News

CARES Act: Small Business Loan Program Update

May 13, 2020Client Alerts

On May 13, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of the Treasury, issued additional guidance (including a new safe harbor) regarding the certification required of all PPP borrowers that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The SBA has created a new limited safe harbor for borrowers that, together with their affiliates (as determined according to the SBA’s affiliation rules for the PPP program), received PPP loans with an original principal amount of less than $2 million. The SBA says it will deem such borrowers to have made the necessity certification in good faith.

SBA provided the following rationales for creating this new bright-line safe harbor:

  • Borrowers with loans below this threshold are generally less likely than borrowers that obtained loans of $2 million or greater to have had access to adequate sources of liquidity.
  • The safe harbor will promote economic security as PPP borrowers with more limited resources endeavor to retain and rehire employees.
  • This approach will enable the SBA to conserve its finite audit resources and focus its reviews on larger loans.

Although borrowers with loans greater than $2 million will not fall within this new safe harbor, the SBA has confirmed that such borrowers may still have an adequate basis for making the required good-faith necessity certification. If the SBA, in the course of its review of these larger loans, determines that a borrower lacked an adequate basis for its necessity certification, the SBA has said it will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notice of the SBA’s determination, the SBA has said it will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

This new guidance has been released just one day in advance of the existing May 14 limited safe harbor to repay PPP loans for borrowers that believed they could no longer make the required necessity certification in light of expanded SBA guidance on the intended meaning of that certification. In guidance issued on April 23, the SBA explained that borrowers must make the necessity certification “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

On May 13, the SBA announced that it was extending the repayment safe harbor deadline from May 14 to May 18 to give borrowers an opportunity to review and consider the guidance issued earlier in the day.

Clients that are considering applying for, have applied for or have already received a PPP loan should reach out to their Gunderson Dettmer attorneys to discuss this latest guidance.

The following is the full text of the guidance set forth in Question 46 of the SBA’s Frequently Asked Questions (available here):

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,* 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 of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not 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. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

*          *          *

This communication, which we believe is of interest to our clients and friends of the firm, is for general information only.  It is not a full analysis of the matters presented and should not be relied upon as legal advice. If you have any questions regarding these matters, please reach out to your regular Gunderson Dettmer contact.


* For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).