PPP Borrowers And False Certifications: SBA Extends Amnesty Under Safe Harbor

The SBA issued a FAQ extending the due date to seek relief under the SBA’s safe harbor for borrowers who made incorrect certifications during the PPP loan process.  The extension provides borrowers with an opportunity to repay proceeds by May 14, 2020 as part of a voluntary disclosure process whereby the SBA will deem the certification to have been made in good faith.  In other words, the SBA will look the other way at the false certification.  

But borrower beware: That relief does not in any way prohibit a United States Attorney’s Office from investigating or prosecuting a borrower for bank fraud if they made a false representation in order to obtain a loan.  That fact has been overlooked by almost every commentator to date, and may leave some uncertain borrowers stuck in an uncomfortable middle ground, weighing their legal options and facing the reality—one all too familiar to white-collar lawyers—that the very act of walking through the safe harbor may actually give rise to an implicit admission that they committed a crime in the first place.  The SBA may not care; but will another prosecuting agency?  

The SBA’s announcement comes on the heels of a warning that it intends to audit many, many PPP loan recipients following applications for forgiveness—a move that signals future scrutiny as part of an effort to cut down on fraudulent applications.  It also comes just a day after the Department of Justice announced its first federal charges against defendants for allegedly seeking fraudulent PPP loans.  And it also follows comments from the Chair of the Senate Committee on Small Business and Entrepreneurship that it intends to conduct “aggressive oversight of the Paycheck Protection Program (PPP), including whether companies made false certifications to the federal government to receive PPP loans.” 

What exactly is the risk that some borrowers are facing here?  There are a host of federal statutes that could be on point.  Most notable, however: bank fraud.  Obtaining a bank loan based on any false pretense, representation, or promise may give rise to a federal charge of bank fraud that carries a statutory maximum of 30 years in prison.  (Note: Most borrowers under the program would not face sentences anywhere near the statutory maximum, given the limited amount of any given loan, but they could still face serious prison time and ruinous financial penalties.)

The federal bank fraud statute provides that:

Whoever knowingly executes, or attempts to execute, a scheme or artifice–

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

The government has long maintained that the bank fraud statute is a broad-scoped provision that captures a wide array of false representations and certifications.  That makes it an effective weapon that is favored by prosecutors.

Borrowers are required to make several certifications during the PPP application process.  Notably, the application requires that PPP applicants certify that “[c]urrent economic uncertainty makes th[e] loan request necessary to support the ongoing operations of the Applicant.” This particular certification has received significant attention—some for its seeming vagueness, some criticizing the SBA’s heavy-handed approach to enforcing the provision; and some chastising government authorities for not doing enough to reign in fraudulent applications.  

Let’s look at the actual FAQs at the center of the debate and the SBA’s safe harbor.  FAQ 31 provides as follows: 

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. . . . borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account 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 the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. 

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. 

The SBA extended the deadline under this safe harbor provision until May 14, 2020.  In FAQ 43, the SBA provided as follows: 

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date? 

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020. 

The SBA’s guidance is admittedly somewhat vague—almost, but not quite, as vague as the underlying certification that it attempts to clarify.  Nonetheless, there are some insightful takeaways from the provisions that shed light on the SBA’s focus.  For instance, the SBA places a particular emphasis on the borrower’s current business activity and their ability to access other sources of liquidity to support their ongoing operations.  The guidance also references a particular example—a public company with substantial value and adequate access to capital markets.  But the SBA has also made clear that private companies with adequate sources of liquidity remain subject to the same rules and restrictions, so the rules are not limited to large companies by any means.  (See FAQ 37.). 

These and other aspects of the SBA’s rules provide insights into their intended legal scope.  They also point toward certain documentary and other legal steps that would-be borrowers and already-funded borrowers alike may take to mitigate their risk exposure.  Those steps will, of course, vary from borrower to borrower, but may just be a cost of doing business with the federal government on favorable terms during the pandemic.  Particularly in light of the Department of Justice’s recent move onto the scene—through arrests and criminal charges for alleged PPP applications with misrepresentations—uncertain borrowers may want to take precautionary steps or seek legal advice (or a legal opinion) before they either accept PPP money or before they submit applications for forgiveness.

Full coverage and live updates on the Coronavirus