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The Treasury's new guidance on who gets to keep PPP loans means many business owners concerned about an audit are probably in the clear

business owner coronavirus pandemic
  • The rules around the Paycheck Protection Program's "certification of necessity" for loan applicants have been clarified.
  • The certification of necessity borrowers make when applying states that the loan is absolutely crucial for the owner's business to survive during the pandemic.
  • The new guidelines state that a borrower receiving a loan of less than $2 million will automatically be seen in good faith for needing a loan. Borrowers with loans above $2 million will be reviewed to see if they need to repay the loan.
  • This approach should encourage more small business owners and employers to apply for a PPP loan without fear of retribution.
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The US Department of the Treasury updated the Paycheck Protection Program (PPP) Frequently Asked Questions (FAQs) yesterday to add guidance around an important detail regarding the "certification of necessity" borrowers make when applying for a loan. In signing off on this certification, borrowers pledge — under penalty of law — that the loan is absolutely crucial for their business to survive due to the business effects of coronavirus.
The update means that most borrowers who may have previously been considering returning PPP funds by today's "safe harbor" deadline established by the Small Business Administration (SBA) due to the threat of a government audit should have fewer concerns about meeting the program's need certification.
Senator Marco Rubio, chairman of the Senate Committee on Small Business and Entrepreneurship, recently aired the idea of using court-ordered means to compel participation in the committee's aggressive oversight into the use of PPP loans.  Meanwhile, Treasury Secretary Steven Mnuchin announced that he intends to audit all PPP loans over $2 million, including potential criminal liability for false certifications of eligibility.
Additionally, last week the Department of Justice handed down its first PPP-related fraud charges, lending weight to recent warnings from the US government that it intends to investigate companies that have taken stimulus funds without needing them.
Yesterday's guidance filled in some important detail that will likely put PPP loan borrowers of all sizes more at ease. Here's what it all means.

Smaller borrowers are automatically certified to meet the standard for need

The pace of lending in the second round of the PPP has slowed considerably, with only $16 billion in new lending last week and an average loan size of just over $72,000. Jared Hecht, CEO of technology services fintech Fundera, believes that part of the reason for this slower pace as compared to the "chaos" of the first round was likely the way the previous government messaging struck small business owners in a time of crisis.
"You're laying people off, you're kind of shut down, you're kind of not shut down. You're trying to figure out what the future has in store for you, and then all of a sudden you hear that if you take this loan you actually might be prosecuted," Hecht said. "You think you need the loan, but the terminology and the guidelines have been so incredibly subjective and ambiguous that you may think you need the loan, but will somebody conducting the loan think that? So you're generally going to say, 'I'm just not going to apply.'"
The revised guidance within the FAQs has been amended to say that a borrower (or group of related borrowers) receiving a loan of less than $2 million will automatically be seen to have stated their need for the funds in good faith. 
"That guidance likely will ease the decision-making process for [prospective] borrowers below that threshold," Neil Getnick, managing partner of Getnick & Getnick LLP, told Business Insider.
Erik Asgeirsson of the American Institute of Certified Public Accountants (AICPA) added that borrowers should continue to focus on making an earnest assessment of their own need for the funds. "You just need to be sure you can explain why the economic uncertainty required you to take the loan," he explained.
The SBA made the decision to automatically grant good-faith certification to borrowers beneath the $2 million threshold for a few reasons, Getnick said.
"The SBA has determined that this is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans," he explained.
He added that this move will also promote economic certainty as borrowers with more limited resources retain and rehire employees. Given the large volume of PPP loans, he said, this approach will enable the SBA "to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns."

Borrowers between $2 million and the loan ceiling will be given a chance to repay

Regarding borrowers who received more than $2 million in funds but less than the loan ceiling of $10 million, Treasury Secretary Mnuchin stated earlier that these loans would automatically be audited. Yesterday's guidance allows for the fact that these loans will be subject to review, but now lays out a model, where borrowers who are found to fall short of the economic necessity standard — for example, those whose companies are seen to have had accessible funds elsewhere that could have helped them weather the COVID-19 crisis — may repay PPP funds to the SBA.
Additionally, the language states that as long as the borrower repays the loan upon notification, the SBA "will not pursue administrative enforcement or referrals to other agencies."
"Basically now, if after the SBA reviews it and they notify the business that they need to repay it, they'll just work with the lender and they'll repay the loan," Asgeirsson said. 
Asgeirsson echoed Hecht's comments that removing the confusion around the liquidity reviews should open the pathway to put more PPP funds in the hands of more businesses that need them.
"There are a lot of business entities and organizations such as AICPA that were concerned that businesses that needed this aid now were not applying due to not understanding what this additional liquidity review was," Asgeirsson said.
Getnick cautioned that this additional guidance only exempts borrowers from concern about the necessity certification, not the other certifications made on the loan application.
"The SBA still may pursue such remedies regarding other certifications and representations in the loan application, for example, the size of the loan applicant's workforce," he said.
SEE ALSO: You should put your Paycheck Protection loan into a separate bank account if you want it to be forgiven, experts say
READ MORE: Fraud related to small business loans is on the rise — and the federal government is on high alert. Here's how to protect yourself in case of an audit or investigation.
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