PPP Loan Forgiveness: Updated Guidelines on Good-Faith Certification and Laid-Off Employees
May 13, 2020
SC&H’s Key Takeaways
- If your loan is less than $2 million, generally, your only worry is maximizing forgiveness.
- For loans greater than $2 million, forgiveness will go through a much more rigorous review process, but criminal penalties should not likely be a concern, and payback cures any issue raised by the SBA.
- Borrowers who offered to rehire employees, only to be rebuffed by the employee, will not see a reduction in their PPP loan forgiveness amount.
On May 13, the Small Business Administration (SBA) issued new guidance on the most frequently discussed item about the Paycheck Protection Program (PPP) loans – forgiveness terms.
How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
It’s important to establish that the SBA is clarifying that, “When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
This is critical because it’s the first admission from the SBA that there was already an initial degree of certification enforced when the business successfully submitted their loan application.
From there, this question is broken down into two categories:
Loans Less Than $2 Million
The SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: “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.”
This is based on the SBA’s determination that 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.” It also states that this should promote increased economic certainty as those with limited resources work to retain and rehire their people. The guidance also mentions that, due to the potentially large volume of audits, this approach will free up SBA resources to focus on larger PPP loans.
Borrowers in this situation should now focus on the efficient and effective use of PPP funds and the related forgiveness thereof.
Loans Greater Than $2 Million
The guidance states that “borrowers with loans greater than $2 million that do not satisfy this safe harbor 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 notice goes on to say that if the “SBA determines in the course of its review 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.” From there, if the borrower repays the loan after receiving notification from the SBA, it seems to indicate that the borrower will not be subject to criminal penalties or additional repercussions with the SBA, or other agencies.
Here, the remaining risk, beyond issues around forgiveness, is as follows: Assume your business borrowed and spent PPP funds to maintain payroll at levels not supported by current or projected business conditions with the expectation that some or most of the PPP loan will be forgiven. Then assume the loan forgiveness you otherwise were eligible for is reduced or eliminated due to the SBA’s interpretation of your certification of need (well after the fact). You now would need to repay loan funds that are already spent on those elevated payroll expenses and may be in a worse economic and cash position than you would have been had you not borrowed PPP funds.
Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
We are awaiting an interim final rule on this particular question, but on May 3, 2020, the SBA and Treasury commented that the rule will exclude “laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation.”
It goes on to say that the borrower must have documentation showing the good faith, written offer of rehire, and the employee’s rejection of that offer. Of note for the “employee”, this may forfeit their eligibility for continued unemployment compensation.