Treasury Secretary Mnuchin Announces Audits of PPP Loans in Excess of $2 Million; Treasury Clarifies Prior Guidance on Alternate Sources of Liquidity

On April 28, Secretary of the Treasury Steven Mnuchin stated in an interview with CNBC that businesses receiving Paycheck Protection Program (PPP) loans in excess of $2 million will be subject to audit by the Small Business Administration (SBA) prior to loan forgiveness to confirm borrower eligibility and need, and he warned of potential criminal liability if the SBA determines that the borrower was not eligible to participate in the PPP or was not justified in certifying need for the PPP loan to continue operations.  

The full CNBC interview with Secretary Mnuchin can be found here: CNBC – Interview with Treasury Secretary Steven Mnuchin. It is expected that this newest guidance will also be included in a forthcoming update to the SBA’s FAQs.

Also on April 28, the SBA, in consultation with the Treasury Department, updated its PPP FAQs to make clear that its recent guidance concerning borrower eligibility and the required good faith certification by a borrower in the PPP application concerning need for the loan, and how alternative sources of liquidity should be taken into account in making such certification apply to businesses owned by private companies as well as public companies.

As of the time of publication of this alert, the SBA website advises that the SBA is, as of April 27, accepting new PPP loan applications from participating lenders. Despite newly appropriated funding for the EIDL program in the Paycheck Protection Program and Health Care Enhancement Act signed into law on April 24, the SBA website also advises that the SBA is not accepting new EIDL applications based on available appropriations funding, but previously submitted applications are being processed in order of receipt.

Prospective borrowers should continue to consult the SBA and Treasury websites regularly to track new content, revisions to previously released guidance, and the status of the EIDL and PPP programs.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act, which are collected and published in the Kramer Levin COVID-19 Legal Resource Guide, can be found here: COVID-19 Legal Resource Guide.

Additional Scrutiny and Considerations for PPP Loan Recipients

Based on Secretary Mnuchin’s April 28 statements, recipients of PPP loans in excess of $2 million should now expect to be audited by the SBA in respect of, among other things, the borrower’s analysis and certification of eligibility to participate in the PPP based on the CARES Act legislation, SBA rules and procedures, and other PPP guidance, as well as the borrower’s certification that the current economic uncertainty makes the loan necessary to continue operations. Secretary Mnuchin described the audit as a full loan review prior to receiving forgiveness. 

This announcement follows the recent release of the Treasury Department’s April 23 FAQ #31 emphasizing that potential PPP borrowers should consider their ability to access alternative sources of liquidity sufficient to support their ongoing operations (in a manner that is not significantly detrimental to their business) in connection with making the required good faith certification that the PPP loan proceeds are necessary to support the ongoing operations of the potential borrower (the need-based certification). The April 23 FAQ #31 came on the heels of the disclosure that several large public companies with access to capital markets received PPP loans, and explicitly noted that such companies are unlikely to be able to make the need-based certification and are thus likely ineligible for PPP loans.

Concurrent with Secretary Mnuchin’s April 28 statements to CNBC, the SBA released an additional FAQ clarifying that the considerations provided in the April 23 FAQ #31 apply to private companies with adequate sources of liquidity, in addition to the public companies that were the focus of the previously released FAQ. This guidance is consistent with our prior interpretation of the FAQ, that it would be prudent for all potential PPP borrowers (whether public companies, portfolio companies of private equity funds or otherwise) to assess their current ability to access alternative sources of liquidity that would be sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business (e.g., including undrawn capacity under an existing revolving credit line, available cash on hand or available cash on hand at the borrower’s parent company) in connection with evaluating the need-based certification.

It is important to note that the April 23 FAQ #31 (and the April 24 interim final rule) provided for a limited safe harbor for recipients of PPP loans that believe that they mistakenly received their loans based on a misunderstanding or misapplication of the need-based certification if they repay their loans in full by May 7, 2020, at which time they will be considered by the SBA to have made the required certification in good faith (and as such, should not expect enforcement action by the SBA, Treasury Department and/or the Inspector General in respect of its prior certification of need).

In light of Secretary Mnuchin’s April 28 statements and expectation of SBA review following loan origination, recipients of PPP loans in excess of $2 million should reevaluate their prior certification of eligibility to participate in PPP and need-based certifications (based on the most recent FAQ guidance noted above) and may take advantage of the safe harbor if they are concerned their prior certifications may not be accurate in light of recent guidance. Such recipients should also be prepared to provide the SBA evidence of its assessment of eligibility and need in connection with such audit.