BREAKING NEWS: Latest SBA/Treasury Guidance Creates Safe Harbor for Economic Necessity Certification for All PPP Loans Under $2 Million

The Small Business Administration (“SBA”) and the Department of the Treasury (“DOT”) have been collaborating on guidance for compliance with the Paycheck Protection Program (“PPP”).  But the “guidance” has been much more than guidance—it has taken on the aura of a rulemaking, promulgating interpretations of the underlying statute and establishing standards of enforcement.
Further, that guidance has gone through a number of updates, on a near weekly basis, which we have covered here and here.  For small companies trying to keep up, it can be overwhelming.

However, the latest update, issued on May 13, 2020, should have small companies breathing a sigh of relief.  The guidance has established a safe harbor regarding the economic necessity certification requirement for all PPP loans under $2 million.

Earlier guidance from SBA/DOT created an economic necessity certification requirement (by the way, that requirement was nowhere to be found in the underlying statute, the CARES Act.)  It required that recipients of PPP loans certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  However, “necessary” was not defined, and many small companies experienced a good deal of consternation over whether a PPP loan was justified in light of their particular financial situation.

Accordingly, SBA/DOT have established that “Any borrower that, together with its affiliates, 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.”

SBA’s justification of this safe harbor was as follows: “SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”