[co-author: Madeline Bardi]
- On October 26, 2020, the SBA announced its intention to require a necessity questionnaire for borrowers who received PPP loans of $2 million or more.
- The SBA intends to use the necessity questionnaire as part of its promised review of the economic necessity certification required for PPP applications for loans greater than $2 million.
- While the certification on the PPP loan application only attested to economic need at the time of the loan application, these new forms indicate that the SBA will also consider the economic condition of the borrower after receiving a PPP loan.
- The SBA has not yet provided guidance on how it will review and assess the information requested in the necessity questionnaire or how it will determine whether a borrower has properly certified economic need. Businesses should familiarize themselves with the information requested by the SBA and pay close attention to any new guidance the SBA may issue regarding the need questionnaire or loan forgiveness forms.
The Paycheck Protection Program: Good Faith Certification of Economic Necessity
The Paycheck Protection Program (PPP), contained in the CARES Act signed by President Trump on March 27, 2020, provided forgivable loans of up to $10 million to eligible small businesses. The CARES Act integrated the PPP into the pre-existing 7(a) loan program administered by the Small Business Administration (SBA). The 7(a) loan program is limited to “applicants for whom desired credit is not otherwise available on reasonable terms from non-federal, non-state, and non-local government sources.” 13 CFR 120.101. This limitation was removed by the CARES Act for PPP loans, instead requiring applicants to make the following good faith certification in order to qualify for a PPP loan: “The uncertainty of current economic conditions makes it necessary to apply for loan to support the eligible recipient’s ongoing operations.
The SBA, in an Interim Final Rule (IFR) and PPP Loan Application, repeated the statute’s certification language without modification or additional regulatory explanation of the standard. 85 Fed. Reg. 20811, 20814 (April 15, 2020).
On April 23, 2020, the SBA issued additional retroactive sub-regulatory guidance in the form of an FAQ that stated that before PPP applicants certify the economic “necessity” of the loan, the applicant must consider their access to other sources of liquidity. See SBA PPP FAQ, available here, at #31. The FAQ appears to be the SBA’s first attempt to impose an additional restriction on loan eligibility for businesses owned by entities with sufficient funds, such as private equity firms and hedge funds. On April 29, 2020, the SBA announced that it would “review all loans over $2 million” to ensure loans were limited to “eligible borrowers in need”, and specifically reminded borrowers of the SBA guidelines regarding the “significant certification” of economic need discussed in FAQ 31. See FAQ 39. Subsequently, the SBA provided a safe haven provision that allowed borrowers to repay their loans by May 8, 2020 if they determined that their “economic need” certification was no longer valid in light of new SBA guidelines. The Safe Harbor redemption deadline has been extended to May 18, 2020. See FAQ 47.
On May 13, 2020, the SBA issued FAQ #46, which provided an additional safe harbor for borrowers with loans under $2 million, stating that the SBA will consider that such borrowers “have made the required certification in good faith regarding the necessity of the loan application.” However, borrowers who received PPP loans greater than $2 million were still subject to SBA audit and review, as previously discussed in FAQ 39. See FAQ 46. The SBA also stated in FAQ #46 that if the SBA determines, when reviewing a request for remission, that the company does not have an adequate basis for the required certification, the SBA will seek repayment of the outstanding PPP loan balance. Identifier. However, it is important to note that the SBA has provided that if “the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on of its certification decision regarding the necessity of the loan application”. Identifier.
Finally, on October 26, 2020, the SBA announced its intention to require a Loan Necessity Questionnaire (“Need Questionnaire”) for certification of “economic need” for both for-profit borrowers. (SBA 3509 form, available here) and non-profit borrowers (SBA Form 3510, available here) (together, the “Need Questionnaires”). As of November 10, 2020, Forms 3509 and 3510 were not published on the SBA website.
Since the publication of the first IFR on April 15, 2020, the SBA has issued 24 additional IFRs, 22 of which were issued after the publication of FAQ 31 on April 23, 2020, but did not change the certification requirement or provide guidance. additional explanations in regulations concerning the level of proof for certification.
