April 30, 2020

SBA Issues PPP Enforcement Guidance

NCEO founder and senior staff member

The Paycheck Protection Program (PPP) has generated considerable controversy concerning its implementation, fairness, and rules. The Small Business Administration (SBA) is maintaining a FAQ document on the PPP program (PDF) that will be regularly updated. The SBA states, "Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the CARES Act and of the . . . PPP Interim Final Rules . . . The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rules and any subsequent rulemaking in effect at the time."

The most intense concern about the PPP program has been over loans made to large companies, especially publicly traded companies, that got millions of dollars from the program, such as Shake Shack and Ruth’s Chris Steakhouse. Some of these companies have announced they will give the money back.

A more basic concern is who should get this money. The law was intended to help small businesses keep people on their payroll, at least for the eight-week period of loan forgiveness, but hopefully longer. Eligible firms included all those meeting SBA size standards as well as many companies in the hospitality business. Generally, SBA size standards mean 500 or fewer employees, but there is a long list of business that can be much larger under those standards, including some with up to 1,500 employees.

Among these eligible businesses, some firms are in fact able to meet payroll anyway, because they either have sufficient ongoing revenue or have sufficient cash reserves. To qualify for the program, companies must be able to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The relevant question for ESOP (and other) companies is “[d]o businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The SBA indicated that borrowers must be able to show that borrowers are required to consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business.” That could include both private and public companies.

The SBA also cautions that, “[a]lthough the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere … borrowers still must certify in good faith that their PPP loan request is necessary.”

So what does this mean? Unfortunately, the guidance is still sparse as to just what companies need to show. Is there some number of months of cash that is enough? Some level of revenue that suffices to pay employees but causes significant losses to the company? Given the volume of loans, it is most likely that any compliance testing will focus on larger companies, but just how this will work out is unclear. It seems unlikely that penalties will be imposed for companies deemed noncompliant, but companies might be asked to repay the loan fully and not get any forgiveness.