PPP loan verification requires immediate attention of the borrower | Löwenstein Sandler LLP
Law360 – May 6, 2020
Just a day after the paycheck protection program reopened lending, Treasury Secretary Steve Mnuchin warned that the Small business administration would consider all loans over $ 2 million. The announcement follows prominent refunds of PPP loans by large corporations that regulators, commentators, and the public didn’t expect to qualify – let alone apply for – for relief under this program, the small business hit by COVID- 19 are affected, should provide support quickly.
The constantly evolving guidelines respond in real time to the realities of program implementation. However, this leaves borrowers with more uncertainty in already uncertain times and only increases the potential for future liabilities – beyond repaying loans that were later found to be inapplicable under the program.
Mnuchin’s comments came days after the SBA posted a new Frequently Asked Question on its website asking whether “Large-company owned companies with sufficient sources of liquidity to support day-to-day operations qualify for a PPP loan.” .
In its reply, the SBA stated that “[i]In addition to reviewing the applicable follow-up rules to determine eligibility, all borrowers must assess their economic needs for a PPP loan in accordance with the standard set by the CARES Act and PPP regulations at the time of the loan application. “
The SBA reiterated that a prospective borrower “must confirm in good faith that their PPP loan application is required”. Before submitting a PPP application, the SBA therefore advised borrowers to “carefully check the required certificate that”[c]The current economic uncertainty makes this loan application necessary to support the day-to-day operations of the applicant. ‘”
The bomb came in the SBA guidelines on how to assess “need” in particular, with the SBA introducing an entirely new standard for applicants both retrospectively and in the future. According to the SBA, an assessment of a borrower should “take into account their current business operations and their ability to access other sources of liquidity sufficient to reflect their day-to-day operations in a manner that does not materially affect the business.”
The US Treasury Department further clarified that this new requirement that applicants place a material detriment to their day-to-day business and consider other sources of funding before certifying their PPP application poses a dilemma for applicants, and in particular for applicants whose loans have already been approved and / or have been paid out. The retroactive nature of the new qualification metrics means that all applicants, regardless of the application phase, must consider their application according to the new standards.
It is important that the SBA for every borrower who is before the 23. “[1] In particular, this restricted Safe Harbor provision only applies to this one certification question; it does not extend to other representations of the PPP application.
Because of this limited safe haven, all borrowers who have received PPP funding, have applications pending, or are considering an application should carefully consider whether potential long-term risks outweigh the short-term benefits of receiving such funds. Such analysis should not be done in a vacuum but should be read in conjunction with the other rules of the PPP, including those relating to a company’s affiliates and their impact on eligibility.
Even if a company’s business relationship with, for example, a private equity firm does not per se preclude it from exemption under the membership rules, a company should consider whether such actual or perceived access to liquidity calls into question its good faith-established need would.
For those borrowers who do not repay or repay the loans in full, the SBA can not only pay attention to whether a loan should be waived (i.e. whether the funds have been appropriately spent in accordance with the law),[2] but also whether the borrower was a suitable candidate in the first place. It remains to be seen whether the borrower’s liability is limited to failure to grant the loan or extends to civil or criminal liability.
As stated on the forms, applicants may be penalized for “knowingly providing false information in order to obtain a guaranteed loan from the SBA” and knowingly using the funds for unauthorized purposes.[3] The statute of limitations for federal crimes after which charges can be brought range from five to ten years.[4]
However, in addition to criminal liability, companies should be aware of potential civil liability and reputational damage when applying, withholding, or returning these funds. Corporations should act now, in the short term the limited safe haven provides, to protect themselves against future claims against directors for breach of duty of loyalty based on (1) alleged wrongdoing, ie by applying in bad faith for PPP loans; or (2) failure to adequately monitor and be informed of the company’s COVID-19 response.
Affected companies should consider holding board meetings to review their eligibility and to discuss the relative risks and benefits of receiving such funds. If companies ultimately decide to apply for or keep PPP funding, they should properly set out the bases for their comments. Companies should also provide shareholders with disclosures about their financial health and action plans to ensure they are in compliance with any statements or attestations made to the government.
The latest guidelines from the SBA should also encourage lenders to reconsider their approach to handling these loans. While making it clear that the borrower is responsible for truthful certification, Mnuchin questioned whether lenders should have considered whether to lend PPP to large corporations and take that reputational risk. In addition, there are already increasing lawsuits against lenders claiming that PPP applications from large companies have given priority over small companies that the loans are intended to serve.
While decisions will undoubtedly need to be made swiftly – particularly with regard to the rapid wind-down of PPP funds – the limited Safe Harbor and SBA guidelines require applicants to pause before the emerging May 14 deadline and beyond Ponder measures.
Reprinted with permission from May 6, 2020, issue of issue Law360. © 2020 Portfolio Media, Inc. All rights reserved. Any further reproduction without permission is prohibited.
[1] Frequently Asked Questions (FAQs) about Paycheck Protection Loans, US Small Bus. Administrator. (04/28/2020), https://www.sba.gov/sites/default/files/2020-04/Paycheck-Protection-Program-Frequently-Asked-Questions_04%2028%2020.pdf.
[2] In an interview with the Wall Street Journal, Mnuchin stated that one of the main focuses of the audit will be to prove that the loan was used on payroll and other items eligible for forgiveness. See Bob Davis & Kate Davidson, US Audits of Small-Business Loans Face Daunting Challenges, Wall St. J. (April 28, 2020 9:07 p.m.), https://www.wsj.com/articles/sba-to-face-big-challenges-ensuring-coronavirus-loans-arent-misspent-11588094140?mod=hp_lead_pos7.
[3] Paycheck Protection Program Borrower Application Form https://www.sba.gov/sites/default/files/2020-04/PPP-Borrower-Application-Form-Fillable.pdf.
[4] See 18 USC Section 3282 (a five year statute of limitations generally applies); 18 USC § 3293 (10-year statute of limitations for criminal offenses by financial institutions, including postal fraud at a financial institution (18 USC § 1341), wire transfer fraud at a financial institution (18 USC § 1343), false statements to banks regarding credit (18 USC § 1014 ) and bank fraud (18 USC § 1344)).
