FAQ 46 & 47: Crime & Punishment (or the Lack of Either) for PPP Loans Large and Small

With one day to spare before the May 14 “Limited Safe Harbor” expires, the SBA released FAQ #46 (May 13) to explain the process of how the SBA will review Paycheck Protection Program (PPP) loans. The new FAQ, unfortunately, prompts more questions than answers regarding risks around certifications required under the PPP. Later in the day, the SBA also released FAQ 47 extending the May 14 deadline to May 18, with “a revision to the SBA’s interim final rule” to follow–or, put another way, more to come.

FAQ 46’s guidance neither clarifies nor alters the meaning or factual premises adequate to certify “necessity” for PPP loans. Instead it explains the SBA’s planned approach for the SBA’s audit and review of PPP loan applications. Borrowers of loans below $2 million are breathing a sigh of relief, especially if they experienced anxiety regarding whether they fully satisfied the necessity requirement. That said, FAQ 46 is more accurately analogized to the IRS saying, “We’re unlikely to audit your tax returns, and if we do, we’ll simply ask for the money you owe us without penalties and interest,” but ONLY if (1) you have the money to repay when required and (2) if you erred solely on the certification of need.

While the FAQ seems to provide a “safe harbor” and to “deem good faith,” it lacks clarity and finality, as it would appear to bind only the SBA, rather than the Department of Justice (DOJ) or potential private litigants. Moreover, regardless of the size of the loan, fraud and problems resulting from missteps in the hyper-technical affiliation and eligibility rules remain fair game for prosecution and were never part of the “limited safe harbor” the SBA had earlier announced.

FAQ 46 provides in relevant portion that in the SBA’s review of a borrower’s good faith certification of a PPP loan application:

“[The] SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to [the] SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,²⁰ received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

This appears as a “safe harbor” solely for certification of need for borrowers (not affiliation rules properly, for instance) with loans aggregating under $2 million (including all loans taken by borrower’s affiliates). FAQ 46 continues:

“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor 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 …”

This statement is somewhat confusing because the “safe harbor” applies only to “PPP loans with an original principal amount of less than $2 million,” so that ALL borrowers with loans greater than $2 million will not satisfy the safe harbor.

FAQ 46 then provides:

“[The] SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by [the] SBA for compliance. … If [the] 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, [the] SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” (emphasis added).

While some have posited that FAQ 46’s safe harbor seems to apply to all loans below $2 million, the above passage clearly speaks of BOTH loans above $2 million “and other PPP loans as appropriate …” In other words, it is unclear precisely how “safe” the harbor is. It is also unclear whether an investigator or prosecutor must carry a steep or modest burden to overcome the borrower’s “deemed …good faith” and shift the borrower into the category of having “lacked an adequate basis for the required certification” of necessity. In other words, while the SBA will clearly scrutinize loans above $2 million, the SBA has been vague regarding the scrutiny the SBA will apply to smaller loans.

Additionally, it is unclear whether FAQ 46’s specific language means that the SBA is restricting itself so that the SBA is ONLY able to seek repayment while the loan remains outstanding: “SBA will seek repayment of the outstanding PPP loan balance” (emphasis added). This detail is important because loan forgiveness is supposed to happen with real speed, which would give the SBA very little time to review these loans. The SBA could have phrased this as “the SBA’s entitlement to ‘seek recovery’ of the original loan amount (regardless of whether forgiven or partially repaid).” The current phrasing supports arguments that FAQ 46 could preclude the SBA from asserting loan recovery rights after the loan has been either repaid or forgiven.

FAQ 46 next outlines the process the SBA will follow:

“If the borrower repays the loan after receiving notification from [the] SBA, [the] 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.”

We are uncertain of how binding the SBA’s articulation of its loan review process will be on the DOJ, though we do note that the SBA has clearly stated its flagging enthusiasm for generating leads for the DOJ as to many of these loans. We also believe that FAQ 46 will, as a practical matter, make it more challenging for the DOJ to enforce claims arising from the certification of need on loans below $2 million. It will be interesting to watch how enforcement priorities change in the coming months and after the elections, as well as how public perception will unfold regarding these loans.

While stating that all applicants for amounts under $2 million will be deemed to have been filed in good faith, FAQ 46 does not change the legal requirement that applicants must in good faith certify need. If that certification is inaccurate, it is still a violation of law and could still be subject to federal enforcement action even though not uncovered in the SBA’s review or audit process. The SBA will require return of funds from borrowers–and we read that to mean borrowers of loans of any size–rather than penalties, unless the borrower cannot repay. Yet, FAQ 46 does nothing to prevent negative publicity or private plaintiffs’ actions. Of course situations of alleged egregious misuse of funds will still bring enforcement, like the action announced on May 13 (where the Atlanta-based borrower used the funds to, among other things, lease a Rolls Royce, buy a Rolex, and pay child support (NBC Reporting)) and the first prosecutions DOJ announced (May 5, Rhode Island (DOJ announced that the borrowers had “discussed via email the creation of fraudulent loan applications and supporting documentations”)).

As to negative publicity, on May 12, five major news organizations (The New York Times, The Washington Post, the parent company of The Wall Street Journal, Bloomberg, and Pro Publica) sued the SBA under the Freedom of Information Act (FOIA) “seeking access to records showing who received subsidized loans under both programs, the size of each loan and which bank processed the loan, as well as other loan-specific information.” (See Washington Post coverage). This is consistent with our firm’s earlier publications regarding the application of FOIA to these loans (See April 8 and April 15 posts), as well as The Wall Street Journal’s reporting (April 21).

We will continue to watch the rapidly shifting landscape around PPP loans, especially as the SBA has advised us to expect an Interim Final Rule.

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here. 

Raymond P. Thek, Vice Chair, Tech Group, Lowenstein Sandler LLP.

Kathleen A. McGee, former Bureau Chief for Internet & Technology, NY Attorney General’s Office; served in Mayor Bloomberg’s Administration (Director, Mayor’s Office of Special Enforcement); prosecuted homicide and sex crimes as an Assistant District Attorney in the Bronx; now serves in Lowenstein Sandler LLP’s Tech Group and White Collar Criminal Defense Group.

Ed Zimmerman, Chair, Tech Group, Lowenstein Sandler LLP & Adjunct Prof. of Venture Capital, Columbia Business School, Co-Founder, VentureCrush.

Kimberly E. Lomot, previously certified as a Designated Attorney for SBA 504 Lending; serves as a debt financing and real estate lawyer at Lowenstein Sandler LLP.