New PPP Loan Guidance on Certification of Need and Opportunity for Penalty-Free Repayment by May 14, 2020

This article was updated May 6, 2020. 

On May 5, 2020, the Small Business Administration issued new FAQs which included a new Question and Answer number 43 which extended the penalty-free repayment period to May 14, 2020. The following article has been updated to reflect that change in date.

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The Small Business Administration (“SBA”) issued new FAQs on April 23, 2020, and an updated Interim Final Rule on April 24, 2020, to provide further guidance on loans under the Paycheck Protection Program (“PPP”) contained in the CARES Act. Of note, the SBA added to its previously released FAQs a Question and Answer number 31 relating to a borrower’s certification of need in obtaining a PPP loan which reads: 

“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 14, 2020, will be deemed by SBA to have made the required certification in good faith.” 

The updated Interim Final Rule, which is not yet finalized, not only clarifies eligibility issues for certain types of businesses (including those in bankruptcy) but also adds similar language to what is in the excerpt above. This new guidance is likely in response to recent reports of large companies receiving PPP loans when smaller businesses were not able to access the loan funds.  Before this announcement, many businesses and nonprofits have struggled with the question of whether they could certify that “economic uncertainty” made it necessary for them to apply for a PPP loan.

Further, the new guidance states that the SBA will deem that a borrower made a good faith determination of economic uncertainty in applying for the loan if (i) that loan was applied for before April 24, 2020, and (ii) the borrower repays the loan by May 14, 2020. Otherwise, the SBA may seek documentation of the basis on which the borrower’s PPP loan application was necessary and pursue penalties against those the SBA deems violated that certification. 

Any business or nonprofit that made a good faith determination of its need, based on the guidance available at the time the PPP loan was applied for, may want to consider if the new guidance provided in Q&A 31 would affect that determination. A business or nonprofit may want to consider the opportunity to repay its PPP loan by May 14, 2020, and not risk any penalties if, based on this new SBA guidance, there is a concern that the SBA may disagree with the organization’s earlier good faith determination of need.  

For additional guidance, please contact your Clark Hill attorney or one of the following Clark Hill attorneys: Christine M. Green (Pittsburgh) cgreen@clarkhill.com, Robin D. Ferriby (Birmingham) rferriby@clarkhill.com, Katy E. David (San Antonio) kdavid@clarkhill.com, Brad Fletcher (Dallas) bfletcher@clarkkill.com.