Paycheck Protection Program: SBA Imposes New Eligibility Requirement with Retroactive Effect

Attorney Keith T. Zimmet

Keith T. Zimmet | President, Managing Shareholder

April 29, 2020

As of April 29, 2020

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package.  One principal feature is the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”).

The PPP expands eligibility for SBA loans under Section 7(a) of the Small Business Act.  The most significant feature of these PPP loans (“PPP Loans”) is that if the borrower complies with certain requirements (described below), some or all of the PPP Loan will be forgiven.

On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act”).

Following the enactment of the Enhancement Act, the SBA, in consultation with the U.S. Treasury, added a new Item 31 to its Frequently Asked Questions, which imposes a new retroactive standard of eligibility, not previously provided, and which requires all borrowers, even those who have already receive PPP loan proceeds, to assess their economic need for a PPP loan.  Borrowers must be able to certify in good faith that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the borrower. Though the SBA does not define “necessary” it requires borrowers to:

“tak[e] into account their current business activity and their ability to access other source of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

With respect to those borrowers who applied for a PPP loan prior to the issuance of the new SBA guideline, and who now believe they are no longer eligible, the SBA provides a safe harbor provided such borrower repays the PPP loan by May 7, 2020.

Specifically, FAQ Question 31 provides as follows:

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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 loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, 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.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, as well as President and Managing Shareholder of our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.

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