operations. It is prudent given this additional guidance that a business or not-for-profit organization receiving a PPP loan should assess and document the specific circumstances that existed to substantiate this economic uncertainty or economic need. The following are some examples of what types of circumstances could have existed as borrowers consider this certification standard further:
The SBA and Treasury Department have decided to look closer at PPP loans of over $2,000,000. The Treasury Department announced this new procedure the week of April 27, 2020 and issued an updated FAQ on April 29, 2020. Specifically, FAQ 39 provides the following:
Question: Will SBA review individual PPP loan files?
Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
Also note, the SBA connected FAQ 31 to FAQ 39 and the importance of the loan certification addressed above. Thus, loans over $2,000,000 in which forgiveness is requested by the borrower will be subject to a further review by the SBA and Treasury Department in part to see if the borrower was “in need.” This $2,000,000+ loan review will be addressed in upcoming guidance from the SBA. Borrowers should be aware of this additional review process.
It is unclear what the review process for PPP loans below $2,000,000 will be. Treasury officials have said that the government will perform a full audit on any company that borrowed more than $2 million, with spot checks for smaller loans.
Congress has poured significant effort, as well as nearly $600 billion, into this PPP loan program, which is designed to help businesses keep their employees. If enough of the PPP loan is used for payroll and other required costs, the PPP loan can be forgiven. Nonetheless, businesses need to monitor the ever-changing landscape for the latest SBA rules. We recommend reviewing and documenting support for the loan certifications that were attested to and seeking the advice of counsel where appropriate. We also recommend preparing messages and a communications strategy in the event reporters ask about the loan.
Please contact your Sikich advisor with any questions you have.
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