While FAQs 31, 37, and 39 provide insight into the SBA and Treasury Department’s thoughts on certification, an agency FAQ is not generally considered binding law. As the US Department of Justice (DOJ) explains: “Guidance documents cannot create binding requirements that do not already exist by law or regulation.” Memorandum from Rachel Brand, Associate Attorney General, to Civil Litigation Units (January 25, 2018). The DOJ cannot (1) “use its enforcement power to effectively convert agency guidance documents into binding rules”; or (2) “use non-compliance with guidance documents as a basis for proving legal violations”. Identifier. Indeed, with more than 22 opportunities since the publication of FAQ 31 to place the guidance in a binding IFR, it is quite clear that the SBA and the Treasury Department have no intention of making FAQ 31 a binding rule. In addition, the SBA, IFRs, and PPP application have made it clear that the SBA intends to apply only the rule or guidelines applicable at the time of loan application, which for many businesses preceded the publication of FAQ 31.
Who should complete the need questionnaires and when?
Any borrower, whether profit or non-profit, “together with its affiliates, [that] received PPP loans with an original principal amount of $2 million or more” must complete a Need Questionnaire and submit it within 10 business days of receiving the borrower from the lender. Within 5 business days of receipt, the lender must upload the form to the SBA PPP forgiveness platform and separately enter the answers to each question on the platform. Failure of a borrower to submit the form and associated documents within 10 business days could result in the SBA determining that the borrower was “ineligible for the PPP loan, PPP loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies.
What information is requested in the need questionnaires?
The SBA 3509 form is divided into two “assessment” sections: (I) business activity; and (II) liquidity. Many questions related to the business activity of the borrower relate to the situation of the borrower after benefit from a PPP loan. These include, but are not limited to: (a) if a state or local authority has ordered the borrower to “significantly modify its operations” due to COVID-19 and any cash outlays related to these changes ; (b) voluntary changes in business operations as a result of COVID-19 and any cash expenditures related to such changes; (c) whether the borrower has started any new capital improvement projects not due to COVID-19, and if so, how much it has spent on those projects; (d) if, between March 13, 2020 and the end of the PPP loan forgiveness period, the “[b]or the rower has paid dividends or other distributions of capital (other than for estimated tax payments) to its owners”; (e) if, between March 13, 2020 and the end of the PPP Loan Forgiveness Period, the Borrower has “prepaid any outstanding debt”; and (f) if, between March 13, 2020 and the end of the PPP Loan Forgiveness Period, any of the Borrower’s employees were “compensated in an amount greater than $250,000 on an annualized basis “.
The Necessity Questionnaire also asks questions related to liquidity, which include, but are not limited to: (a) whether [the borrowers] are listed on the stock exchange; (b) whether their parent companies are publicly listed; and (c) if a publicly traded company or private equity firm, venture capital firm or hedge fund owns 20% or more of any class of its securities. Form 3509 also asks borrowers to represent the value of their equity.
Although the SBA has not yet provided guidance on how it will review and assess the information it has requested in the necessity questionnaires, the questions outlined above indicate that there may be additional review. borrowers who had significant liquidity at the time of the application. , employees or paid owners for an amount greater than $250,000 on an annualized basis during the rebate period, or are publicly traded or owned by publicly traded companies. There may also be additional scrutiny of borrowers held by private equity firms, venture capital firms, or hedge funds. It has not been announced when the need questionnaires will come into effect or when they will be sent to borrowers.
While the relevant certification on the PPP loan application only attested to “current” economic need for the loan at the time of application, the necessity questionnaires indicate that the SBA will also consider economic need after the borrower has received a PPP loan, which comes as a surprise and leaves borrowers wondering how the SBA will handle this information and what consequences may result. This is particularly unusual because the accuracy of certifications is usually only assessed at the time a certification is made. Although post-certification information can shed light on the accuracy of a certification, the extraordinary uncertainty in April and May 2020 should be an important consideration to make against the actual post-certification experience.
Recommendation: Borrowers should gather the required documents, review and complete the new form before submitting a forgiveness request, and consult with an attorney to find out if the need questionnaires change their loan forgiveness or repayment strategy. Above all, do not submit the form before requested by your lender.