Potential Legal and Regulatory Risks Regarding Small Business Eligibility for Paycheck Protection Program (“PPP”) Loans

President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (“Enhancement Act”) on Friday, April 24th. This legislation infuses $310 billion into the Paycheck Protection Program (“PPP”) with more than $250 billion in unrestricted funds for the program and an additional $60 billion allocated specifically for smaller lending institutions.

Given the additional funding for the program, more of your small business clients may want to apply. It is important that you inform these clients, as well as those that may have already received funding in the first phase, of the potential legal and regulatory risks associated with applying for, and receiving, funds under the program.

As you may have heard, the word on the street among small businesses regarding the PPP has been that these are basically grants of "free money" and that if you own a small business "you’d have to be crazy not to apply." However, numerous recent headlines have shone the spotlight on the distribution of PPP funds to large restaurant chains including Shake Shack, as well as other prominent public and private companies. Articles have criticized the loan program, questioned the propriety of the eligibility requirements, and impugned the integrity and ethics of many organizations that have applied for funding. In light of this scrutiny, several of these entities have returned the funds received.

As initially promulgated, the PPP was designed specifically to provide immediate relief to eligible small businesses that believe that the "current economic uncertainty" of the COVID-19 pandemic makes such a loan for their business "necessary to support their ongoing operations," and they certify these representations to the lender. Although we all recognize that most if not all small businesses face some level of uncertainty in light of the COVID-19 pandemic, greater clarity from the regulators was needed to refine the program qualifications as the impact on some small businesses does not rise to the level of "uncertainty" to meet the spirit and intent of the program.

On April 23rd, the Small Business Administration ("SBA") updated its Frequently Asked Questions Document to add FAQ 31. The new FAQ provides much-needed clarity regarding program qualifications specific to businesses with access to other sources of liquidity to support their ongoing operations. Any business that received a PPP loan prior to the issuance of this new guidance and who now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full by May 7, 2020. Any business that does so, will be deemed by the SBA to have made the required good faith certification on their PPP loan application.

It is clear that heightened government scrutiny will be forthcoming to investigate potential fraud and abuse, as demand for these PPP loans, even with the additional funding, is expected to exceed loan availability. Businesses who have received PPP loans and are later found not to have qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences.

Take Immediate Action Now

From CAMICO's risk management perspective, it is critical that firms take the appropriate loss prevention measures to "warn" business clients of the potential legal and regulatory risks associated with applying for, and receiving, funds under the program, as well as to "advise" them of the steps to take to minimize their risks of potential future legal and regulatory exposure.

Given the fast approaching May 7th deadline imposed by the SBA for repayment of PPP loans deemed not to meet the updated eligibility requirements, CAMICO urges firms to take immediate action to disseminate a communication to their clients. We have developed a business client notification for this purpose and we recommend that you use this notification as the foundation for a communication you send to all clients that may have entertained applying for a PPP loan.

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