One of the most popular yet confounding and controversial federal programs created by The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the Paycheck Protection Program (PPP) under the Small Business Administration (SBA). From the staggering amount of money that was made available to eligible entities pursuant to the loan program, to the uproar caused by media reports about PPP loans being made to publicly traded companies, to the confusion surrounding proof of eligibility and economic need, the PPP loan program has been a hot topic – because of what it is and the way it has been implemented. However, now that many of the SBA loan applicants have been approved and received their loan funds, and the safe harbor return date has passed, it’s time to consider the risks associated with another facet of the PPP loan program: loan forgiveness. Eight weeks after loan disbursement, PPP loan recipients may begin applying for loan forgiveness, subject to the satisfaction of certain conditions. The SBA recently unveiled the standard forgiveness application, which, like the PPP loan application, contains certifications that must be made by a recipient who is seeking forgiveness for these federally guaranteed loans. In connection with the delivery of these applications for forgiveness and the related certifications contained therein, applicants can be sure that federal enforcement agencies will be closely scrutinizing the applications, certifications, and supporting records.
This alert addresses the PPP forgiveness conditions, the forgiveness application process, and steps to ensure compliance and mitigate enforcement risk, particularly under the federal False Claims Act.
Background and context
PPP provided SBA-guaranteed emergency loans to eligible small businesses navigating the unprecedented COVID-19 global pandemic to be used for payroll and other fixed obligations. One of the most attractive features of the loan program was the ability to obtain loan forgiveness if the loan funds were used for payroll and certain other fixed obligations, like rent and utilities, and 75 percent of the requested forgivable amount was used for payroll. Any loan proceeds not used for forgivable purposes would accrue interest at 1 percent. This unprecedented program caused applicants to rush to submit applications to their lenders for PPP funds, and the SBA announced within two weeks that the initial $349 billion in CARES Act PPP funds had been exhausted. Eventually, an additional $321 billion in funding for PPP loans was made available on April 24, 2020. Following the initial announcement of the loan program, the SBA and the Treasury issued significant additional guidance on eligibility, which clarified the regulations and eligibility criteria in some part and in other cases, arguably moved the goal posts, particularly with respect to public companies and private equity companies. Following the release of a series of FAQs and increased scrutiny in the press, Treasury Secretary Mnuchin also announced that the SBA will conduct audits of all businesses that received PPP loans amounting to more than $2 million, and reiterated his warning that PPP borrowers may face potential law enforcement action if they took funds without satisfying eligibility requirements. The SBA then announced a safe harbor date for loan recipients to return the funds without penalty if they determined they no longer qualified under the revised guidelines. Now that the borrowing safe harbor date has passed (discussing SBA FAQ # 43; see also SBA FAQ # 47), borrowers next must navigate the PPP forgiveness provisions in seeking forgiveness of their loans.
Generally, PPP loans are eligible for up to 100 percent forgiveness in connection with the approved use of proceeds for the recipient’s qualifying payroll costs; interest payments on real or personal property mortgage obligations, for obligations incurred before February 15, 2020; rent payments under leases in force before February 15, 2020; utility payments where service began prior to February 15, 2020; and additional wages paid to tipped employees – with the condition that all of the foregoing costs were incurred and paid during the eight-week period beginning on the date of PPP loan origination, defined by the CARES Act as the “covered period.”