You may remember that the Paycheck Protection Program application requires the borrower to confirm in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Bad publicity over misuse and abuse of PPP funds has increased. It was determined that a number of loan recipients did not need the money. This, in turn, led U.S. Treasury Secretary Steven Mnuchin to warn that the PPP funds were designed only for very small businesses and that there would be “severe consequences” for large companies that inappropriately accepted PPP loans.
Republicans and Democrats have now all jumped on the PPP-fraud bandwagon to express their shock and dismay at the misuse of PPP funds by corporate America. Of course, this is a typical government-created nightmare, is it not? Congress makes a bad loan law, with few constraints and poorly-drafted definitions, then complains when businesses avail themselves of the law.
As we warned was coming some months ago, a vigorous level of audit is now underway targeting businesses that received more than $2 million in PPP funding. Specifically, the SBA has created a “Loan Necessity Questionnaire”, that banks are required to distribute to PPP borrowers with loans greater than $2 million, to “justify” the need for the loans. So, how exactly does this work?
Well, the Questionnaire – with supporting documentation – has to be returned to your lender within 10 business days of your getting it. Its purpose is to evaluate the good-faith certification of economic necessity borrowers made on their PPP loan applications. If you don’t return it, the SBA may determine you were ineligible for the PPP loan and/or any forgiveness. Unfortunately, the Questionnaire is fact-based and compares business activity and liquidity in 2020 to 2019. Putting aside some small area for commentary – “yes” – “no” questions are simply inadequate to provide a realistic picture of the economic uncertainty, risks, concerns, scenarios or contingencies a business owner was facing at the time of the PPP application. Hindsight, in this case, is anything but 20-20, and for the government to now try to question the decision-making process of a business owner months ago while in the middle of a pandemic is absurd.
BLLP has advised clients to complete the Questionnaire promptly and in good faith, but to make sure a detailed addendum is attached, explaining the intricacies of a direct-to-consumer model, the impact of local and state shut-down orders, the unknown affect on the in-home sales process, etc. If you’d like to see what BLLP suggests in this regard, please just touch base with us. Putting aside potential PR concerns (now that information as to every PPP borrower has been made public) and cases of obvious abuse, we see very little risk in the SBA or a lender being able to legally deny loan forgiveness to a client based on an alleged “bad faith” loan certification by a remodeler. QR
D.S. Berenson is Managing Director of Berenson LLP, a law firm that specializes in home improvement management issues.