Update on the PPP Loan Program

Written with support from Zack Spickard, Balentine Family Office Team Member

Since becoming law on March 27, cracks have emerged in the Payroll Protection Program (PPP) portion of the CARES Act. This program allotted $660 billion to small businesses to keep employees on payrolls and businesses solvent. The rushed nature of this legislation left many of the rules unwritten as businesses began to get their loans funded.

The rules are being revised to this day, which has led to increased speculation over legal and financial implications of these loans for borrowers.

Some businesses, incapable of operating under current stay-at-home orders, also fear they took the loans too early. Many small businesses have found it more beneficial to furlough employees and let them receive inflated unemployment insurance payments rather than pay them to stay at home. As written, the PPP loans require a business to spend the loan proceeds over an eight-week period, beginning once funds are received. Small business owners have also complained that only 25% of funds can be used on non-payroll expenses, an inadequate amount for many capital-intensive businesses. Small business owners and politicians are calling for the Treasury to loosen these forgiveness terms, allowing more time for businesses to use these funds and more to go toward operating expenses. Treasury Secretary Steve Mnuchin indicated in April that he believes he has the authority to change the payroll requirements, although he is not inclined to do so at this time.

In addition to widespread confusion over the terms of the PPP loans, many people are wondering whether they were legally entitled to the funds in the first place.

In the wake of some large businesses, of which several were publicly traded, receiving PPP funds meant for small businesses, there has been an uproar over why they were eligible for the loans. While technically allowed to receive these funds under the writing of the CARES Act, many large chains have since returned these funds to avoid a public relations nightmare.

Despite the waiving of the “credit elsewhere” requirement for PPP loans in the CARES Act, recent updates to the legislation attempt to dissuade applicants who have access to other sources of liquidity, even if not forgivable like PPP loans. The Small Business Administration and Treasury have developed FAQs to answer the flood of questions received from confused small business owners. Among the most notable:

FAQ #31 (published April 23, 2020)

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

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. 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. 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.” 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. 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. 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.

FAQ #37 (published April 28, 2020)

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

FAQ #39 (published April 29, 2020)

Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

FAQ #43 (published May 5th, 2020)

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

To summarize, the SBA has put the responsibility of meeting the requirements for a PPP loan on the borrower, not the lender or SBA, even if the SBA approves the loan.

There are significant questions over what is meant by “adequate source of liquidity” and the legal ramifications of taking a loan if you had access to other sources of funds, even if those were not forgivable. These consequences are more significant after the SBA announced that they will review all loans in excess of $2MM, and if the loan is found not to be necessary, criminal fines of up to $1MM and imprisonment for up to 30 years can be imposed. The SBA has given a grace period until May 14 for repayment of loans which were dispersed to borrowers who did not meet the criteria which was passed ex post facto.

There is ongoing debate over what is meant by “necessary to support the on-going operations of the applicant.” Businesses which have not yet faced significant distress but see it on the horizon are confused whether to give back the money or not. Many businesses in these situations are not giving the money back, instead choosing to make their case to their lender and the SBA once loan-forgiveness time comes. Many lawyers believe the ever-changing nature of this legislation and vagueness of key aspects of the bill make civil (and, especially, criminal) liability incredibly hard to impose. The question of liability largely surrounds the use of words such as “necessary” and “adequate” throughout the bill and will make PPP forgiveness negotiations a case-by-case basis.

Another key aspect of the CARES Act which has changed is the tax situation for forgiven loans. The IRS recently said that expenses related to the forgivable loans through the PPP program will not be tax deductible. They cited section 256 of the tax code, which says that deductions can not be taken if they are tied to a certain class of tax-exempt income. Congress could override this interpretation by passing a bill which explicitly allows the deductions, but this movement has not gained much steam so far.

There is still significant confusion over the rules of the PPP program, and the SBA is continuously releasing new guidance over how to interpret the CARES Act.

Businesses should consult with experienced counsel to ensure they continue to comply with the requirements to keep the PPP funds. Companies which accept and keep PPP funds should keep detailed records of how they are spending the funds, particularly as new provisions are passed.