SBA Issues Loan Necessity Questionnaire for Recipients of Large PPP Loans

The U.S. Small Business Administration (the “SBA”) released a loan necessity questionnaire for borrowers that received Paycheck Protection Program (“PPP”) loans of $2 million or more. The questionnaire is meant to aid the SBA in assessing whether these borrowers needed the loans. The questionnaire for for-profit borrowers can be found here. The questionnaire for non-profit borrowers can be found here. The questionnaire has been shared with lenders and financial trade associations but had not yet been posted on the SBA’s website at the time of this client alert.

The PPP makes available low-interest and potentially forgivable loans to businesses that employ fewer than 500 people (generally). PPP loans are meant to help small businesses pay for certain overhead costs and to encourage small businesses to keep their workers employed through the COVID-19 crisis. The SBA administers the PPP, which was created in March under the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”), as modified by the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) and the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”). 

The “Necessity” Certification. Borrowers that applied for PPP loans were required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of their business. The SBA automatically will audit all loans of $2 million or more. However, borrowers that, together with their affiliates, received PPP loans of less than $2 million are deemed to have made the required “necessity” certification in good faith.

SBA Review of Large Loans. For loans of $2 million or more, the SBA’s guidance to date, excerpted in part below, did not provide detailed instructions on what factors the SBA would consider in determining whether such borrowers made the “necessity” certification in good faith:

PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

The new questionnaire gathers information about the borrower’s operations during the COVID-19 crisis, including, among other factors:

• Changes in revenue
• Changes in operations
• Cash spent to comply with COVID-19 orders
• Cash and cash equivalents on hand immediately prior to its PPP loan application
• Capital distributions
• Voluntary debt prepayments
• Details on highly compensated employees and employee-owners
• Market capitalization of publicly listed borrowers
• Identity of equity owners
• Participation in other CARES Act programs

The questionnaire indicates that the SBA will look at the totality of the borrower’s circumstances, so it is unclear how much weight the SBA will assign to each response in the questionnaire.

Additional Information. The SBA may issue more guidance on this topic in the future, and until the questionnaire is formally published on the SBA’s website, it may be subject to change. The complete text of (i) the CARES Act is here, (ii) the PPP Enhancement Act is here, and (iii) the PPP Flexibility Act is here. For more information, please contact your Quarles & Brady attorney or:

• Melissa McCord: (414) 277-3079 / melissa.mccord@quarles.com