PPP Update & Guidance - COVID-19 Alert
April 28, 2020
UPDATE: PAYCHECK PROTECTION PROGRAM RECEIVES ADDITIONAL FUNDING; SBA AND TREASURY ISSUE ADDITIONAL GUIDANCE ON ELIGIBILITY
On April 24, 2020, President Donald Trump signed into law an additional $484 billion coronavirus relief aid package. Significantly, the bill provides a new $310 billion round of funding for the Paycheck Protection Program (“PPP”).
The new package includes some industry-specific allocations. Not less than $30 billion has been allocated for financial institutions holding between $10 billion and $50 billion in assets, and not less than $30 billion has been allocated for financial institutions holding less than $10 billion in assets.
On April 27, 2020, the SBA began taking new applications under the PPP. However, the website quickly crashed due to the pent-up demand. Many banks already lending under the PPP have yet to reopen their applications. Current backlogs from previously submitted applications are the likely culprit. If you or your client has not yet applied for the PPP, you are encouraged to have your application prepared.
SBA / TREASURY ISSUE ELIGIBILITY GUIDANCE
On April 23, 2020, the Small Business Administration (“SBA”), in conjunction with the Department of the Treasury, issued additional guidance regarding eligibility to borrow under the PPP. The guidance is thought to be in response to the general public’s misgivings regarding some high-profile borrowers (who have since committed to returning the borrowed funds).
The guidance, in the form of a FAQ, is as follows:
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 “[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, 2020 will be deemed by SBA to have made the required certification in good faith.
We see two major takeaways from this guidance: 1) the SBA is warning that it will be scrutinizing applications, and 2) still, additional guidance is needed as the FAQ contains conflicting language as to which borrowers the rule applies.
To the first point, the FAQ sends a clear signal that the SBA will be auditing the books of certain borrowers claiming to have a need under the program. The SBA has put the burden on the borrower to assess whether it is 1) affected by “current economic uncertainty,” and 2) whether the “loan request (is) necessary to support … the Applicant.” Thus, in addition to existing statutory requirements the SBA seems to have created an additional two-prong test. For borrowers who have already made a certifying statement under the program, but who now may be worried that they do not meet the certification requirements, the SBA is allowing the borrower to pay back the funds through May 7, 2020 at no penalty.
It is unclear what recourse the SBA may pursue should it determine a violation of the certification statement occurred, i.e. whether the borrower was affected by current economic conditions and whether it had a need for the loan. It is possible that the SBA could pursue criminal penalties against the borrower under the United States Code of Crimes and Criminal Procedure for making a “materially false … statement or representation.” In addition, the SBA may pursue civil damages up to $10,000 per violation and three (3) times “the amount of damages which the government sustains.”
Regarding the second takeaway, the Answer tends to broaden the scope of the Question. The Question asks whether “businesses owned by large companies” are eligible. The Answer, however, only refers to “borrowers” in a general sense. Thus, the Answer appears to apply the guidance to all borrowers, rather than “businesses owned by large companies.” The safest assumption is that the guidance applies to all borrowers.
We remain available to answer your questions on these and other matters. For further information, please contact: