Armanino Blog

SBA and Treasury Challenge PPP Loans Needs and Offer Limited Safe Harbor to Borrowers

April 30, 2020

UPDATE to Original Post (May 6, 2020)

As borrowers continued to wrestle with whether they meet the PPP eligibility requirements as clarified in SBA FAQ #31 related to PPP eligibility in time for the May 7th safe harbor date, the SBA added FAQ #41 on May 5th extending the repayment date to May 14th. In addition, the SBA intends to provide additional guidance as to how it will review certification which should provide additional insight into how organizations should be considering how the loans may be deemed necessary to support ongoing operations. See the full FAQ and answer below:

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

Original Update April 30, 2020

Over the past few days, very significant concerns have arisen that PPP loans have been made to entities that did not truly need the funds to sustain their businesses. While the bar for “need” was set quite low, the clear intent of the program was to get money in the hands of businesses who needed the lifeline to keep people employed, not simply to pump ultra-low-cost money into the economy. The negative long-term impact for those determined not to have “needed” funds received under the program could include financial penalties and, perhaps more importantly, significant public relations problems.

The SBA is offering a “limited safe harbor” window to borrowers who are finding that they borrowed more than they “need,” and who based their loan application on the ambiguous instructions that were available at the time they applied. Those borrowers have until Thursday, May 7 to return the money without ramifications.

In addition, on April 28 Treasury Secretary Mnuchin announced that all loans greater than $2 million will be audited for compliance both with the loan eligibility and calculation rules and with the forgiveness calculations and certifications. Additionally, reports surfaced the following day that Secretary Mnuchin has now extended the audit threat to all borrowers regardless of loan amount.

Armanino recommends that borrowers closely scrutinize, and confirm they are still comfortable with, the representations made when their application was signed:

  • Current economic uncertainty makes this loan necessary to support ongoing operations. The implication is that the entity does not have access to other sources of funding and that the funds are “necessary”, not simply a nice-to-have.
  • Funds will be used primarily to maintain payroll. These funds will provide employment stability and protect paychecks.
  • Acknowledgement that making a false statement on the loan application to get the loan is punishable with fines and imprisonment.

We further recommend that all PPP borrowers monitor all additional details and guidance coming out of Treasury or the SBA in the coming days, in case any such details impact the borrower’s compliance analysis. Statements made should be supportable and acceptable to all stakeholders and/or board members. There is no specific guidance regarding how much available capital is enough, or too much, for the PPP loans program.

If you have any concerns about your ability to meet the new test and prevail in an audit, we urge you to speak with your tax counsel and, if appropriate, avail yourself of the safe harbor and return all or a portion of the loan funds by May 7.

In any case, it’s clear that this funding is intended to protect jobs and support ongoing operations. As with most dealings with the government, we advise a conservative approach to help you fulfill the intention of the program.

For our latest regulatory updates and more information on keeping your business running during disruption, visit our COVID-19 Resource Center.

Disclaimer: All content provided is current as of date issued and is subject to change as additional details surface.

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