Recipients Of PPP Loans Under $2M Won't Face Review

By Jon Hill and Andrew Kragie
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Law360 (May 13, 2020, 9:55 PM EDT) -- Companies that received less than $2 million in coronavirus relief loans through the Small Business Administration's Paycheck Protection Program will not face review of their certification that they needed the money, officials said Wednesday in an attempt to reassure smaller employers.

The SBA has previously said it planned to scrutinize larger PPP loans to make sure that their recipients really belonged in the small-business aid program, but in an updated guidance document, the agency said its review will include a safe harbor for any company that, along with its affiliates, took out PPP loans totaling less than $2 million.

According to the guidance, these borrowers will be deemed to have acted in good faith during the application process when they attested to the necessity of their loan requests. This certification is required to obtain a PPP loan, but the agency has warned that some companies might not legitimately be able to make this claim if they have other financing options to fall back on.

"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," the agency said.

Following a backlash to reports that some national restaurant chains and other public companies got money through the program, the SBA issued guidance last month advising that public and private companies able to tap "other sources of liquidity" probably don't qualify for one of the program's forgivable, low-cost loans of up to $10 million each.

The agency also said companies like these that received PPP funding could repay it by May 7 to avoid government scrutiny of their loan requests, a deadline that has since been extended to Thursday. In the meantime, a number of recipients have announced they will give back their loans. 

But some experts have questioned whether that guidance raises risks of future investigations and other adverse consequences that could discourage otherwise eligible small businesses from taking advantage of the program, and already, a lawsuit challenging the guidance has been filed by a small tech company and its subsidiaries that say they received PPP loans but now fear they may have to return them.

In its guidance on Wednesday, the SBA said that it hopes to provide economic certainty for smaller-time PPP borrowers by establishing a safe harbor for its reviews of any loans. And given that more than 4.3 million loans have been approved by the program to date, a safe harbor will also help narrow the focus of these reviews and make more efficient use of "finite audit resources," the agency said.

The SBA said that companies with PPP loans exceeding $2 million could still be found to have made their necessity certification in good faith, even if they don't qualify for the safe harbor. But the SBA added that if it determines a borrower didn't have a legitimate basis for making that certification, the agency "will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness."

"If 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," the agency said.

But questions still remain even after the new guidance.

Although companies have until May 14 to give back their PPP loans with no questions asked, Wednesday's guidance muddies the waters by suggesting these borrowers could wait to return the money only if the SBA starts asking questions and still avoid enforcement action or a referral to other agencies.

And it's still not clear what kind of "review" will be applied to loans over $2 million. U.S. Treasury Secretary Steven Mnuchin has previously said there would be "a full audit of every loan over $2 million," but officials have generally used the word "review" rather than "audit."

But whatever form this review takes, Roscoe Jones Jr., a Gibson Dunn & Crutcher LLP attorney who has advised clients on the loan program, told Law360 that Wednesday's guidance underscores that recipients of bigger PPP loans can expect follow-up from the government.

"For small companies with loan amounts less than $2 million, this is further evidence that SBA is trying to ensure that small companies benefit from the program without additional review or actions," Jones said. "For the larger companies [that have received over $2 million, this confirms] that you're going to have extra scrutiny."

Speaking to reporters on Wednesday, Senate Small Business Committee Chair Marco Rubio, R-Fla., emphasized the efficiency benefits that the safe harbor could bring to the SBA's loan reviews.

"Basically, any loan under $2 million is going to be assumed certified in good will. That's important," Rubio said. "That's 99% of the loans, and it allows them to focus their audits on the 1% of the loans [that are] over $2 million."

Rubio added that he wants to review how financial institutions prioritized PPP loan applications, an issue that is currently the subject of multiple class action lawsuits against major banks that participated in the program as lenders.

"There are some questions about what happened early on in the plan and whether those banks were giving priority to some borrowers over others," Rubio said. "How much of that was due to know-your-customer [requirements] versus internal decisions? That's going to be something that we'll have to examine at some point, but first we've got to look over how the program is working right now."

When asked about additional PPP funding, Rubio said the program has another $120 billion still available for loan guarantees out of the total $310 billion authorized in a second round last month. By comparison, the initial $349 billion in lending capacity given to the program was exhausted within two weeks after it launched in early April.

"We'll see if this slowdown that we saw in the applications was temporary, waiting for guidance on certification and forgiveness, or whether we sort of hit our mark," Rubio said. "We'll have to wait and see if other businesses decide that they want to use this now that the rules are a little clearer."

--Editing by Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.

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