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Does New PPP Loan Guidance Give Borrowers a License to Steal?

by Melanie Waddell

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(Photo: Susana Gonzalez/Bloomberg)

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.”

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.”

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Notably, Levine continued, Treasury “just gave businesses that made outrageously aggressive certifications what essentially amounts to a license to steal from the American taxpayer … as long as they ‘only’ stole $2 million or less. To be clear, many, if not most PPP loan recipients are likely well deserving of such funds.”

Levine added: “But I can share w/ you that I have personally spoken w/ several biz owners (both w/in and outside of the financial planning community), who absolutely, unequivocally, 100% pushed the boundaries (putting it lightly).”

He said that, while he understood the SBA’s rationale for the decision — a need to focus limited resources on bigger audits — “there’s a HUGE difference between saying ‘We’re going to FOCUS on the bigger loans’ and ‘We’re going to completely IGNORE smaller loans and ONLY look at the larger ones.’”

Jeff Bialos, a partner at Eversheds Sutherland in Washington, however, told ThinkAdvisor in a Thursday email that characterizing the SBA’s updated guidance as a license to steal is “unfair.”

SBA and Treasury “effectively sought to retroactively move the goal posts — and change the meaning of the economic certification to mean that a party could not in good faith make it and obtain funding if it had other sources of liquidity,” Bialos said.

“That position was subject to serious question,” he continued. “The CARES Act made it clear that availability of other credit, a condition of traditional SBA loans, did not apply to PPP loans.”

In short, “Congress made a conscious choice not to apply that criteria to PPP loans. It’s well established that under the ‘fair notice’ doctrine, you cannot prosecute a party for conduct that it did not know was prohibited,” Bialos said. “Certainly that is the situation here. Numerous borrowers made good faith certifications that the ‘uncertainty’ required funding for their operations — without regard to whether other credit is available. That wasn’t a requirement. It therefore would be unfair to seek legal action against parties that took PPP funding under this certification.”

What SBA and Treasury “have therefore done is walk back their move of the goal posts in a fair manner,” Bialos said.

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Melanie Waddell

@Think_MelanieW