SBA Imposes Loan Limit and Audit Requirement for Certain PPP Borrowers
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On April 3, 2020, participating lenders began accepting loan applications from small businesses and non-profit organizations as part of the $349 billion Paycheck Protection Program (PPP), which was approved as part of the CARES Act. On April 29, the U.S. Small Business Administration (SBA) announced that it will audit PPP loans over $2 million, and on April 30, the SBA posted a fifth Interim Final Rule imposing a $20 million limit on PPP loans to businesses in the same corporate group.
05.01.20
The SBA updated its FAQs on April 29, 2020 following an announcement by Treasury Secretary Mnuchin and SBA Administrator Carranza that the SBA would be auditing all recipients of loans in excess of $2 million in order to “ensure PPP loans are limited to eligible borrowers in need.” The audits would take place following the lender’s submission of the borrower’s loan forgiveness application to the agency. It is not clear, based on the language of the new guidance, whether audits will be conducted for loans for which forgiveness is not requested. The SBA, which typically leaves audits to the individual lenders, will be releasing further guidance in the coming weeks detailing their planned audit procedures.
On April 30, 2020, the SBA posted a fifth Interim Final Rule which limits funding to $20 million for businesses that are part of a single corporate group, meaning any group of businesses that are majority owned, directly or indirectly, by a common parent. Businesses can be considered part of a single corporate group for purposes of the new restriction even if they are otherwise eligible for a waiver of the SBA’s affiliation rules, which generally applies to businesses such as hotels and restaurants. The limit takes effect immediately for loans that have not been fully disbursed as of April 30. For loans that have been partially funded as of that date, the cap applies to any additional funds that would cause the total loan amount for a corporate group to exceed $20 million. Borrowers that have already applied for or received over $20 million and still have pending loan applications must notify their lender and withdraw or cancel their applications. Failure to do so “will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness.”
It is unclear what the requirements are for borrowers that have already received over $20 million but have no loan applications pending. Borrowers in this position should consider contacting their lenders as a cautionary measure as we await further guidance.
The new guidance comes after the SBA reminded borrowers earlier this week of their obligation to “certify in good faith” that their loan request is “necessary” or risk facing criminal liability, which you can read more about here.
The SBA Focus Group of them COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.
Author Matthew McDonald is a partner in the Corporate & Securities Department at Klehr Harrison.