The U.S. Small Business Administration (SBA) has begun to issue loan necessity questionnaires to Payroll Protection Program (PPP) borrowers, adding clarity to the good faith certification … By providing this information, we are not giving legal or tax advice. 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." Lenders are being required by SBA to send Loan Necessity Questionnaires to borrowers with Paycheck Protection Program (PPP) loans of $2 million or more. PPP Loans - Necessity Certification. In addition, in FAQ #46 and in subsequent interim final rules, the SBA issued guidance with a limited safe harbor providing that any PPP borrower, together with its affiliates, that 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. 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 … This checklist is intended to provide recommendations on ways to minimize the potential exposure to SBA claims that your PPP loan was not “necessary” and therefore a “false certification” was made to the SBA. Start-ups should proceed with caution when planning to apply for a PPP loan. A number of borrowers have observed that the amount of their PPP loans, determined based on the application formula of 2.5 times average monthly payroll costs, may be more than they require as a business necessity and have questioned whether they can partially repay their PPP loans on or before May 18. Why loan necessity forms? ", (As noted above, on May 13, 2020, the U.S. Treasury and SBA extended the safe harbor repayment date to May 18, 2020.). 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. New guidance from the SBA clarifies the "necessity" requirement for PPP loans. The U.S. Small Business Administration (SBA) recently announced its plan to require Paycheck Protection Program (PPP) lenders to issue “loan necessity” questionnaires to all borrowers of PPP loans of $2 million or more. Lenders may rely on a borrower's certification regarding the necessity of the loan request. The wording the SBA used in this sentence, in particular, is interesting: “This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary.” Many PPP loan recipients have been concerned about the possibility that the SBA will determine they did not act in good faith in applying for the loan, … Disclaimer: We are providing the current SBA Loan Application and links to related information as a convenience. In October 2020, the SBA issued Form 3509 – Paycheck Protection Program Loan Necessity Questionnaire (LNQ) for for-profit borrowers. Log in, Get free tax planning and financial advice, Not-for-Profit Auditing/Financial Reporting, Work Opportunity Tax Credit extended through 2025, Analytical procedures can help make your audit more efficient, Take control of your charitable donations using restrictions. As part of this process, SBA is providing a Loan Necessity Questionnaire to lenders for them to provide to PPP borrowers that, together with their affiliates, received loans of $2 million or more. What Should Borrowers Do? While the new FAQ offers some limited guidance, it provides no objective test or metrics and many questions remain outstanding. So far, the only safe harbor guidance is with respect to a payment in full of a PPP loan by such date. Upon request from their lender, borrowers should return the completed questionnaire to their lender within 10 … Hedge Funds and Private Equity Firms Ineligible: In its Interim Final Rule dated April 24, 2020, the U.S. Treasury stated that hedge funds and private equity firms are ineligible for a PPP loan because they are "primarily engaged in investment or speculation.". 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. Home / PPP Loans – Necessity Certification. For example, it is unclear how the SBA will interpret "access to other sources of liquidity" and "not significantly detrimental to the business." The Paycheck Protection Program (PPP) was quickly executed, and with new FAQ’s and Interim Final Rules out on a regular basis, it feels as though the rules are still being written. For advice on your specific situation, please contact your advisors. Any borrower that applied for a PPP loan prior to April 23 will be deemed to have made the necessity certification in good faith if the loan is repaid in full by May 18. Lenders may rely on a borrower's certification regarding the necessity of the loan request. Lenders may rely on a borrower's certification regarding the necessity of the loan request. ", Much Announces Attorney Promotions in Chicago, Paycheck Protection Program Round 2: The Highlights, The Show Must Go On: Stimulus Package Provides Relief for Venue Operators. The SBA rule and FAQ guidance on the necessity certification provide a safe harbor if PPP loan funds are repaid by May 7. Those borrowers questioning whether their certification that "current economic uncertainty makes this loan request necessary to support the ongoing operations" was appropriate may repay the loan in full prior to May 18 and will be deemed to have made the certification of necessity in good faith. Any borrower that applied for a PPP loan prior to April 23 will be deemed to have made the necessity certification in good faith if the loan is repaid