The Treasury Department and Small Business Administration released updated guidance Wednesday stating that the SBA will deem all loans with original amounts under $2 million to be in good faith, meaning the loans won’t be challenged.
Debate is ensuing as to whether the guidance gives loan takers a license to steal or if it’s a fair “walking back” of the SBA and Treasury’s previous guidance.
Question 46 of its updated FAQ asks: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
SBA says: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”
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Jim Richards, founder and principal of RegTech Consulting, a financial-crimes risk management firm in San Francisco, said in a LinkedIn post that the SBA’s decision was “stunning.”
The SBA’s decision “involves the ‘good faith certification’ of, among other things, that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,’” Richards said.
“There will be grey areas where the borrower maybe didn’t really need the loan. But there will be situations where a borrower flat out lied about needing the loan — or grant if the loan is forgiven,” according to Richards.
With the updated FAQ, SBA “is essentially saying that as long as the PPP loan is less than $2 million, borrowers can flat out lie about needing the loan because SBA is not going to check — in fact, SBA deems these loans to be made in good faith. And for PPP loans of more than $2 million, if SBA catches the borrower in a flat out lie about needing the loan, as long as the borrower then pays the loan back, SBA won’t pursue enforcement or refer the borrower to other agencies (e.g, the Department of Justice),” Richard said.
The SBA said that consumers should report any fraud incidents to its Office of Inspector General Hotline.
Jeff Levine, lead financial planning nerd for Kitces.com and a colleague of Michael Kitces at Buckingham Wealth Partners, said Wednesday in a tweet that “while its great to finally have some certainty on how the certification requirement will be interpreted, Q&A #46 creates a significant moral hazard with respect to the PPP program.”