Additional PPP Guidance: Some Clarity on Potential Audits and Penalties

The Small Business Administration (the “SBA”), in consultation with the Department of the Treasury, continues to release guidance in attempts to clarify certain provisions of the Paycheck Protection Program (the “PPP”), established by the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  On May 13, the SBA updated its existing FAQs to provide some much needed clarity on potential penalties and/or audits for companies that already received funding under the PPP loan program. Notably, FAQ 46 provides a “safe harbor” for borrowers who received PPP loan funding in amounts less than $2 million.

The CARES Act suspends the traditional SBA loan requirement that borrowers must be unable to obtain credit elsewhere but does require all applicants to make a “good-faith” certification that their PPP loan request is necessary based on current “economic uncertainty” related to the COVID-19 pandemic.  Without any further initial guidance, a number of well-established, publicly traded companies received significant PPP funding resulting in multiple negative media reports and public scrutiny.  Due to such public outrage, the SBA and Department of the Treasury attempted to provide further guidance on what would – and would not – be considered a “good-faith certification” by updating the SBA FAQs on April 23, 2020.  In addition, on April 28, Treasury Secretary Steven Mnuchin announced that any PPP applicant receiving $2 million or more in PPP loans will automatically be fully audited, while recipients of smaller PPP loans may be subject to audits, as well.  The SBA’s response raised more questions than answers and left borrowers (i) in doubt as to whether or not their specific situation met the “good-faith” standard, and (ii) concerned the additional guidance would lead to potential audits and penalties.

To further clarify the SBA’s interpretation of the “good-faith” certification, the SBA issued the following “safe harbor” as a portion of its recent May 13 guidance:

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.”

Accordingly, borrowers who find themselves under the $2 million threshold can rest easier knowing they will not be subject to audits or penalties by the SBA in connection with their “good-faith” certification.  The SBA hopes this guidance will “promote economic certainty” so smaller borrowers can shift their focus toward their business and employees.  For PPP loans exceeding $2 million, the SBA will likely still audit such borrowers, but did emphasize that even such larger loans “may still have an adequate basis for making the required good-faith certification.”  The recent guidance also clarifies the procedure in the event the SBA ultimately determines a borrower fails to meet its good-faith certification standard.  If such a determination is made, the borrower will not be eligible for loan forgiveness, and the SBA will request full payment of the then outstanding balance.  If full payment is made, the SBA will not pursue further penalties or referrals against the borrower.

For those borrowers either (i) under the $2 million threshold, or (ii) determined by the SBA to have met the good-faith certification, the next step in the PPP process will be to begin the Loan Forgiveness Application published by the SBA on May 15.  The loan forgiveness aspect of the PPP is what initially attracted small businesses to the program promising forgiveness of borrowed funds so long as borrowers utilize PPP proceeds for payroll, business mortgage interest, rent and utilities.  Based on the previous track record of the SBA and Department of Treasury, borrowers should be on the lookout for additional materials, guidance and clarification with respect to PPP loan forgiveness over the coming weeks.

While many questions still remain and some are likely yet to arise in connection with the PPP, the recent guidance should at least allow the majority of borrowers to focus on the actual intent of the program: retaining and rehiring employees. This article was written by Alec Herzog, a member of STRUCTURE Cokinos, the transactional team of Cokinos | Young (principal office in Houston, Texas), under the leadership of Tiffany Melchers.

J. Shannon Gatlin

Alec C. Herzog