On the morning of May 13, 2020, the Small Business Administration (SBA) clarified how it will review a borrower's good faith certification concerning the necessity of their Paycheck Protection Program (PPP) loan request.

As discussed in previous Alerts, a borrower certified that "current economic uncertainty makes this loan request necessary to support ongoing operations" on the application form for the PPP loan.

Today's guidance under FAQ 46 provides a safe harbor that any borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity for the loan request in good faith.

According to the FAQ, this allows for economic certainty to those borrowers while allowing the SBA to conserve its finite audit resources and focus its reviews on larger loans.

For borrowers with loans in excess of $2 million, the FAQ goes on to state that if the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, it will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for forgiveness.  However, if the borrower repays the loan after receiving such notification, the SBA will not pursue administrative enforcement or referrals to other agencies.

This guidance is welcome news to PPP loan recipients and should provide borrowers the comfort to plan for the use of the PPP loan proceeds with more certainty. Hopefully, guidance on the determination of forgiveness will be forthcoming as well.

Originally published May 13, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.