Managing Paycheck Protection Program Loan Compliance

By David Eskew
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Law360 (May 18, 2020, 5:40 PM EDT) --
David Eskew
David Eskew
Business owners (including my partners and I) have been following closely rules and updates related to the Paycheck Protection Program, which is the centerpiece of the massive stimulus package known as the Coronavirus Aid, Relief, and Economic Security, or CARES, Act.[1]

The PPP is an amendment to the Small Business Act,[2] and it seeks to serve as a lifeline to eligible businesses by providing a forgivable loan to pay for temporary payroll costs and certain other business expenses. Since the passage of the PPP, questions have arisen about who is eligible to apply and how to obtain loan forgiveness.

To complicate matters, the government promised audits for larger loans, and prosecutors charged the first PPP fraud case. If prior government stimulus programs are any teacher, fraud schemes involving the PPP will abound, and enforcement efforts by the government will be robust, especially for larger loan applications.

This article takes a closer look at the PPP from the business owners' perspective, summarizing the most likely cause of compliance headaches and predicting likely areas of government enforcement actions.

What is at stake if an applicant gets it wrong?

On May 5, federal prosecutors announced the first criminal case related to PPP fraud.[3] In that case, two defendants were charged with making false statements in order to obtain an SBA loan and conspiring to commit bank fraud.[4] One of the defendants was also charged with aggravated identity theft.[5] The government alleged that defendants falsified PPP loan documents, necessary tax forms and fabricated employees.[6]

It is, perhaps, the brazen nature of the fraud scheme — fake businesses, forms and employees — that explains the swift government action. Indeed, similar prosecutions under the Troubled Asset Relief Program, or TARP, following the last huge government stimulus package, took years to ferment.

But, one does not need to fabricate businesses and lie about employees to run afoul of the eligibility and use rules under the PPP. As summarized below, the PPP has specific rules about which businesses qualify for assistance, how to calculate the loan amount, and complicated restrictions related to loan forgiveness.

Moreover, the loan application and rules regarding the PPP require a substantial good-faith certification. The certification language carries, as it almost always does, warnings of potential penalties. As stated in interim final rule 1, the Small Business Administration may direct the repayment of any PPP funds if used for unauthorized purposes, and knowing misuse of the funds could result in additional liability such as charges for fraud.[7]

With the specter of disgorgement and additional penalties, what are the most likely areas of compliance headaches for current or potential borrowers?

Can the business make the good-faith certification regarding loan necessity?

Whenever money is obtained on the basis of a signed and certified form, you can be sure fraud prosecutions will follow. This is especially true when the standard to which the applicant is certifying is somewhat vague. The PPP includes a substantial certification regarding eligibility and use of funds.

The most concerning is the necessity certification, in which the borrower "must certify in good faith ... [that c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant."[8] Neither "uncertainty" nor "necessary" are defined terms, which begs the question, what is enough uncertainty to make the loan necessary?

Early disbursements under the PPP created even more uncertainty. As recently reported in the Washington Post, "[n]early 300 public companies have reported receiving money from the [PPP]," including "43 companies with more than 500 workers, the maximum typically allowed by the program."[9] In total, more than $1 billion was paid out to publicly traded companies.[10]

Despite outrage over these disbursements, the U.S. Department of the Treasury hailed the program as a success, but at the same time issued stern warnings regarding forthcoming audits for loans over $2 million and potential criminal liability.[11] The Treasury Department also created and then extended a deadline to return funds.[12]

In an attempt to clarify the necessity certification, the Treasury Department posed and answered the following question in a frequently asked questions document it is periodically updating: "Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan?"[13]

Though a simple no might have clarified the issue, the government opted to dance around the answer, offering some guidance, but little clarity. The answer stated, "all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application."[14]

The answer went on to state that, while borrowers need not show that they are unable to obtain any financing elsewhere:

borrowers still must certify in good faith that their PPP loan request is necessary ... taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.[15]

In what may be the only piece of actual guidance in the answer, the document stated:

it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.[16]

So, big, profitable companies probably don't qualify, but maybe they do. This is not a revelation and not particularly helpful to the smaller, nonpublic companies that must also make the necessity certification.

