SBA to Presume Good Faith for PPP Loans Under $2 Million, and Other Updates

If you received a Paycheck Protection Program (PPP) loan with an original amount of less than $2 million, the Small Business Administration (SBA) will presume that the borrower’s certification regarding the necessity of the loan was made in good faith.

Released in a May 13, 2020 update to the SBA’s FAQ for Lenders and Borrowers, this should be deemed good news for borrowers.

For loans that are more than $2 million, borrowers may still have an adequate basis to make the required certification. If the SBA determines the certification was unjustified, it won’t pursue administrative enforcement or referrals to other agencies as long as the loan is repaid.

Overview of FAQ 46

Following is a summary of FAQ No. 46, which asked how the SBA will review borrowers’ required good-faith certification and the necessity of their loan request.

SBA’s Answer

When submitting a PPP application, borrowers must certify in good faith that a PPP loan is necessary to support their ongoing operations because of current economic uncertainty.

After consulting with the Department of Treasury, the SBA determined two things.

1. Borrowers of Less Than $2 Million

A safe harbor will apply to SBA’s review of PPP loans for borrowers who, along with their affiliates, received PPP loans with an original principal amount of less than $2 million. The SBA will presume the borrower’s required certification concerning the necessity of the loan was made in good faith.

Part of the SBA’s reasoning is because borrowers in this threshold category are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers with larger loan amounts.

According to the FAQs, the SBA further determined that safe harbor is appropriate because:

  • It helps promote economic certainty as PPP borrowers with more limited resources work to retain and rehire their employees.
  • It allows the SBA to conserve its audit resources and focus its reviews on larger loans, where its compliance effort may yield higher returns.
2. Borrowers of More Than $2 Million

Borrowers with $2 million-plus loans that don’t 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.

Previously, the SBA stated that PPP loans over $2 million will be subject to a compliance review of program requirements, which are outlined in the PPP Interim Final Rules and in the Borrower Application Form.

As a result of an SBA review, if adequate basis for the required certification concerning the necessity of the loan request isn’t found, the SBA:

  • Will seek repayment of the outstanding PPP loan balance
  • Will inform the lender that the borrower isn’t eligible for loan forgiveness

If the borrower repays the loan after receiving notification from SBA, the SBA:

  • Won’t pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request
  • Won’t let its determination concerning the certification regarding the necessity of the loan request affect its loan guarantee.

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