Safe Harbor Deadline for Ineligible Borrowers to Return Paycheck Protection Program Loans is Extended to May 14

UPDATED 5/6/2020

The Small Business Administration (SBA), in consultation with the U.S. Treasury,  published retroactive guidance regarding the loan necessity certification a borrower must make on its application for a Paycheck Protection Program (“PPP”) loan.

In its update to the list of Frequently Asked Questions (FAQs) about PPP loans issued on April 23, the SBA explained that prior to making an application for a PPP loan “all borrowers should carefully review the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’” In making this good faith certification, the Treasury stated that all borrowers must take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operation in a manner that is not significantly detrimental to the business.”

Although the SBA guidance specifically questions loans made to public companies with substantial market value and access to capital markets, the guidance applies to both public and private companies.

The generality of the SBA guidance left many borrowers confused. There were news articles published about small businesses that were concerned about expending PPP loan funds despite perceived operational needs.  In a likely response to this confusion, the SBA updated its FAQs about PPP loans on May 5, indicating that it was going to provide additional guidance regarding how it would review the business certainty certification.  Additionally, the FAQ update provides that a borrower will be deemed to have made the business necessity certification in good faith if the borrower applied for the PPP loan prior to the issuance of the FAQ and repays the loan in full by May 14, 2020. The original safe harbor repayment deadline way May 7.

Applicants for PPP loans should be aware of potentially significant liability exposure if they are found to have falsely made the good faith certification regarding the necessity of the PPP loan. The CARES Act created three new oversight bodies to monitor the use of the federal relief funds: the Special Inspector General for Pandemic Recovery, Congressional Oversight Commission and the Pandemic Response Accountability Committee.

In addition to the criminal statutes cited in the CARES Act for false statement to federal officials and lending institutions, enforcement will likely occur under the civil False Claims Act (“FCA”).  Persons who violate the FCA are liable for treble damages and a civil penalty. The FCA provides a cause of action to whistleblowers and the federal government.

If you have any questions or concerns surrounding your PPP loan, please contact our office and arrange a time to speak with one of our corporate attorneys.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

Posted by Attorney Marcia S. Orgill. Orgill concentrates her practice in the area of business and personal taxation—especially complex domestic and international tax strategies.