The Small Business Administration (SBA) has announced that it will not scrutinize the application certifications for loans of less than $2 million under the Payment Protection Program (PPP). In turn, the federal government will focus its scrutiny of PPP loan applications on larger business recipients with regard to whether the loans were necessary because the recipients could not obtain capital by other means. The announcement should provide peace of mind to the smallest loan beneficiaries who feared running afoul of federal law for inadvertent mistakes while putting larger beneficiaries on notice that they will not be given the same benefit of the doubt.
All applicants for PPP loans must certify, among other things, that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In public statements, Treasury Secretary Steven Mnuchin stated that this language means that applicants were unable to obtain capital by other means and that larger businesses who obtained loans under false pretenses would face unspecified penalties. Mnuchin also previously stated that all these PPP loans would undergo “audit.” (See our previous posting. [link to April 29 blog]) The SBA later used the term “review” rather than “audit” without defining what “review” will entail. Following Secretary Mnuchin’s statements that businesses which may have access to alternative capital could repay the PPP loans without penalty, the SBA formally announced a “safe harbor” which allowed businesses which repaid loans by May 7 (later extended to May 14) to be deemed to have made the certification in good faith. The “safe harbor” followed a series of news reports regarding large chain business chains, such as Shake Shack and Ruth’s Chris Steak House, which received loans and repaid them after public criticism.
The new policy puts larger PPP loan beneficiaries on notice to prepare to defend the accuracy of their loan applications (see our previous blog) and the use of loaned funds. It also signals that the government will be less receptive to claims of good faith error than it would be with smaller and presumably less sophisticated borrowers.
Under federal fraud statutes, the maximum penalties for individuals are 20 to 30 years in federal prison and a fine of the greater of $250,000 or twice the gain or loss.