Today marks the end of the Small Business Administration’s (SBA) self-proclaimed amnesty period for ineligible borrowers to repay their loans under the Paycheck Protection Program (PPP). Last week, the SBA issued a flurry of information that borrowers should carefully review prior to making a final decision regarding repayment. Below we discuss the new information issued by the SBA last week, and we recap developments over the past several weeks.
I. How we got here
The PPP has been a lifeline to small businesses and nonprofits, providing a total of $659 billion in potentially forgivable loans that can be used for payroll costs and other designated expenses during an 8-week period. But the program has also come with significant scrutiny from the SBA, Congress, the Department of Justice (DOJ), and the news media.
In April, the news media reported that businesses few would think of as small (e.g., Ruth’s Chris, Shake Shack, the Los Angeles Lakers) were receiving PPP loans. Congress and the public expressed concern, and so too did the SBA. Why did these businesses qualify for loans issued by the SBA? There were a few reasons. First, the program eliminated many of the SBA’s typical restrictions in its 7(a) loan program—the SBA’s primary program for providing financial assistance to small businesses. It permitted businesses with fewer than 500 employees to qualify for loans, even if those businesses do not meet the SBA’s definition of a “small business concern.” For example, the Los Angeles Lakers, a sports franchise reportedly worth more than $4 billion with annual revenue last year above $400 million, would clearly not qualify as a small business concern. The Lakers, however, met the PPP’s alternative qualification of a business with fewer than 500 employees, which Congress did not tie to any revenue-based criteria.
Second, while typically SBA size-based standards require a business to include its affiliates, Congress expressly exempted businesses with a National American Industry Classification System (NAICS) number beginning with 72 from this requirement for PPP loans. NAICS 72 businesses are in the Accommodation and Food Services industry, which includes restaurants, bars, and hotels, among others. This meant that individual locations of national restaurant or hotel chains might still be able to qualify for PPP loans if they had fewer than 500 employees associated with that specific location. Not only that, but individual locations organized as separate business entities could each obtain a PPP loan. This led to some affiliated businesses receiving nearly $100 million in PPP loans, even though the program capped PPP loans at $10 million per borrower.
Following the public outcry, on April 23 the SBA put out new guidance which caused borrowers consternation and led many businesses to return their loans. That guidance—issued through SBA Frequently Asked Questions (FAQ) 31—focused on one borrower certification in particular. A borrower must certify, subject to the potential for civil or criminal liability, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Given the worldwide economic upheaval caused by COVID-19, and the continuing uncertainty for how long this unprecedented period will last, or what the economy will look like afterwards, this certification would not have given most borrowers pause.
In addition to the SBA’s guidance, Treasury Secretary Steve Mnuchin warned that borrowers could face criminal liability for retaining PPP loans that were intended for small businesses. Secretary Mnuchin and the SBA announced that every PPP loan over $2 million would be reviewed by the SBA, in addition to loans under $2 million where appropriate.
Following the SBA’s guidance and Secretary Mnuchin’s comments, many businesses returned their PPP loans and many more questioned if they should. The SBA established an amnesty period, which has been extended twice but is set to expire today, for ineligible borrowers to return their loans and, if the deadline is met, SBA will consider the original certification to have been made in good faith.
II. New guidance by the SBA last week
A. Need-based certification
For loans more than $2 million, the SBA also provided some comfort to borrowers. If the SBA determines in the course of its review that a borrower lacked an adequate basis for its need-based certification, it will give the borrower an opportunity to pay it back upon notification in order to avoid an administrative enforcement action or a referral to the Department of Justice, at least based on its need assessment. For borrowers that repay their loans upon notification, this does not entirely eliminate the risk of a civil or criminal action by the DOJ, as such an action could be brought without a referral by the SBA, but it does significantly reduce the risk that such an action will arise from the need-based certification.
B. New interim rule
On May 13, the SBA also published a new interim final rule that applies to partnerships and seasonal businesses, which will result in increased loan amounts for certain of these borrowers. As to partnerships, the SBA had previously issued an interim final rule on April 14 which clarified that individual partners in a partnership were not eligible to apply separately from the partnership for a PPP loan. Rather, the partner’s compensation could be counted as a payroll cost incurred by the partnership and included, subject to other applicable rules, in the partnership’s loan amount request. The SBA’s interim rule issued last Wednesday allows partnerships that previously excluded partner compensation to update their loans, so long as their lender has not yet filed an SBA Form 1502.
C. Forgiveness application
On Friday of last week, the SBA put out long-awaited guidance on the forgiveness process and promised further guidance and regulations would be coming soon. The SBA published the loan forgiveness application, instructions, calculation forms, schedules, worksheets, and the certifications borrowers would be required to make. The SBA used this opportunity to issue new rules and to clarify certain ambiguous provisions in the statute.
- New rules and clarifications
Section 1106 of the CARES Act contains the loan forgiveness provisions of the PPP. It allows for a borrower to receive forgiveness of up to 100 percent of its original loan amount, essentially turning the loan into a grant. Many borrowers, however, will not be eligible to receive full forgiveness because of several potential reductions contained in Section 1106. The guidance put out by the SBA on Friday does not change this reality, however it does offer some additional help and clarity.
Second, the SBA created an option for borrowers to use an “alternative payroll covered period” when convenient. Instead of beginning the 8-week period upon disbursement of the loan, the SBA will allow a borrower with a biweekly (or more frequent) payroll schedule to use the first day of their first pay period following the loan disbursement date. This will be very helpful for CFOs who were dreading the possibility of having to figure out payroll costs for a partial pay period.
- Additional certifications required
While the statute itself requires only two certifications in connection with a forgiveness request—namely, that the documentation presented is “true and correct” and that the amount of forgiveness requested was used for eligible expenses—the SBA had added a plethora of additional certifications into the forgiveness application. This presents additional risk of False Claims Act liability or criminal exposure in connection with statements made in the forgiveness application, and thus should be carefully reviewed by borrowers.
Among the additional certifications required are that the borrower “has accurately verified the payments” for the eligible payroll and nonpayroll costs, the amount requested includes “all applicable reductions” and that the amount requested does not include more than 25 percent in nonpayroll costs.