May 18th, 2020

PPP Loan Program Updates: Additional Funding and Valuable “Safe Harbors”

The Frankfurt Kurnit Corporate Group continues to track developments in the Paycheck Protection Program (the “PPP”), adopted as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We have summarized below some key developments since our last update.

Availability of Funding. The initial tranche of $349 billion authorized under the PPP loan program was fully allocated by April 16th -- two weeks from the date on which applications were first being accepted.  The second tranche of $310 billion, approved April 24th, is not being distributed as quickly. According to Small Business Administration data, as of May 8th, 2020, approximately $189 billion in PPP loans had been approved under the second phase of the PPP loan program. This would mean that at least $120 billion in loan capital remained available for PPP loans as of that date (and possibly more, to the extent that previously approved PPP loans were returned by the borrowers).

If you have already applied, you can check on the status by calling 1-800-659-2955 24 hours a day (expect significant wait times). Additional information on the PPP, as well as the SBA’s Economic Injury Disaster Loan and Economic Injury Disaster Grants, can be found here.

Updates: A New Safe Harbor. Since the initial passage of the CARES Act, the SBA has issued guidance and “FAQs” to clarify certain PPP provisions. In our April 27th update, we addressed the SBA’s response to question 31 in its FAQs, which was released on April 23rd and indicated that the SBA would begin to scrutinize the borrower certifications regarding whether “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In particular, applicants, in certifying economic need for PPP funding, were to “[take] 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.” The SBA offered a form of amnesty in FAQ question 31 to applicants who may not have been able to substantiate their need for PPP funds (in light of their potential ability to access other sources of capital) if they returned their funding in full by May 7th. On May 5th, the SBA extended the period until May 14th, and promised additional guidance before the May 14th expiration date. 

Applicants faced significant uncertainty as to how to demonstrate actual economic hardship caused by the pandemic, and the need for PPP funding in light of their access to other sources of liquidity. The concerns for larger borrowers became greater after Secretary of the Treasury Steven Mnuchin announced on April 28th that all PPP loans in excess of $2 million would be audited to ensure compliance.  Borrowers of all sizes had to consider the risk that the government would question whether they had made the required certifications in “good faith.” [A certification that would have been deemed in “bad faith” could have resulted in considerable civil and possibly even criminal liability.    

The SBA relieved some of the uncertainty for many borrowers surrounding its May 13th responses to questions 46 and 47. In response to question 46, the SBA created a created a safe harbor with respect to SBA review for borrowers of less than $2 million by stating that such borrowers “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.“ This safe harbor, in essence, meant that the SBA would not refer applicants for less than $2 million of PPP money for civil or criminal penalties. The SBA also alleviated some of the anxiety of applicants with loans greater than $2 million by announcing that even if the SBA were to undertake a compliance review and discover that a borrower “lacked an adequate basis for the required certification” concerning the necessity of a loan, the borrower would not automatically be subject to civil or criminal liability. Instead, the SBA has stated that it would seek repayment of the loan and inform the applicable lender that the borrower is not eligible for loan forgiveness under the PPP loan program. If the borrower repays the loan following notice from the SBA, then the SBA will not pursue administrative enforcement or referrals to other agencies (i.e., the Department of Justice) based on a faulty certification[1].

Why Provide a Safe Harbor? The SBA provided two reasons.  First, the SBA assumed that borrowers of smaller loans are less likely to have access to capital and more likely to truly need the loan to retain and hire employees than borrowers with larger loans (in essence doubling down on the assumption they stated in FAQ question 31 that public companies are less likely to be able to make the necessary certifications). Second, the SBA wrote of its desire “to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”  The latter explanation was more likely to be the true driver of this guidance; as of May 8th, a total of 2,571,167 loans were extended, of which only 7,900 were in excess of $2 million, representing about 19% of the total principal amount of loans extended. Notwithstanding the establishment of the safe harbors announced by the SBA in its FAQs, applicants would still be well-advised to document the support for the decision to accept a PPP loan, such as cash flow projections and sources of funds.

If you have questions about applying for PPP loans, or about other CARES Act developments, please contact Jay Rand, Deborah Wolfe, Tricia Legittino, Wendy Stryker, or any other member of the Frankfurt Kurnit Corporate and Employment Groups.  

[1] In its response to FAQ question 47, the SBA extended the safe harbor for returning a loan until May 18th.