We have received many inquiries from our clients and others regarding whether they should return their PPP loans because of the SBA’s recent threat of civil or criminal liability for wrongfully obtaining a loan. Existing borrowers are worried about liability if they do not repay their loans immediately.
 
This morning, May 13, the SBA issued interpretive guidance Q&A No. 46, which addresses an important component of the application process and provides substantial protection for PPP loan borrowers. The PPP loan application form required borrowers to certify, in good faith, that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Until Q&A 46, there was no guidance on how “necessary” the PPP loan had to be and there was no definition of the word “necessary.”
 
In Q&A 46, the SBA states that, for PPP loans of less than $2 million, the borrower will automatically be deemed to have acted in good faith in certifying that the loan was necessary. This is what is known as a safe harbor, meaning that any applicant with a loan of less than $2 million had no liability for the certification.
 
Q&A 46 does not imply that certifications for loans over $2 million are false. A borrower of a large loan may have certified in good faith, based upon its facts and circumstances. However, those borrowers will have to offer proof to the SBA of their good faith certification. Therefore, borrowers with loans over $2 million should carefully review their financial condition and results of operations to determine whether their certification was made "in good faith" and, if not, consider whether to repay the loan. The SBA will review compliance with the certification requirement for larger loans and will seek repayment of those loans if the SBA finds that there was no adequate basis for the certification.
 
However, Q&A 46 goes on to explain that the SBA will not pursue administrative enforcement or referrals to other agencies if a borrower with a larger loan repays the loan after an adverse SBA finding. The reference to referrals to other agencies is extremely important because those referrals include referrals to the Justice Department for criminal prosecution. Therefore, the SBA is effectively stating that, even if it finds that the certification for a loan over $2 million was not made in good faith, a borrower that promptly repays the loan will not be exposed to criminal liability. Furthermore, even if the SBA determines that a certification was not made in good faith, that determination will not adversely affect the SBA's 100% guarantee benefitting the lending bank.