New Treasury Guidance Provides Safe Harbor for PPP Loans

Neil Hare
Mon, 18 May 2020 12:56:16 +0000

Updated June 1, 2020: The House passed the Paycheck Protection Program Flexibility Act on May 27, 2020, which attempts to ease restrictions on small businesses as they seek loan forgiveness under the Paycheck Protection Program authorized by the CARES Act. Be sure to read House Passes PPP Loan Forgiveness Bill, Treasury Issues Harsh Forgiveness Regulations—What You Need to Know.

As small business owners begin looking towards applying for forgiveness of their SBA Paycheck Protection Program (PPP) loans, the Treasury Department issued highly sought-after guidance on May 13, providing a “safe harbor” from audits or penalties for companies that received a loan under $2 million.

The new guidance was posted in an updated version of PPP loan FAQs. The guidance states the following:

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 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.

Previous to this guidance, many companies were worried that under the “good faith” certification requirement on the PPP lending application, they would be subject to SBA or Treasury audits and potential penalties and damages. The PPP loan application requires the borrower to certify in “good faith” that they are requesting the loan due to “economic uncertainty,” and that they have no access to credit elsewhere. Traditional SBA loans require written documentation that the borrowed tried and failed to access credit from other sources.

With no real definition of “good faith” or “economic uncertainty” in a business environment that no one in either the private or public sector has seen before, business owners were concerned about their future legal exposure. While it defied credulity that the government would have the bandwidth to audit many loans or the political will to narrowly define “economic uncertainty” after it shut down the economy, business owners were nevertheless concerned.

This anxiety was further exacerbated by media reports that publicly traded companies and major brands like Shake Shack, Sweetgreen, the LA Lakers, and Harvard University received PPP loans when seemingly they would have access to capital elsewhere. Many of these companies and organizations returned the funds, while others did not. The negative press also had a chilling effect in which the flow of loan applications and amounts requested slowed down, leaving many billions of dollars left in the program, for better or worse. This is partly because smaller firms are finally in the queue for PPP loans, which is good, but the entire point of the program was to introduce liquidity into the economy and to protect workers’ wages. Therefore, having this money sit on the sidelines is not helpful to businesses, workers, or the U.S. economy.

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It is worth noting that these larger brands met the requirements of the PPP program but still faced pressure from the court of public opinion. Arguably, the shutdown of the NBA season caused plenty of “economic uncertainty” for the Lakers, along with no real end in sight for social distancing, making attending sporting events unlikely well into the future. The team is not, however, a mom-and-pop corner shop, so perhaps the backlash was justified.

Based on the new guidance, businesses with loans under $2 million no longer have to worry about an audit or possible penalties for not meeting the “good faith” requirement. And, while loans over $2 million might be scrutinized or audited, there will not be severe penalties or criminal charges, outright fraud excepted. The worst-case scenario would be a request to repay the loan with interest.

The new guidance did explain that for all borrowers, there could still be scrutiny that the loans were used appropriately to meet the forgiveness requirement: 75% for payroll and 25% for expenses such as rent, mortgages, utilities, and interest payments, tracked for 8 weeks immediately after receipt of funds. If lenders or the government determine the borrower did not use the funds as such, a portion of the loan could potentially not be forgiven and could convert into a 2-year loan at 1% interest. However, banks do not want to carry small, 1% loans on their balance sheets, nor does the government want to encumber small firms with debt, so the overwhelming majority of these loans should be forgiven if administered correctly.

Despite this much-needed safe harbor, many questions still remain about PPP loan forgiveness, which will hopefully be answered in future Treasury guidance. Meanwhile, on May 15 the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, a new relief bill worth $3 trillion. The legislation does look to change some of the PPP requirements that have elicited objections from small business owners. This includes expanding the current 8-week period to use the funds to 24 weeks instead; reducing the 75% payroll requirement; extending the PPP program through the end of the year; and making 501c(6) organizations like chambers of commerce as well as small media companies also eligible for PPP. And, if the Republicans in the Senate have their way, any new legislation will include a new safe harbor for potential lawsuits against companies based on Covid-19 along with no additional funds for PPP until the current round is exhausted and its benefits measured.

One additional relief measure on the horizon is the Main Street lending program. This will look like a traditional loan and have an application process with lending institutions with standard due diligence. The loan amount will be a minimum of $500,000, so it is aimed at larger firms. Eligibility requirements for the Main Street program are still evolving.

In the meantime, this new safe harbor will hopefully lead to many more small businesses feeling more confident about applying for and receiving PPP funds, with less worry about problems down the road.