Paycheck Protection Program Update
UPDATE: On May 13, 2020 the SBA published additional FAQs stating it would be issuing a new interim final rule that will extend the deadline for the safe harbor from May 14, 2020 to May 18, 2020, and providing some clarity for small borrowers. See post here.
UPDATE: Late on May 5, 2020, SBA published another FAQ that extends the repayment date for the safe harbor discussed below until May 14, 2020. Borrowers who applied for a PPP loan prior to April 24, 2020 and are reevaluating whether they can in good faith make the required certification regarding the loan being “necessary”, in light of SBA’s guidance discussed below, now have until May 14, 2020 to repay the loan and be deemed by SBA to have made the required certification in good faith. The FAQ also states that SBA will be revising the interim final rule providing the safe harbor prior to May 14, 2020 “to provide additional guidance on how it will review the certification.” KMK will continue to follow developments in the PPP and looks forward to revisions to the interim rule which will hopefully provide clarity on this issue.
On April 21, 2020, the Senate approved by unanimous consent a relief package to mitigate the economic fallout of the coronavirus pandemic, which in part, provides an additional $310 billion appropriation to the Paycheck Protection Program (PPP). This relief package increases the total appropriation to PPP from $349 billion (as established by the CARES Act) to $659 billion, after the first $349 was allocated in just 13 days. Of the additional allocations, $30 billion is dedicated to insured depository institutions and credit unions with consolidated assets between $10 billion and $50 billion, and $30 billion is allocated to community financial institutions, insured depository institutions and credit unions with consolidated assets of less than $10 billion. The House is currently scheduled to consider, and expected to pass, the measure today (April 23, 2020).
The initial round of PPP funding has been subject to sharp criticism after publicly traded restaurant groups and other companies deemed by the public not to need the funds received PPP loans. Treasury Secretary Steven Mnuchin warned of “severe consequences” for large companies that took advantage of PPP loans, adding that the Treasury Department will be publishing an FAQ that will instruct large corporations not to take funds from the PPP program. Sen. Marco Rubio, R-Fla., went one step further, tweeting that the certifications made by business applicants about the necessity of their loan request would be enforceable by the federal government, noting that “any company (of any size) that hasn’t been harmed by the current economic conditions & nevertheless applies for & receives #PPP has a big problem.”
The CARES Act explicitly suspends the ordinary SBA loan requirement that borrowers must be unable to obtain credit elsewhere, and replaces it with a good faith certification that “current economic uncertainty” makes a PPP loan “necessary to support the ongoing operations” of the Borrower. Today, SBA and Treasury published additional guidance in their FAQs that, in our view, materially changes how the good faith certification has been interpreted by most businesses and advisors and, for some companies, may change their analysis of whether they are eligible for a PPP loan.
In this new FAQ, SBA and Treasury answer the question “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” In the answer, SBA and Treasury recognize that credit available elsewhere standard was suspended by the CARES Act, but that certification regarding whether the PPP loan request is “necessary” must take into account a business’s “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.”
To date, most companies and advisors have conducted this analysis based solely on a business’s current business activity and economic uncertainty, consistent with the language of the CARES Act. The “other sources of liquidity” factor appears to be a version of the no credit available elsewhere requirement that was specifically waived in the CARES Act. The guidance goes on to state that “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 SBA, upon request, the basis for its certification.”
The guidance provides a safe harbor for borrowers that applied for a PPP loan prior to the issuance of this guidance and may no longer be eligible in light of the updated guidance. If such borrowers repay the PPP loan in full by May 7, 2020, SBA will deem that the prior certification was made in “good faith.”
It is unusual for a federal agency to take such an action via FAQ that is not subject to the notice and comment, as well as other normal procedures of the federal regulatory process. Despite the unusual method, companies who have applied or who may apply for a PPP loan should analyze this new guidance to ensure they are still eligible for a PPP loan, which involves multiple factors that vary from business to business. Businesses may also want to consider public reaction to obtaining a PPP loan should the list of recipients become publicly available. The CARES Act is silent whether the list of PPP loan recipients is public information, but such information may be disclosed by the SBA, Congress, or the media via a Freedom of Information Act request or leak.
KMK Law has commercial finance, tax and employment experts as well as a multi-disciplinary team ready and willing to advise on such matters. Please contact a KMK attorney for assistance, including those listed below.
Nicholas L. Simon
Partner
513.579.6574
nsimon@kmklaw.com
Julie T. Muething
Partner
513.639.3870
jmuething@kmklaw.com
James C. Kezele
Partner
513.579.6958
jkezele@kmklaw.com
Zachary T. Gubser
Associate
513.579.6474
zgubser@kmklaw.com
Nicholas D. Kereiakes
Associate
513.579.6467
nkereiakes@kmklaw.com
KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.
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