The Small Business Administration (SBA) has updated its Paycheck Protection Program (PPP) loan FAQs to add FAQ 53, which concerns the Loan Necessity Questionnaire. Despite criticisms of the Loan Necessity Questionnaire inquiries into a borrower's financial results after receiving a PPP loan to determine the uncertainty the business faced at the time of the PPP loan application, the FAQ 53 appears to be doubling down on the SBA's use of a 20/20 hindsight inquiry.
As we summarized in this article, the Loan Necessity Questionnaire purportedly relates to the uncertainty certification (sometimes referred to as the "necessity certification"): "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." We also pointed out in that article that it is disturbingly easy to infer from the Loan Necessity Questionnaire that the SBA will use the PPP borrower's financial results after receiving the PPP loan to gauge the uncertainty the business faced at the time of the PPP loan application. We have argued that this would be absurd because it compares the uncertainty perceived by the borrower before receiving a PPP loan with the financial performance of the borrower after receiving the PPP loan. Unfortunately, FAQ 53 only adds to the ambiguity about what the SBA will use to determine whether the PPP borrower made the uncertainty certification in good faith.
In discussing the uncertainty certification, the SBA's FAQ 53 contains a correct summary of the legal requirement:
"This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary."
Although the above statement bodes well, in the next sentence the SBA immediately backtracks and attempts to justify its information requests in the Loan Necessity Questionnaire:
"In its review, SBA may take into account the borrower's circumstances and actions both before and after the borrower's certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application." (Emphasis added.)
Thus, FAQ 53 does not provide any new guidance; it simply attempts to rationalize the position the SBA advanced in developing the Loan Necessity Questionnaire.
By considering a PPP borrower's circumstance and actions after receiving a PPP loan, the SBA's latest FAQ contradicts the unambiguous statutory language directing consideration of only the borrower's circumstances "at the time of the loan application." For example, at the time of a PPP loan application, many PPP borrowers had, in good faith, uncertainty about whether their customers or clients would be able to continue to purchase their goods and services. Other PPP borrowers were legitimately uncertain about the impact COVID could have on their employees' health and their ability to transition to remote work and how those uncertainties could impact the borrower's net income. The substantial CARES Act stimulus funds presumably helped to support the economy generally, and PPP loans certainly helped the borrowers specifically along with "downstream" people that depended on the financial health of the borrowers such as their employees, lenders and landlords. By focusing on a borrower's gross revenue in the fiscal quarter after receiving a PPP loan, in the context of an economy bolstered by the entire CARES Act stimulus program, the SBA seems to suggest that the CARES Act did not have any impact on the American economy or that additional capital from the PPP loans did not impact the borrower's business decisions. Just because a business did well after trillions of dollars in government stimulus flooded the economy and the borrower had an increased capital cushion from the PPP loan, is simply not probative on the core question of whether a borrower in good faith had uncertainty about the impact of a global pandemic on its business operations at the time they applied for a PPP loan.
In other words, for many PPP borrowers, the significant stimulus actions taken by the federal and state governments, including the receipt of additional working capital via a PPP loan, alleviated many borrower's need and allowed them to weather the economic uncertainty, often by enabling them to modify their business models (e.g., experimenting with remote work or selling online). For many borrowers, these undoubtedly represent "subsequent developments [that] resulted in the loan no longer being necessary." It is not proper (that's how lawyers say "totally ludicrous") for the SBA to use top line financial performance in a single fiscal quarter arising after the borrower made the uncertainty certification as somehow probative evidence of bad faith when making the certification.
As we discussed in this article, the Associated General Contractors of America (AGC), a construction trade association, challenged the legality of the Loan Necessity Questionnaire. Coincidentally, AGC filed the lawsuit on the same day that the SBA released FAQ 53. As part of the lawsuit, the AGC challenges the SBA's use of hindsight. If FAQ 53 was designed to help the SBA defend its position in the lawsuit, then in our opinion the SBA completely failed to justify its position.
We continue to believe that the SBA should be asking for information entirely different from that sought in the Questionnaire: the assessment used by each PPP borrower when they certified that COVID-related economic uncertainty necessitated their PPP.
As a final matter, we note that FAQ 53 softened the deadline for a PPP borrower to provide a response to the Loan Necessity Questionnaire. In the Loan Necessity Questionnaire, the SBA stated: "The completed form is due to the Lender servicing your PPP loan within ten business days of receipt from your Lender." (Emphasis in original). In FAQ 53, however, the SBA states: "Upon request from their lender, borrowers should return the completed questionnaire to their lender within 10 business days of receipt." (Emphasis added.) Use of "should" rather than "must" or "is due" indicates that PPP borrowers have more than 10 business days, though the consequences of not doing so in the requested time-frame or not submitting the form are undefined. However, we invite the SBA to provide additional guidance on this issue. Until then, we recommend that PPP borrowers submit the response within 10 business days.
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