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HARMON CURRAN NONPROFIT LAW BLOG

SBA Guidance Addresses When a PPP Loan is “Necessary” and Announces Special Review of Loans Exceeding $2 Million

Since our last update on the Paycheck Protection Program (PPP), the Small Business Administration (SBA) has published additional guidance about the PPP that may be of interest to those 501(c)(3) organizations who are considering applying for a loan or have already done so.

Access to Other Sources of Liquidity is Relevant to Certification that the Loan is Necessary to Support the Applicant’s Ongoing Operations

In the face of public controversy about some public companies that received large loans despite apparently having ready access to liquidity, the SBA issued the following guidance in the form of a frequently asked question (FAQ):

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

While this question was initially focused on businesses owned by large companies, the statement that a borrower should “take 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” appears to apply equally to private companies and 501(c)(3) organizations. Accordingly, 501(c)(3) organizations should consider these factors in deciding whether they can make the required certification, and those who have already received a loan but are concerned that they may not qualify in light of this guidance should note the May 7, 2020 safe harbor for repayment of the loan.

Special Review of Loans in Excess of $2 Million

The SBA also announced that it would subject all PPP loans in excess of $2 million to individual review following receipt of the application for forgiveness of the loan. The FAQ on this point is reprinted below:

Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

The complete set of official FAQs on the PPP can be found here.

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This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.