On May 13, 2020, the Small Business Administration (SBA), with support from the Department of the Treasury, made two important announcements in its Frequently Asked Questions for administration of the Paycheck Protection Program (PPP), established by the CARES Act. The PPP provides small businesses with funds to use during the eight-week period from the first date of loan disbursement to cover allowable costs. These include payroll costs, including health care and retirement benefits, as well as certain other prescribed costs, such as interest on mortgages, rent, and utilities.

While nonprofits traditionally have not been able to participate in SBA loan programs, that changed with the CARES Act. The PPP, administered by the SBA pursuant to its 7(a) business loan program, is available to Section 501(c)(3) charities or 501(c)(19) veterans organizations that (i) were operational on or before March 1, 2020 and (ii) either (A) have fewer than 500 employees (taking into account full and part-time employees and employees of affiliates) or (B) meet the SBA employee-based size standards for the industry in which they operate. On May 3, 2020, the SBA expanded the eligibility criteria to include certain nonprofit hospitals that are tax-exempt but have not been recognized as exempt under Section 501(c)(3) of the Internal Revenue Code. There is a required “necessity certification” a nonprofit must make when taking the PPP loan, which provides that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (Necessity Certification).

SUMMARY

Since the launch of the PPP, guidance from the SBA and Treasury has been evolving as these agencies attempt to address the many questions that have arisen as borrowers and lenders strive to navigate the program. Successful nonprofit PPP loan applicants are required to make the Necessity Certification when accepting the PPP funds.

The evolving guidance has caused challenges for successful nonprofit PPP loan applicants when determining the risks of retaining such loans in light of subsequent SBA guidance on the Necessity Certification.

On May 13, 2020, the SBA issued new Frequently Asked Question 46, which provides a safe harbor for those borrowers who have loans less than $2 million:

  • 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.

FAQ 46 also notes that, for loans greater $2 million if the SBA determines that a borrower lacked an adequate basis for its good faith Necessity Certification, 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.”

Also notable is new FAQ 47 that extended from May 14, 2020 until May 18, 2020 the deadline for any borrower to return PPP loan proceeds to the lender if the borrow determines it had access to other funds at the time of the PPP loan. This extension gives borrowers time to consider FAQ 46.
This alert seeks to provide background on the challenges that have existed around the “Necessity Certification” and how new FAQ 46 may provide some comfort to nonprofits seeking some clarification on this requirement.

FAQ 17

On April 6, 2020, FAQ 17 was released and states:

Question: I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?

Answer: No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.

This guidance dovetails with later guidance, contained in the Interim Final Rules dated May 5, 2020, wherein the rules clarified, in connection with explaining that student workers should be counted for purposes of the 500-employee test unless they are participating in federal or state work study, that: “Educational institutions that filed loan applications prior to the issuance of the regulation are not bound by this interpretation but may rely on it.”

For many commentators, this FAQ 17 stands for the principle that PPP borrowers may rely on reasonable determinations made in good faith based upon guidance it had at the time of its application. However, subsequent to FAQ 17, FAQ 31 was released and seemingly presented an exception to this general principle with respect to the Necessity Certification for the loan.

FAQ 31 and 43

On April 23, 2020, SBA released FAQ 31 which suggested that borrowers should review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (hereinafter referred to as the “Necessity Certification”). Also, this FAQ provided that any borrower who applied for a PPP loan prior to April 24, 2020, and repaid the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.

In other words, the FAQ created a “safe harbor” for loan repayment if the borrower determined that its Necessity Certification might not be supportable. On May 5, 2020, FAQ 43 extended the repayment date for this safe harbor to May 14, 2020, again noting that any borrower who opts to return the loan by this date will be deemed by SBA to have made the required certification in good faith. SBA then memorialized the safe harbor provision, including the May 14 deadline, in interim final rules issued on May 5, 2020. SBA noted that the safe harbor was created “to ensure borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standards.”

SBA provided additional guidance around this certification in other FAQs as well. In FAQ 37 (released April 28), SBA clarified that this guidance to revisit the certification applies to private companies (not just public companies). Further, in FAQ 39 (released April 29), SBA reminded borrowers of the “important certification required to obtain a PPP loan” and stated that it would review individual PPP loan files upon submission of the loan forgiveness application, including specifically all loan files in excess of $2 million, as well as other loans “as appropriate.”

Note that the certification representations for the loan include a statement that “[a]ll certifications made below are in compliance with the rules and definitions that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program …” Further, on the Borrower Application Form, a similar statement appears, but with an important caveat: “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program …” 

FAQ 31 suggests borrowers should look at the Necessity Certification (at the time it filed its application and at the time it signed the loan documents) “taking into account [its] current business activity and [its] ability to access other sources of liquidity sufficient to support [its] ongoing operations in a manner that is not significantly detrimental to the business.” It seems likely that the recommended re-examination contained in FAQ 31 should be read solely related to the Necessity Certification, and should not be read to undermine the guidance in FAQ 17 and the updated Interim Rules, which suggest that a borrower can rely on the guidance that existed at the time of its application for purposes of determining eligibility and other guidance.

Put differently, SBA and Treasury have not released guidance that asked applicants to review updated guidance on a rolling basis and revisit their entire loan application—including borrower eligibility—based upon updated guidance throughout the entire eight-week covered period or even during the full term of the loan.
The evaluation whether an applicant can make the Necessity Certification is inherently a fact-intensive assessment based on the circumstances as they existed at the time of the loan application. Nonprofit borrowers should not lose sight of the fact that the PPP was designed to incentivize applicants during this pandemic to maintain payroll (i.e., not terminate or furlough employees, or reduce their salaries) for the eight-week covered period. Nonprofit borrowers that received this PPP loan and made business decisions in reliance on the anticipated forgiveness should be documenting the facts that were at issue at the time they applied for the loan, including the manner in which the loan enabled them to forgo or delay consideration of significant reductions in salaries and staffing, or alternatively, to recall employees to work.

REVIEW BY SBA

On April 28, 2020, Treasury Secretary Steven Mnuchin stated that the government will perform a full audit on any company taking out more than $2 million from the small business loan program prior to any loan forgiveness. This promise to review loans above $2 million was thereafter memorialized in FAQ 39, which states:

“To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.”

On April 13, 2020, SBA, in consultation with Treasury, released FAQ 46 which provides more detail on how the SBA intends to review borrowers’ loan applications, including the Necessity Certification. This FAQ confirms (or re-confirms), among other things, 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.
  • 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.
  • Borrowers with loans greater than $2 million “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.”
  • 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.”

In addition, New FAQ 47, also released on April 13, 2020, extended from May 14, 2020 until May 18, 2020, the deadline for any borrower to return PPP loan proceeds to the lender if the borrow determines it had access to other funds at the time of the PPP loan. This extension gives borrowers time to consider FAQ 46.

This guidance should provide much needed comfort to nonprofits who submitted and received funds under the PPP based upon a good faith certification at the time of application and were grappling with subsequent guidance on the Necessity Certification.


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