Bruce Claassen

April 29, 2020

On Friday, April 24, 2020, President Trump signed the bill that authorizes an additional $310 billion in funds for the Paycheck Protection Program.  On Monday, the SBA reopened the application process, but it was quickly beset with problems due to the sheer number of applications that have waiting since the program ran out of money.   The SBA has also limited the number of applications that can be submitted to them to avoid crashing their system.  At this point, most experts anticipate funding will run out by the end of this week.  The good news is that there are restrictions placed on this new round of funding that specifically allocates funding to smaller banks and those in harder-hit areas to ensure that more small businesses have access to the funds.

 

As is probably unavoidable at times like these, there has been no shortage of second-guessing and Monday morning quarterbacking of the first round of funding.  A media firestorm has erupted around what many consider to be larger businesses who were able to access funding through this program because the CARES Act significantly relaxed how the standard affiliation rules apply to SBA loan applicants.  This allowed larger hotel and restaurant chains to obtain PPP loans even though their total employee count company wide is well over 500.    Some of these businesses have been publicly shamed into returned their PPP loan funding, even though many of them were the first and worst effected by the COVID-19 crisis. 

 

As a result of the public outcry, the SBA and Treasury have also updated their interim guidance to at least attempt to address this issue.  New Q&A #31 tries to provide guidance on this issue, and has led many legal experts around the country to caution all who have received a loan to now re-assess whether they really have been impacted by COVID-19, and return their funding by May 7, 2020, to avoid some serious legal consequences.   This “sky is falling” approach has caused a significant amount of panic amongst small businesses who received these loans and worry about facing the legal ramifications of making a false statement on their loan application.  It is certainly important to re-evaluate your situation and ensure that you have not made any false claims on your application, but it is equally important to remember the intent with which this program was enacted.

 

The new Q&A #31 specifically states that “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 application.”  The CARES Act set the bar pretty low, and was very general in how it was written.  It stated that you are eligible for a PPP loan if you have been impacted by COVID-19.   It also waived the normal SBA requirement that you must be unable to obtain credit elsewhere. 

 

The new guidance now indicates that a borrower must, in good faith, certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations…”  It also says that the borrower should take into account their current business activity and other sources of funding.  As a borrower, you must self-assess whether you’ve been “impacted,” and as long as the bank is in agreement, then you are approved.   The SBA is not making this determination.  Rather, it is handled between the bank and borrower.  The banks are being held harmless because the SBA understands that the bank really can’t know for sure that the business needs the funds.  That means if the SBA later determines that you obtained a loan under false pretenses, you alone will be held accountable.  Treasury Secretary Mnuchin has stated that the SBA may audit loans over $2 million to ensure the borrower indeed needed the funds.

 

The intention was and has always been to help small businesses continue to pay their employees, and the fact remains that most small businesses have been affected in some way by this crisis.  A few weeks ago, the main concern was obtaining funding through the program.  Now that some businesses have their funding, and more time has passed allowing a possibly different view of how COVID-19 is affecting their business future, it is a good time to re-evaluate your "needs."  

The original law required only that you be impacted by the COVID-19 crisis.  Nowhere in the law did it state that you needed to be on the verge of bankruptcy, or have no access to other funding means.  The new guidance now suggests that if you have other funding options available, then maybe you aren't eligible for a PPP loan.  Does that mean that if you have been funded for your loan, that you should return the funds?  If you choose not to, and are later audited by the SBA and found to have obtained a loan that you shouldn't have, will you face fraud charges?

 

There are no easy answers to these questions, but remember that you are making a “good faith” certification of need on the application.  There is no bright-line test, and the answer for every business will be different and extremely subjective.   If you are concerned that you may have exposure, we encourage you to seek the legal advice of an attorney who is experienced in SBA matters.  

 

If you’re interested, there is an interview on Youtube with Steve Bulger (Regional Administrator for SBA Atlantic Region) here.   There is a discussion regarding this specific topic at 14:50 of the video.

 

If you have questions about this, please give us a call.