Practice Areas

Treasury provides new guidance on enforcement of economic need certification

May 13, 2020

The U.S. Treasury Department on May 13 updated its Frequently Asked Questions document to explain how it will police compliance with the economic need certification of the Paycheck Protection Program (PPP). This is much-needed clarification for business owners who have recently become worried about the increasingly aggressive enforcement pronouncements by Treasury and the Small Business Administration (SBA).

Consistent with the CARES Act requirements, applications for loans under the PPP require participants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the [a]pplicant.” Over the past several weeks, Treasury issued several items of guidance making this certification more onerous and limiting, after the fact, the ability of companies to participate in the PPP. Those who had already received PPP loans have faced increasing uncertainty as to whether they would be forced to repay loans after spending the money to keep their businesses afloat or, in a worst case, be subject to civil or criminal penalties. We have previously provided guidance to companies to help minimize these risks.

Now, Treasury has added to the FAQ Question 46, which addresses the economic need certification and offers some important guidance.

  • Companies borrowing less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Treasury describes this as a “safe harbor” that is justified by the lesser resources of businesses that borrow less than $2 million and by SBA’s own “finite resources.” This is an important clarification and provides relief to the smallest participants in the PPP who should not have to worry that Treasury might conduct audits or investigations of companies who borrowed less than $2 million, absent separate evidence.
  • As Treasury has already announced, companies borrowing more than $2 million will be audited. Question 46 states that these larger borrowers “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.” Importantly, Treasury also states that if they conclude that a borrower was not eligible and the borrower repays the loan, there will be no further enforcement action by Treasury or the SBA.

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.

While Question 46 certainly offers helpful guidance, there are still plenty of unknowns. Does this guidance prevent further enforcement actions against companies based on separate evidence, such as resulting from a qui tam suit? Will borrowers of more than $2 million be required to repay the full loan immediately or over the term of the promissory note to benefit from this guidance? What will the previously announced audits of companies that borrowed more than $2 million consist of?

As the deadline for forgiveness applications approaches, it will be critical for Treasury to provide guidance on these points.

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