SBA Clarifies Good-Faith Certification Review of PPP Loans

By: Kevan Lee Deckelmann, and Tara Walker

The Small Business Administration (“SBA”) has issued much-anticipated guidance on how the SBA will evaluate whether a key certification required of all Paycheck Protection Program (“PPP”) loan applicants was made in good faith.

Today’s guidance comes just one day before a May 14 deadline for borrowers to return loan money to the government under a “safe harbor” rule that sought to encourage certain borrowers, particularly large public companies with access to adequate reserves, to reevaluate whether they had made the required certification in good faith.  Under previously issued guidance, the certification will be deemed to have been made in good faith if borrowers return their loan money by May 14 (extending a prior deadline of May 7). The “necessity” certification, which has come under a great deal of scrutiny in light of quickly evolving guidance from the SBA, requires all borrowers to state on their loan applications that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The new guidance clarifies that the certification will be deemed to have been made in good faith in all cases where a borrower, together with its affiliates, received a PPP loan of less than $2 million.

Additionally, with respect to loans of more than $2 million, the guidance provides that, if it is determined that a borrower “lacked an adequate basis” for the required certification, the SBA will seek repayment of the outstanding balance of the loan and inform the lender that the borrower is not eligible for loan forgiveness for any amount of the loan. If the borrower repays the loan amount after receiving notification from the SBA, the SBA “will not pursue administrative enforcement or referrals to other agencies” regarding its determination respecting the certification.

Previously, the SBA had informed borrowers that it would examine all loans above $2 million following submission of a loan forgiveness application to “ensure PPP loans are limited to eligible borrowers in need,” but it had not provided clear details regarding the extent of such a review—or the consequences of a negative determination regarding the “necessity” certification. While this guidance does not elaborate on the factors or metrics the SBA will use to determine if a borrower lacked an adequate basis to make the certification in good faith, it largely removes the spectre of criminal prosecution threatened in prior guidance.

Today’s guidance makes no changes to the certification language itself, although it likely will give borrowers a degree of comfort in evaluating whether or not to keep their PPP loan.

To read more, please see the SBA’s list of PPP FAQs.