How Will the SBA Review Borrower’s Good-Faith Certification of PPP Loans?
Uncertain and confused seem to be the key words that describe how most borrowers under the PPP program are feeling since receiving their funding. The announcement by the SBA that they intended to audit all loans over $2.0MM, and that the audit would include reviewing the borrower’s certification that economic uncertainty made the loan necessary to support the ongoing operations of their business, certainly didn’t help. The lack of guidance on how necessity would be assessed, language that indicated smaller loans may also be subject to audit, and a relatively short safe harbor in which to return funds had many wondering, despite our best efforts to comply, if keeping the money was worth the risk.
SBA Guidelines on Good Faith Certification
Today the SBA issued an update to its growing FAQ list which you can find here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
Question 46 addresses how the SBA will review borrowers’ required good-faith certification concerning the necessity of their loan request. We encourage you to read the FAQs to ensure you understand the PPP provisions.
Here are our key takeaways:
- The SBA has provided a safe harbor for borrowers, together with their affiliates, with an original loan amount of $2.0MM. These borrowers will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
- For loans larger than $2.0MM, the review of the borrower’s certification on the necessity of the loan will be based on the borrower’s individual circumstances. There is no objective requirement specified for documenting the borrower’s basis for determining the necessity of the loan request and it appears the determination will be made on a case by case basis. In supporting the case for providing the safe harbor for loan amounts under $2.0MM, the SBA noted that borrowers with loans less than $2.0MM are generally presumed to have less access to other forms of liquidity in the current environment. This would seem to imply that access to other capital may be part of the SBA’s assessment, for companies with loans over $2.0MM.
- Borrower’s with loans in excess of $2.0MM, that are subsequently determined by the SBA to not have sufficient basis for the necessity of the loan, will be allowed to repay the loans and will not be allowed any forgiveness. If the loans are repaid after receipt of notification from the SBA, the SBA will not pursue administrative action or refer the borrower to any other agency for further action on this issue.
While this guidance is the first step in starting to remove some of the uncertainty and confusion, the big questions that still remain relate to loan forgiveness. Today we heard whispers that the guidance on that topic is expected Friday. We will continue to monitor this topic and to update you as information is available. Finally, let’s hope Congress does the right thing and passes legislation to fulfill the intent of exempting loan forgiveness from taxation. While the loan forgiveness is not taxable, the IRS announced that any expenses paid by proceeds from the loan that are forgiven will not be deductible for tax purposes.
More to come………………….
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