The Treasury Department further updated its FAQ document on May 13 to provide additional comfort to applicants on the issue. The FAQs read, "[h]ow will SBA review borrowers' required good-faith certification concerning the necessity of their loan request?"[17] The answer has two parts: one for loans under $2 million and one for loans over $2 million.

For loans under $2 million, the Treasury Department announced a safe harbor, stating that any borrower receiving such a loan "will be deemed to have made the required certification concerning the necessity of the loan request in good faith."[18] For loans over $2 million, the guidance is cold comfort. The government did not clarify what necessity means for these larger loans, but stated:[19]

If 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. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies.

Based on this guidance, applicants for larger PPP loans still lack specific rules on the appropriate circumstances justifying necessity, but are now assured that administrative enforcement and potential criminal referrals will not follow if the ineligible loans are returned in a timely manner.

Importantly, applicants should not assume that if they apply and receive the money, all is well. Indeed, it is a common experience in other contexts that the lender determines eligibility for and the amount of a loan. For instance, when taking a home equity loan, borrowers submit the necessary documentation and the bank, after a review, appraisal and underwriting process, tells the borrower what amount can be lent.

But, with the PPP, the language of the certification and the rules make clear that the onus of compliance is squarely on the borrower, and lenders may rely on the borrower's representations and documents. As stated in interim final rule 1:[20]

SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders ... will be held harmless for borrowers' failure to comply with program criteria[.]

So, what should businesses do in assessing their own need for a PPP loan? It is not entirely clear, but two concepts emerge from the Treasury Department's guidance: current business activity and access to other sources of liquidity.

First, the business should be sure that it can document that its "current business activity" has been negatively impacted by COVID-19. For most small-to-medium-sized businesses, it will be easy to produce financial documentation showing a downturn in business caused by COVID-19. The financials need not be existentially bleak but should evidence enough dislocation to show that a loan is needed to effectuate the PPP's own stated goals, that is, to maintain current payroll levels and to support ongoing operations.

Second, be sure that the business does not have an alternative source of liquidity. In an effort to discourage public companies from applying for the loan, the Treasury Department guidance specifically referenced market value and access to capital markets as two examples of alternative sources of liquidity, but one could imagine that it might also be hard to make the necessity certification if the business had available to it, before onset of the health crisis, a large line of credit.

How much money am I eligible to take?

Beyond the certification issues, there are also compliance questions around the amount of the loans. The PPP sets out specific calculations to be used in determining the amount of the loan.[21] There is a $100,000 salary cap for payroll calculations, and borrowers have to provide backup for their payroll claims, including tax forms.[22] Businesses are eligible to obtain 2.5 times the amount of their monthly eligible payroll, up to $10 million.[23] Once again, the PPP largely places the onus of compliance on the borrower.

As stated in the Treasury Department FAQs:

Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form.[24]

The FAQs also state: "[L]enders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs." The recent criminal charges indicate that the government is prepared to look behind claims regarding the number of employees and purported tax filings.

Thus, while the specificity of the loan calculation formulas avoids the risk of uncertainty in how to calculate the loan amount, it does raise the need for careful (and truthful) documentation to support payroll claims.

How will loan forgiveness be calculated?

Perhaps the most attractive feature of the PPP is that the loans can be fully forgiven. But, the PPP has strict rules regarding loan forgiveness and statutory mechanisms that may reduce the amount of forgiveness depending on the borrower's actions during the 8-week period following loan origination.

Moreover, no borrower will receive forgiveness unless certain required documentation is timely submitted to the lender[25] and as of May 15, borrowers must complete an application for loan forgiveness with a detailed schedule documenting use of the loan funds.[26] Thus, if businesses hope to have their loans forgiven, compliance with the use restrictions is a must and good record-keeping a necessity.

First, PPP loans will be forgiven in an amount equal to the sum of payroll costs, mortgage interest, rent and utility payments, for the eight-week period beginning on the date of loan origination.[27] It is, therefore, imperative for businesses to use their loans only for these four approved uses and to document such uses carefully.