in full by May 18. © 2021 Much Shelist, P.C. If your company applied for a PPP loan before April 24, and after assessing how your business has been affected by COVID-19 and the guidance regarding the Necessity Certification, you feel unsure whether your business should keep the loan you may return it to your lending institution by May 18, 2020 without fear of potential audit or False Claims Act (FCA) liability (further discussed below). There are four key takeaways from this new guidance: Hedge Funds and Private Equity Firms Ineligible: In its Interim Final Rule dated April 24, 2020, the U.S. Treasury stated that hedge funds and private equity firms are ineligible for a PPP loan because they are "primarily engaged in investment or speculation. Under applicable rules of professional conduct, this content may be regarded as attorney advertising. 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. A borrower returning the funds within this period is presumed to have obtained the loan "based on a misunderstanding or misapplication of the required certification Violations of the False Claims Act could lead to treble damages and per-claim penalties in excess of $21,000. certifications. On Thursday, December 9, 2020, the Small Business Administration (SBA) and the U.S. Department of the Treasury updated the Paycheck Protection Program (PPP) Loan FAQs regarding the recently imposed loan necessity questionnaires.FAQ 53 was released to address why some PPP borrowers are receiving a For-Profit and Non-Profit Loan Necessity Questionnaire (SBA Forms 3509 … Lenders may rely on a borrower’s certification regarding the necessity of the loan request. The FAQs have been updated to include FAQ #53, which addresses a PPP loan borrower’s necessity certification. Borrowers must be prepared to demonstrate to the SBA their bases for the certification. Accordingly, borrowers that have not already submitted an application should carefully evaluate whether they can make the necessity certification in good faith. Unfortunately, there is no bright-line test, and every borrower's situation and analysis will be different. PPP Loan Program New FAQs Released: ‘Necessity’ Guidance Cooley Alert April 23, 2020 A key aspect of the CARES Act relief package is the now well-known Paycheck Protection Program (PPP) being administered by the Small Business Administration (SBA), which provides for loans of up to $10 million per small business applicant to be used on payroll, benefits, rent and other authorized … If you have questions about these or other government loans, we encourage you to reach out to your Much attorney or any member of our Coronavirus Task Force. Borrowers applying for a second draw Paycheck Protection Program (PPP) loan must make the same uncertainty certification (sometimes referred to as the “necessity certification”) that they made in connection with their first draw PPP loan: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Recklessly disregarding the rules can give rise to liability. Borrowers should note that the False Claims Act does not require specific intent to defraud the government. Checklist for Documenting PPP Loan Necessity. 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. Applicants for PPP loans are required to make several certifications including: "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Tweet. The necessity certification in the PPP loan application requires an authorized representative of the applicant to certify “ [c]urrent economic uncertainty makes this loan necessary to support the ongoing operations of the Applicant.” By Joshua D. Steele of Harris Beach PLLC Published December 15, 2020. Michael is an accomplished corporate attorney who represents clients in a variety of business matters. If a borrower makes the necessity certification, it should take affirmative steps now to document its need, and prepare and maintain detailed records and analyses supporting its determination of necessity, including a detailed analysis of its working capital and liquidity at the time the application is submitted, as well as the availability of capital from other sources. Borrowers that fail to make their certifications in good faith may be subject to civil and criminal penalties, including liability under the False Claims Act. Audits for Loans Over $2 Million: Both the SBA and U.S. Treasury have signaled a very strong enforcement bias, publicly stating that any borrower that has received over $2 million in PPP loan proceeds will be subject to an audit, with spot checks for smaller loans. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan? 