On April 23, 2020, the Treasury issued a warning to all borrowers noting that businesses are required to “assess their economic need for a PPP loan” before submitting a PPP loan application” and must take “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.” This guidance was without question issued in response to public backlash over large, public companies receiving PPP loans.
Significantly, the Treasury’s Frequently Asked Question #31 was materially different than the black letter law of the CARES Act. The statute states that “a borrower need only certify that the loan was needed because “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’”
While undoubtedly moving the goal post after several borrowers had already certified their need for the loan, the Department of Treasury provided an escape hatch and announced that borrowers could return the loan funds by May 7, 2020, no questions asked – effectively providing a “safe harbor” period in which “ill gotten” PPP loan funds could be returned without penalty. The Department of Treasury later extended the “safe harbor” deadline to May 18th.
Audit Procedures and PPP Certification Clarified
On May 13th, the U.S. Treasury announced that borrowers whose loan amount (combined with the loan amount of any affiliates) is less than $2 million is automatically deemed to have made the PPP loan certification in good faith. There’s also good news for borrowers whose loan amounts are more than $2 million. Such borrowers that do not return PPP loan funds by May 18th may still have an adequate basis for making the required good-faith certification. As long as their business activity and ability to access other sources of liquidity at the time they applied for the PPP loan were insufficient to support their ongoing operations in a manner not significantly detrimental to the business, they can now feel confident in their ability to demonstrate good faith.