Starting the Week with Critical Updates to the SBA Paycheck Protection ProgramAnchin AlertApril 27, 2020
There have been additional developments over the last several days regarding the Paycheck Protection Program (PPP) and the only thing we can say with certainty is that more changes will come!
The amount of PPP Loan availability has been increased by $310 billion while the program is facing additional scrutiny for many banks’ prioritization of certain loan applicants over others, and also for the financing needs of the applicants themselves. Lenders, borrowers and the SBA itself all seem to be reeling from delays and a series of changes to the program which was rolled out with little time for planning to disburse what is now more than $650 billion of loans and relief.
Look for political pressure to increase, possibly causing a “tightening” of loan forgiveness provisions. It is late in the game for this to happen with 1.6 million loans already made and so many businesses that are struggling to survive counting on the forgiveness provisions as promised. However, there are already proposals being floated in Congress to add additional hurdles to qualify for forgiveness.
Below, we list critical updates to the PPP Program that every applicant should carefully review. Please read through and contact your Anchin Relationship Partner, or the Anchin COVID-19 Resource Team at firstname.lastname@example.org for further information. Key Recent Updates:
1. On Friday, April 24, 2020, additional funding was signed into law. Key provisions relating to PPP loans and other crisis-related funding include:
a. Increase of PPP loan funding by $310 billion to $659 billion;
b. $60 billion of the increased PPP loan funding has been set aside for smaller lenders, including $30 billion for FDIC-deposit institutions and credit unions with assets between $10 billion and $50 billion and another $30 billion for “community financial institutions,” and FDIC deposit institutions and credit unions with assets of less than $10 billion;
c. Increase of SBA Economic Injury Disaster Loan (EIDL) Emergency Grant funding from $10 billion to $20 billion; and
d. An additional $50 billion in funding for EIDL Loans related to Covid-19.
2. The Treasury and SBA issued a joint statement late Friday that the SBA will begin processing applications again on Monday, April 27 at 10:30 am ET. We expect that they will begin with applications that lenders had already approved and submitted to the SBA before the prior funds were exhausted. The SBA is also expected to prioritize applications from smaller lending institutions under the parameters outlined in 1b above.
3. The Treasury added FAQ #31 on Thursday, April 23, 2020. Here is the Question and the key sections of the Answer. We have added the emphasis indicated below:
a. Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
b. 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, 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. For example, 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 the SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by the SBA to have made the required certification in good faith.
4. The Treasury and SBA issued a new Interim Final Rule on Friday, April 24, 2020 that listed several items in the form of an FAQ. These include:
a. Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.
b. The SBA affiliation rules do not necessarily make portfolio companies of a private equity fund ineligible for PPP if they still meet the size threshold. However, such borrowers should “carefully review the required certification on the PPP Application Form stating that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’”
c. A business’ participation in an ESOP does not result in affiliation with the ESOP and is therefore otherwise eligible for PPP.
d. A business in bankruptcy is ineligible for PPP.
e. Repeats the May 7, 2020 date as a “limited safe harbor” for borrowers who applied prior to April 24, 2020, and will be considered to have acted in “good faith” if the loan is repaid by May 7, 2020. “This safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.”
5. Many lenders have communicated with their customers, sharing FAQ #31 verbatim and characterizing it as new guidance that “strengthens some of the language regarding qualifications” for PPP. Some banks have created an email address for customers to use to withdraw their pending application or to notify the bank of their intention to return their loan if “you do not believe that your business meets the definition of economic need.”
6. At least one bank also shared the following regarding the governing SBA regulations:
a. Please remember that you also certified you understood that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
What Should Business Owners Do Now?
All existing PPP borrowers, applicants and potential applicants should again consider whether they meet the conditions of the certification. This is a judgment call that companies must make for themselves based on their specific facts and circumstances. We encourage you to consider your eligibility in light of the new guidance and to speak with your attorneys.
It is good practice for any borrower under PPP to document their reasoning in completing the certification and to list the factors considered in reaching the conclusion that the PPP loan funds were “necessary” under the terms of the CARES Act based upon economic need.
Disclaimer: Please note this is based on the information that is currently available and is subject to change.