On May 13, 2020, the Small Business Administration (SBA) issued updated guidance, in the form of updated Frequently Asked Questions (FAQs), on how it intends to enforce non-compliance with PPP loan certifications.   

The guidance was issued in light of widespread confusion and concern over how the federal government would interpret the “necessity certification” that all PPP applicants must make when submitting their applications.  That certification requires borrowers to certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Post-hoc guidance previously issued by the SBA caused serious confusion over how that certification would be interpreted.  

To alleviate the concern and uncertainty as to how the necessity certification will be interpreted in future audits or investigations, the SBA, in consultation with the Treasury Department, created a safe harbor that applies to the SBA’s review of PPP loans under $2 million.  Specifically, according to the SBA’s guidance, “[a]ny 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.”  The SBA notes that this safe harbor is designed, in part, to “promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees” and to “enable SBA to conserve its finite audit resources and focus its review on larger loans, where the compliance effort may yield higher returns.”

The SBA states that while borrowers with loans greater than $2 million will not be able to avail themselves of this safe harbor, they can still satisfy the required good faith certification based on their “individual circumstances in light of the language of the certification and SBA guidance.”  The SBA goes on to state that all PPP loans in excess of $2 million will be subject to review for compliance with program requirements, and that if the SBA determines in the course of that review 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 loan forgiveness.”  The SBA also makes clear that “[i]f 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.”

While the SBA’s updated guidance and safe harbor provides comfort to those who make the required necessity certification in good faith, it by no means eliminates the risk of criminal, civil, and administrative enforcement actions down the line.  In fact, the DOJ has already announced several PPP loan fraud prosecutions, and all indications point to an increase in such actions as time goes on.

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with government investigations, including fraud investigations and prosecutions.  If you need assistance with such a matter, please contact us today.