Federal PPP Loan Program and “Economic Uncertainty” Certification – Safe Harbor Extended to May 18th, 2020

May 14, 2020 | Shawn M. Govern

The Federal Government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or “Act”) on March 25, 2020.  Section 1102 of the Act created the Paycheck Protection Program (“PPP”) to help small businesses cover their payroll expenses for up to eight (8) weeks and to assist with some limited expenses (rent, mortgage interest and utilities) during the sixty days that most businesses anticipated being shuttered due to the Novel Coronavirus Pandemic and most Stay at Home Orders being issued or recommended around the country.  This program was to be administered by the Small Business Administration (SBA) in consultation with the US Department of Treasury. 

Obviously, there have been a lot of questions and modifications that have occurred as the program was rapidly rolled out and seeks to quickly address many small business owners.   To guide professionals, applicants and local bankers who have processed the loans, the SBA and Treasury Department have issued a growing document (PPP - Frequently Asked Questions) which has been updated multiple times since the PPP program was unveiled.   The most recent update occurred yesterday on May 13, 2020 in response to a flurry of concern from many small businesses who reacted to the Treasury Department warning on April 29th, that all PPP loans awarded in excess of $2 million will be subject to review as well as “other loans as appropriate.”    This touched off a firestorm.  Many small businesses, despite hard times, considered returning the money and/or methods of defending anticipated audits or worse yet, prosecutions.

In response, on May 5th, the SBA in consultation with the Treasury Department extended the deadline (“Safe Harbor”) for returning loan funds from May 7th to May 14th, returning of the funds would result in no investigation or audit and the original application would be presumed to have been submitted in “good faith” - as noted below the Safe Harbor has been further extended to May 18.  In extending the deadline for the return of funds,  the Treasury Department further reminded everyone that applicants were to certify on the borrower application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  

Of course the admonishment about the “certification” requirements also created anxiety amongst small business owners all over the country.  What does “economic uncertainty” mean and how do I know if my economic uncertainty will be satisfactory under Federal Government scrutiny?  Will my particular facts qualify?   Is it worth keeping the money?  What if I’ve relied upon these funds and they're not forgiven as anticipated, in which case, I will have put my small business in a worse situation, with large payments on a loan that I didn’t want (recall the funds that are not forgiven, are converted to a two year loan at 1% interest, with up to a 6 month deferment).   Although a 1 % loan is great, the repayment period of two (2) years, depending upon the total amount of the loan, could result in very large payments.

When the Treasury Department issued the extension of the Safe Harbor from May 7th to May 14th, it promised to issue further guidelines on what “economic uncertainty”.   Those guidelines were issued yesterday (May 13th) one day before the expiration of the Safe Harbor.  As part of the issuance of the guidelines on the definition of “economic uncertainty”, they further extended the Safe Harbor to May 18th.

According to the SBA in consultation with the Treasury Department, here are the guidelines for determining whether your business’ application for PPP funds and your certification of “economic uncertainty” was done in good faith, Treasury Department PPP Frequently Asked Questions #46 reads as follows:

“When submitting a PPP application, all borrowers must certify in good faith that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’  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.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold ar generally less likely to have had access to adequate sources of liquidity in current economic environment than borrowers that obtained larger loans.  This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.  In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, 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.  SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.   If 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.  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.  SBA’s determination concerning  the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.”

The bottom line is that the Safe Harbor exists for all recipients up to $2 million awards.  After $2 million, the applicants may be subject to audit or inquiry. However, if they can establish and illustrate economic uncertainty at the time of their application, they nevertheless will satisfy the economic uncertainty criteria.   How does an applicant who has received a PPP award in excess of $2 million satisfy the economic uncertainty criteria? The following is a list of suggestions: 

  1. Prepare a timeline leading up to and continuing after the PPP application was signed and submitted to the lender.  Information which should be included:
    • Illustrations that demonstrate the lack of other liquidity to support its ongoing operations;
    • Even if there were other sources of liquidity (i.e. Line of Credit; deposit accounts; etc.), prepare an explanation as to how implementing the use of these sources would have been detrimental. (For example, a business which has a large payment to complete an acquisition has been setting aside, on a regular basis, funds to meet that future obligation.  This clearly is another source of liquidity, but tapping into it rather than applying for the PPP would have created a significantly detrimental situation in the near future.
    • Demonstrate a lack of revenue or a decrease in revenue;
    • Decrease in orders, invoices, distributions, bid requests, etc.;
    • Lack of available materials or supply chain conditions that adversely affect production;
    • Lack of marketing opportunities and the statistical impact (i.e.  If 30% of your future orders is a result of trade shows and all the trade shows were cancelled);
    • Demonstrate that your business was closed due to the determination that your business was not “essential” for purposes of remaining open under applicable Stay at Home Orders;
    • Perhaps your business is open but your primary customer base is not.   For example, a distributor of milk who provides milk for elementary schools.   With the schools closed perhaps a substantial portion of the orders have been cancelled, even though the distributor may still be delivering to grocery stores.
    • Reduction in work force due to illnesses, lack of public transportation, work force refusing to show up for work due to concerns about illness, etc.;
  2. If you have a board of directors, incorporate the facts and timeline information noted above and incorporate with a Board of Director’s Meeting, with written minutes and Resolution.   This demonstrates that you took steps to have the business analyze the need for the application.  Further illustrates a “good faith” process and effort in determining the economic uncertainty that justified the application.
  3. Take appropriate steps to adequately track the use of the PPP funds.  At the end of the day, the purpose of the programs is to guard payroll and to cover basic expenses of the business during an 8 week shut down.  Accordingly, your legitimate use of the funds will also serve as a method to justify your application.  Some methods of helping to justify the funds use:
    • If you have a separate payroll account from which you draw payroll, place at least 75% of the PPP award into the separate payroll account.  If necessary, open a separate account to help with the tracking of the funds and to avoid any argument that the funds were intermingled with other business revenues and were diverted to other expenses not permitted under the program.
    • Closely track the spending of the remaining 25% which is permitted for rent, mortgage interest and utilities accounts which were previously in existence before February 25, 2020.   Accordingly, track and keep receipts, invoices, cancelled checks (front and back sides of the checks) for all such expenditures.

DeWitt is here to assist business owners in navigating these uncertain times. Our team of attorneys welcome the opportunity to answer any questions you may have in relation to the PPP Loan Program.