The most recent guidance from the Small Business Administration (“SBA”) on the Payment Protection Program (“PPP”) clarifies various components of its anticipated PPP loan review process. In addition to releasing the forgiveness application, which includes forgiveness calculation worksheets, the SBA guidance explains the review process and provides clarity on some of the eligibility requirements that were ambiguous when organizations first submitted their applications.
Congress created the PPP through the CARES Act to provide forgivable loans to small businesses, including 501(c)(3) and 501(c)(19) nonprofit organizations. In order to qualify for forgiveness, an organization must use the loan proceeds to cover payroll costs, mortgage interest payments, rent, and utilities during the eight weeks after it received the loan and use at least 75% of loan proceeds for payroll costs.
Certification of Need
After many PPP applicants had already received their loans, the SBA released guidance that scared and confused borrowers into questioning whether they were eligible for the loan in the first place. Additionally, comments made by Treasury Secretary Mnuchin suggested many organizations that received a PPP loan did not actually meet the necessity certification requirements. The SBA published additional guidance last week, which eased the panic created by these actions.
In an FAQ issued May 19, 2020, the SBA announced a safe harbor for PPP borrowers of less than $2 million. It states that such borrowers “will be deemed to have made the required certification concerning the necessity of the loan requested in good faith.” Thus, if an organization borrowed less than $2 million, the SBA will not review whether or not it had a need for the loan at the time it applied. The SBA may still audit such organizations for other reasons, as stated below.
The SBA has also provided relief to PPP borrowers of more than $2 million. Although the SBA will audit these organizations to determine if they had a need for the loans at the time they applied, if the SBA determines they did not have such need, the SBA will merely “seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” The SBA will not penalize the organization if it returns the loan.
SBA PPP Loan Review
Additional guidance clarifies the SBA’s PPP loan review process. The SBA has suggested that it may review any PPP loans, at any time at its discretion. The review may include whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought.
Presumably, this includes borrowers with loans of less than $2 million. The SBA previously stated that it will focus on auditing loans of $2 million or more. However, the new guidance suggests that the SBA may review any borrower. With the safe harbor, discussed above, the SBA will only audit borrowers with loans of $2 million or more for certification of need, as borrowers of less than $2 million automatically meet the certification requirement.
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If you have questions or would like assistance with PPP loan forgiveness, please contact the Law Firm for Nonprofits.