SBA Formally Announces Enforcement Program for PPP Loans

May 13, 2020 Update: On May 13, 2020, the SBA, in consultation with the Department of the Treasury, published updated Frequently Asked Questions that included a new Question 46 which provides additional guidance about the “necessity” certification. This new guidance provides:

  1. Loans under $2 million (when aggregated with borrowings of affiliates): 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 necessity certification in good faith. As such, no further file documentation regarding necessity should be needed for loans below this threshold
  2. Loans $2 million or more (when aggregated with borrowings of affiliates):

a. The SBA clarified that it is possible to meet the necessity certification depending upon facts and circumstances, which reinforces the need to have good documentation about good faith compliance with the necessity certification;
b. If the SBA determines that the necessity certification was not met and the loan is repaid without forgiveness, then there will be no additional administrative enforcement or referrals to other agencies

May 5, 2020 Update: Late on May 5, 2020, the SBA, in consultation with the Department of the Treasury, published updated Frequently Asked Questions that included a new Question 43 which extends the safe harbor deadline for returning PPP loan proceeds until May 14, 2020. This new guidance states that the SBA will issue additional guidance on how it will review the certification prior to such date. This additional guidance, when issued, could be very helpful for documentation purposes. We will issue an updated client alert once this additional guidance is issued.

On April 29, 2020, the Small Business Administration (the “SBA”), in consultation with the Department of the Treasury, published updated Frequently Asked Questions that included one new Q&A about the SBA’s expected enforcement regime regarding loans under the Paycheck Protection Program (the “PPP”) issued under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This guidance appears intended to supplement and give teeth to the guidance that was issued on April 23, 2020, regarding the certification that borrowers must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Our analysis of the certification guidance can be found here.


New Question 39 of the Frequently Asked Questions specifies that all loans in excess of $2 million will be reviewed by the SBA and that other loans will be reviewed “as appropriate.” In issuing this enforcement program, the SBA explicitly cross-references the aforementioned guidance they issued on April 23, 2020, regarding the certification about necessity discussed above.

The review will occur at some time following the borrower’s application for loan forgiveness, but it is not clear whether forgiveness will be delayed until the review is complete, or whether forgiveness itself will be the triggering mechanism that will cause the review to occur at some point in the future.

The SBA further indicated that additional guidance will be issued in the future on these reviews and reinforced the understanding that the onus for this certification is on the borrower rather than the lender by stating that the SBA’s guarantee will apply regardless of the outcome of the review as long as the lender complied with the prior guidance issued related to lender obligations.

Practical Considerations for Borrowers

If you have already received a PPP loan and are debating whether to return all or part of the loan by the May 7, 2020, safe harbor deadline, you will want to consider this additional enforcement guidance as part of your deliberations. As discussed in our previous client alert, the lack of guidance as to what makes a loan “necessary” and how much liquidity is adequate is frustrating, but it is important to companies to make a good faith determination of such necessity.

If you keep the loan, we recommend that borrowers take proactive steps to document the good faith determination about why the current economic uncertainty around the pandemic makes this loan request necessary to support the ongoing operations of the borrower, including the ability to access other sources of liquidity in a manner that is not significantly detrimental to the business.

Documentation of this could involve the following steps:

  • Prepare and keep detailed files which include a statement that qualitatively and quantitatively summarizes the current economic situation and why management and the board believed at the time of the submission of the application, and continues to believe today, that the uncertainty of the economic environment makes the loan necessary and how the Company’s other sources of liquidity are not sufficient to weather this uncertainty without causing significant harm to the business, including the ability to retain its employees and maintain its payroll for the benefit of its employees. It is better to have that prepared now than when asked for documentation several years in the future.
  • Include quantitative information such as:
    • Financial projections and cash flow modelling (and perhaps balance sheet and income statement modelling) showing worse, likely and best case scenarios
    • Document decreases in revenue and cash from the beginning of the shutdown until you applied for the loan
    • Document decreases in the number of employees working from the beginning of the shutdown until you applied for the loan
    • Document increases in accounts receivable and decreases in pipeline and backlog due to the pandemic
    • Document current cash availability and reasonable estimates of how quickly that cash will be depleted under the aforementioned worse, likely and best case scenarios
    • Specific examples of the impact the COVID-19 pandemic has had on the Company, including layoffs, furloughs, hiring freezes, salary reductions
    • Related, document what other sources of liquidity are available (e.g., working capital lines of credit, new term debt or capital markets offerings) and what negative impacts that accessing them may have on the business, including timing and risk to complete if not an existing resource, and what risk there may be in those liquidity sources no longer being available under the worse, likely and best case scenarios
    • Document any pressure in receiving supplies or materials due to supply chain constraints
    • If a public company, document view on whether the company has “substantial market value”
    • Any other information that would relate to such Company and its business in determining the rationale for obtaining a PPP Loan consistent with the requirements of the CARES Act
  • Ensure that (i) that the material reviewed by the board includes this documentation and (ii) corporate authorizations related to the PPP loans make clear that the proceeds are intended to be used only for permissible purposes and describing those permissible purposes

Tracking Use of Proceeds

When considering permissible uses of PPP loan proceeds, it is important to keep in mind that at least 75% of the proceeds must be used for payroll costs and this requirement does not end just because the 8-week “covered period” has ended.

In addition, you will need to provide documentation as to how the PPP loan proceeds were utilized during the 8-week “covered period” in order to file a claim for loan forgiveness.

Because of these requirements, we generally recommend segregating PPP loan proceeds in a separate account so their specific use can be tracked. We also recommend that detailed payroll and other information is maintained to ensure the Company can track that the PPP loan proceeds were used at least 75% for payroll costs (as defined by the CARES Act) and no more than 25% for non-payroll related expenses as permitted by the CARES Act.

Stevens & Lee can help our clients decide whether to return a PPP loan and document the rationale for retaining all or part of such loan.

Please contact Anthony S. DiSandro, Edward C. Renenger, Sunjeet S. Gill, Daniel J. Sobol or the Stevens & Lee attorney with whom you regularly work if you have questions or need assistance with this process.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.