Second, not all costs were created equal under the PPP. The rules state that not more than 25% of the loan can be used for nonpayroll costs.[28] As explained in the interim rule:

the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.[29]

Given these restrictions, loan recipients will also have to carefully calibrate how the loan funds are disbursed in order to ensure that the loans will be forgiven.

Third, loan forgiveness is "based on the employer maintaining or quickly rehiring employees and maintaining salary levels."[30] The statute sets out formulas that serve to reduce the amount of loan forgiveness if the number of employees on payroll decreases during the 8-week period following loan origination,[31] or if salaries and wages decrease.[32] Exemptions for such reductions apply if employees are rehired during the period after the business received the loan.[33]

The new loan forgiveness application posted on May 15 provides a detailed schedule for borrowers to document their use of the funds. Accordingly, loan applicants should be keenly aware of the payroll claims they are making in connection with their application and should have a plan to use the funds in a manner that avoids loan forgiveness reductions.

Final Thoughts

The PPP provides a lifeline to businesses suffering as a result of dislocation brought on by the COVID-19 crisis. If businesses carefully comply with the eligibility and use requirements in the statute and attendant rules, the PPP could help thousands of businesses keep their doors open and their employees employed without taking on any additional long-term debt.

But, as with any large government stimulus program, there are strings attached. The statute contains detailed eligibility and use restrictions and a fulsome borrower certification. The statute also places the burden of truthfulness and accuracy firmly on the borrower. Thus, be aware that noncompliance with the statute's requirements can trigger penalties, including disgorgement, civil and criminal penalties, and loan forgiveness reductions.

David M. Eskew is a partner at Abell Eskew Landau LLP and a former assistant U.S. attorney and chief of the health care and government fraud unit in the district of New Jersey.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Pub. Law 116-136, available at

[2] 15 U.S.C. § 636(a).

[3] See Press Release, dated May 5, 2020, available at

[4] See Complaint, dated May 4, 2020, Mag. No. 20-33 (D.R.I.), available at, and Complaint, dated May 4, 2020, Mag. No. 20-34 (D.R.I.), available at

[5] Id.

[6] See, e.g., Affidavit of Christina Grady, dated May 4, 2020, ¶¶ 3, 9-27, available at

[7] Id.

[8] See 15 U.S.C. § 636(a)(36)(G)(i)(I); see also Interim Final Rule 1, 85 Fed. Reg. 73, at 20814.

[9] Jonathan O'Connell, Steven Rich and Peter Whoriskey, Public Companies Received $1 Billion in Stimulus Funds Meant for Small Businesses, Washington Post, dated May 1, 2020,

[10] Id.

[11] Sergei Klebnikov, Mnuchin Warns Of 'Criminal Liability' For Public Companies Taking Small Business Loans, Forbes, dated April 28, 2020,

[12] See Interim Final Rule, dated May 8, 2020, available at

[13] Paycheck Protection Program, Frequently Asked Questions, updated May 13, 2020, Question # 31, available at

[14] Id.

[15] Id.

[16] Id.

[17] Paycheck Protection Program, Frequently Asked Questions, updated May 13, 2020, Question # 46, available at

[18] Id.

[19] Id.

[20] Interim Final Rule 1, 85 Fed. Reg. 73, at 20812, available at

[21] See generally 15 U.S.C. § 636(E).

[22] See generally 15 U.S.C. § 636(E).

[23] Id.

[24] Paycheck Protection Program, Frequently Asked Questions, updated May 13, 2020, Question # 1, available at

[25] See Pub. Law 116-136, § 1106(f). 

[26] See Paycheck Protection Program Loan Forgiveness Application, available at

[27] See id., §§ 1106(a)(3) and (b)(1)-(4). 

[28] 85 Fed. Reg. 73, at 20813.

[29] 85 Fed. Reg. 73, at 20813-14. 

[30] Paycheck Protection Program Overview, available at

[31] See Pub. Law 116-136, § 1106(d)(2).

[32] Id., § 1106(d)(3). 

[33] Id. at § 1106(d)(5). 

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