SBA Clarifies PPP Loan Certification Requirement; Mandatory Audits of Large PPP Loans
This article is part of our continuing coverage of COVID-19-related legislation, rules, and orders.
United States Treasury Secretary Steven Mnuchin announced April 28, 2020 that all loans of over $2 million issued to businesses as part of the CARES Act’s Paycheck Protection Program (PPP) will be audited to ensure compliance with CARES Act rules. (See, e.g., articles in the Washington Post, Forbes, and Fortune.)
This announcement is made less than a week after the Small Business Administration (SBA) provided information through responses to Frequently Asked Questions (FAQs) issued April 23, 2020, and April 26, 2020.
Notably, FAQ 31 addresses the certification requirement set forth in §1102 of the CARES Act, explaining that borrowers must “certify in good faith that their PPP loan request is necessary” because “current economic uncertainty makes this loan request necessary to support the ongoing operations of the” borrower. FAQ 31 further explains, in relevant part:
“Borrowers must make this certification … 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.”
The lone example the SBA gives through the FAQs of a borrower that cannot make the certification in good faith is a “public company with substantial market value and access to capital markets …” FAQ 31 was written by the SBA after the PPP loan program came under public scrutiny due to large organizations such as the Los Angeles Lakers, Ruth’s Chris Steakhouse, and Shake Shack receiving significant PPP allotments.
The SBA’s Office of Inspector General will be responsible for conducting audits related to this certification requirement and other compliance requirements related to PPP loans. Secretary Mnuchin’s announcement – viewed against the backdrop of public scrutiny at the time the SBA issued the FAQs – likely means that the audits will be focused on larger loans. Nonetheless, it is prudent for any borrower receiving a PPP loan to consult with their attorneys and other advisors to begin collecting information now in the event that an audit does later occur. A knowing violation of the certification requirement – or other requirements of the CARES Act – may result in civil and, in more serious cases, criminal liability.
A borrower who applied for the PPP loan before April 23 and repays the loan in full before May 7, 2020 will avoid any potential liability.
In addition to documenting information necessary in the event of an audit, borrowers should continue to maintain meticulous documentation regarding expenditures of loan proceeds. This documentation will be necessary for companies to achieve loan forgiveness at the end of the applicable eight-week period. As a reminder, loan forgiveness may be achieved by:
- complying with the forgivable and permissible use requirements requiring 75% expenditure on qualified payroll expenses;
- maintaining employee staffing levels; and
- maintaining the required employee compensation levels during the applicable eight-week period following loan origination.
Sacks Tierney has qualified attorneys to answer your questions about these provisions and to help guide your business if you wish to apply for and obtain any of the assistance available through the CARES Act.