UPDATE: Too Little, Too Late? SBA Updates Guidance on PPP Safe Harbor the Day Before May 14 Deadline

**UPDATE 5/14/20: Since publication of this post, the SBA has now updated the PPP Safe Harbor deadline to May 18. This post has been updated to include this additional information.

Just hours before the first extended May 14 deadline for businesses to return “unnecessary” Paycheck Protection Program loans without penalties, the SBA has published new guidance on how it will review borrowers’ required good-faith certifications.

As we discussed here, on April 28, the SBA published an interim rule on the PPP, which included a “Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request.” When applying for a PPP loan, businesses are required to certify that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, the relatively vague certification was widely misunderstood and misinterpreted. To that end, the SBA originally gave PPP loan recipients until May 7 to return their loans, no questions asked, if they had made the certification incorrectly.

By May 5, there was still significant confusion about how loan money was to be returned. Thus, the SBA updated its PPP FAQ’s, announcing its intention to extend the PPP Safe Harbor period to May 14 and promising “additional guidance on how it will review the certification prior to May 14, 2020.”

On May 12, the SBA moved to publish a formal update to its interim rule on the PPP, including the Safe Harbor provision, in the Federal Register the following day. However, according the the Federal Register’s editors “[a]n agency letter requesting withdraw of this document was received after placement on public inspection.” Now, I don’t want to speak for the SBA, but if I were to hazard a guess, I’d say the SBA remembered that it had promised additional guidance on how it would evaluate good-faith certifications somewhere between moving to publish the updated interim rule and withdrawing it.

In any case, the SBA’s PPP FAQ guidance, updated today, now includes Question 46: “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

First, SBA includes a new safe harbor for “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million[.]” For those borrowers, SBA will presume that they “made the required certification concerning the necessity of the loan request in good faith.” In other words, congratulations! If you got a loan less than $2 million, the SBA will probably not come snooping around to make sure you and your affiliates certified to your need appropriately (unless it has some specific reason to do so)!

The SBA justifies this new safe harbor, explaining that “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.” In addition, it states that the safe harbor is likely to “promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”

Finally, SBA (essentially) admits that its getting a bit overwhelmed and, as a result, will be limiting its focus to going after big fish: “[G]iven 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.”

Next, the SBA explains it will be reviewing certifications made by all borrowers which received a loan more than $2 million. Though, as it states, “borrowers with loans greater than $2 million that do not satisfy” the new safe harbor provision, they “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.”

The SBA states that, if during its review, the SBA determines 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.” But the SBA still doesn’t explain how it might determine whether or not a business needed the money. As this seems to be the big question on everyone’s mind, we hope more information will follow.

Fortunately for a borrower in this situation, however, if said “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.” In addition “SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.” This isn’t to say there might not be other penalties for wrongfully certifying in the future, but for now, it looks like SBA would rather just have the money back than worry about imposing punishments. That’s likely to fall to others.

After providing additional information about how the SBA will review borrowers’ required good-faith certifications about the necessity of their loan requests and outlining its new safe harbor for recipients of loans under $2 million, the SBA has now also extended the May 14 payback deadline to Monday, May 18.

If you have any questions or concerns about how to return your PPP loan by May 18, the clock is ticking! Contact your lender as soon as possible. If you have any other questions about this post, or legal needs related to federal government contracting, you can reach out to us here. And, as always, keep your eye on the blog: we’ll keep you updated!

**UPDATE 5/14/20: Since publication of this post, the SBA has now updated the PPP Safe Harbor deadline to May 18. This post has been updated to include this additional information.