As businesses find themselves the recipients of funds from an approved loan under the Paycheck Protection Program (“PPP”) of the 2020 CARES Act, the focus has now shifted to how to properly use the money and whether, and to what extent, the loan will be forgiven, in light of the representations – and certifications – made in the application process.
Guidance on the program has come slowly and one of the main sources has been the United States Small Business Administration (SBA)’s “Frequently Asked Questions.”
In our last update, we pointed out that the SBA made it clear that the propriety of the loan itself – not just the extent of forgiveness – will be reviewed in part based on veracity of the certifications made by the employer at the time of its application. This review will take place at the time the borrower made application for forgiveness (FAQ #39).
Since the time of our last update, several new FAQs have been added by the SBA, including one that sheds light on the question of treatment of employees who do not want to return to work (FAQ #40), and another that extends the safe harbor date by which a borrower must return loan proceeds if it determines it is no longer comfortable with its original certification of the necessity of the loan (FAQ#43).
FAQ #40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Question #40, (published May 3, 2020) goes to the question of the importance of the number of employees used by the business owner in the representative period provided in the borrower’s original loan application. This “head count,” along with the way the funds are used, are key components in gauging potential forgiveness. The FAQ points out one of the “ugly truths” of the program: some employees would rather collect basic unemployment plus the additional $600 weekly payment provided by the CARES Act than return to work. Of course, as the question points out, refusing to work may make an employee ineligible for benefits, but many employers may not want to put their valued employees in the position of making that call, especially if they are in an industry that is not “essential” or are operating at much less than the capacity at which all employees are necessary.
We think the Answer raises more questions than it answers.
Borrowers need to await further guidance on this and several related issues.
The larger question based on recent FAQ’s, including the addition of Question #43 of May 5, 2020, is whether a borrower should have qualified for the PPP loan in the first place. In this regard the SBA issued FAQ’s #31, #37, and #39 addressing the certification made by borrowers on Application Form 2483 that “current economic uncertainty” made the loan “necessary”. While the Application Form had no criteria for making that determination, the SBA has now made it clear that in making that certification, a borrower was certifying that it had made a determination that it did not have “other sources of liquidity [that] were sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.”
The SBA offered guidance indicating that if a borrower had applied but now has “second thoughts” that it could return the money by May 7, 2020 and the certification would be deemed to have been made in good faith. In response to what were significant concerns over the nature of the elements involved in reviewing the certification, the SBA, in FAQ #43 published by the Treasury on May 5, 2020 has now extended the period to return the loan proceeds to May 14, 2020 and stated:
SBA will revise its Interim Final Rule, and intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Of course, not knowing that this next guidance would be forthcoming, some borrowers actually already returned the loan proceeds, or turned down a loan they’d been approved for, concerned about the possible ramifications of not doing so. In light of the fact that the 8 week covered period for determining whether a borrower used the money correctly (in a manner that will allow it to be forgiven) starts on the day of loan disbursement, it is likely that borrowers have used some of the money before receiving the anticipated guidance, and may not be able to return that portion
You might ask: Why is it important to consider this certification? If they find out that I was wrong doesn’t it just mean that I have to repay it at 1% over the 18 months?
The answer is “no”. There are potentially significant other penalties that kick in if a borrower is found not to have made the certification of necessity in good faith. While not giving clear guidance on “liquidity,” Application Form 2483 was clear on potential consequences. The application states:
I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
There are significant other questions that need to be answered. Please keep good records on use of loan funds, and profits and losses pre and post this pandemic.
We will continue to monitor the regulations and guidance on this topic and provide additional updates.
We encourage you to speak with one of the firm’s transactional group attorneys to answer any questions.