SBA Explains “NECESSITY” Provision for PPP Borrowers – But Not Really!

Two weeks ago, the SBA announced Paycheck Protection Program (“PPP”) borrowers must show “necessity” before they will be allowed to get/keep their PPP loans.  This spawned the question, how will the SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?  Yesterday in a “Release” issued by the SBA we got some guidance and some assurances, but few answers.
 
Answer from the SBA:  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.
 
Brody and Associates believes this gives blanket protection to borrowers who applied in good faith and without fraud, and who borrowed less than $2,000,000. So, even if your business has lost no revenue due to the COVID-19 pandemic and incurred no increased costs, as long as you believed the loan was necessary, the SBA will not question the necessity of the loan.  Great news for these borrowers but it still leaves necessity undefined. 
 
The Release further provides borrowers with loans greater than $2 million must have an adequate basis for making the required good-faith certification, based on their individual circumstances, but begs the question of what this actually means! The Release is also not clear on what happens if the loan is exactly $2,000,000.  Finally, the Release explains if you can’t show necessity, your loan will be recalled and no forgiveness provided.  Here is exactly what the SBA said;
 
Answer from SBA:  If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. 
 
However, if the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.  SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
 
If this is an issue for your business, please contact Brody and Associates for further information and analysis.
 
The subject matter discussed in this post can be very technical.  It is an evolving area of law and very fact specific.  Our goal here is to simply alert you to some of the key issues involved.  We urge you to seek competent legal counsel before applying these ideas to your specific situation.  Brody and Associates stands ready to discuss your particular needs.