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. Following the news that public companies and well-funded private companies are obtaining Paycheck Protection Program (PPP) loans, on April 23, 2020, the Small Business Administration (SBA) issued guidance in the form of an additional FAQ. Ramifications for Certifications Not Made in Good Faith: Borrowers may be subject to audits and enforcement scrutiny. In May, the SBA released FAQ #46, which provided a safe harbor for loans less than $2 million—automatically deeming a good faith certification concerning the necessity of the loan for borrowers that, together with their affiliates, received PPP loans with an original principal amount less than $2 million. Increased Maximum Amount of New PPP Loans For Seasonal ... to the lender a certification, ... their loan before the issuance of the $2 million loan necessity safe harbor to … The FAQ goes on to introduce a “no fault” return policy by stating that “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 to have made the required certification in good faith if the loan is repaid in … Upon request from their lender, borrowers should return the completed questionnaire to their lender within 10 business days of receipt. The deadline was previously extended from May 7, 2020 and then again from May 14, 2020. 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." Those borrowers questioning whether their certification that "current economic uncertainty makes this loan request necessary to support the ongoing operations" was appropriate may repay the loan in full prior to May 18 and will be deemed to have made the certification of necessity in good faith. UPDATE: Following FAQ 47 issued by the U.S. Treasury and SBA, this article has been updated to reflect May 18, 2020 as the safe harbor repayment date. Treasury also indicated that PPP borrowers have until May 18, 2020, to return their loan proceeds without penalty if the company decided it could not certify in good faith that the PPP loan was “necessary” and promised additional guidance on this topic before May 18, 2020. As part of this process, SBA is providing a Loan Necessity Questionnaire to lenders for them to provide to PPP borrowers that, together with their affiliates, received loans of $2 million or more. All rights reserved. If Your PPP Loan Is Under $2 Million, the SBA Now Presumes You Made Your Necessity Certification in Good Faith PPP Funds Must Be “Necessary to Support The Ongoing Operations of The Applicant”. 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. PPP loans under $2 million will be granted a safe harbor with respect to the necessity certification. In response, the U.S. Small Business Administration released FAQ 31 on April 23, 2020, alerting that “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.’ If a borrower revisits its Loan Necessity Certification, and does not feel good about the initial certification, the government is allowing a borrower to return the PPP loan proceeds on or before May 7, 2020, and that borrower will be deemed to have made the Loan Necessity Certification in … Should your business add Roth contributions to its 401(k). The guidance, outlined in. The questionnaires, Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers, are sent to … Creditors' Rights, Insolvency & Business Bankruptcy, Creditors’ Rights, Insolvency & Business Bankruptcy. Since the passage over the Coronavirus Aid, ... 2020, and noted that additional guidance on how certifications will be reviewed will be released prior to that deadline. In May, after an outcry due to multiple publicly traded entities receiving PPP loans, the Treasury and Small Business Administration (SBA) released FAQ #31, which nebulously stated that a borrower should carefully review the needs certification before keeping the PPP loan and established a safe harbor date of May 7, 2020, for any organization that did not meet the certification to return funds … Safe Harbor: As this guidance is retroactive to certifications that pre-dated the guidance, the SBA has provided a limited safe harbor. As this guidance is retroactive to certifications that pre-dated the guidance, the SBA has provided a limited safe harbor. When applying for a PPP loan, the applicant must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On May 13, 2020, the SBA released guidance regarding how the SBA will review this certification by adding Question 46 to its list of Frequently Asked Questions . Finally, it bears noting that the necessity certification is not the only aspect of the PPP that could generate interest for private plaintiffs or the government. Borrowers that submitted their applications prior to April 23 should revisit the necessity certification in light of the latest SBA guidance, and if the borrower is uncertain about its ability to make the necessity certification, it should give serious consideration to repaying the loan before the May 18 safe harbor deadline. Following the news that public companies and well-funded private companies are obtaining Paycheck Protection Program (PPP) loans, on April 23, 2020, the Small Business Administration (SBA) issued guidance in the form of an additional FAQ. The application and related requirements may change and we are not responsible for updating this information. Although such companies will not be audited with respect to the necessity certification, an audit or other government oversight may occur for other purposes and based on other factors. The guidance, outlined in FAQ 31, reminds borrowers that they "should review carefully the required certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.". This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. “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.”