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SBA Backs Off Threat Against Firms That Didn’t Need Loans

Mark Niquette
SBA Backs Off Threat Against Firms That Didn’t Need Loans

(Bloomberg) -- The Trump administration said firms that took loans of more than $2 million that they didn’t need from a small business aid program would be allowed to repay the money without legal consequences, reversing an earlier threat that the government could pursue them criminally.

New guidance issued Wednesday for the Paycheck Protection Program by the Small Business Administration and the Treasury Department also said that companies that accepted loans of less than $2 million will automatically be determined to have done so in good faith because they’re less likely to have access to other resources.

The guidance comes before the Thursday deadline that the SBA and Treasury had set for firms that weren’t eligible for a PPP loan to return them without penalty and provides more assurance for firms with smaller loans who were uncertain about whether they should keep the money. Some companies have reported returning loans even though they think they’re eligible amid changing rules and guidance.

Assuming that loans of less than $2 million were taken in good faith will allow the SBA to focus its resources on reviewing larger loans given the massive size of the program, the agencies said. More than 4.3 million loans worth almost $535 billion have been approved so far, including almost 33,900 loans of more than $2 million as of May 8, according to SBA data.

The SBA has said it will review all loans above $2 million and potentially others as well to check whether firms properly certified they were necessary. If the SBA determines a company couldn’t justify the need, the loan won’t be forgiven -- and if the borrower repays it, no further action will be taken, according to the new guidance.

Last month, following a backlash after large firms swooped in and collected millions from the program -- which was intended to cast a lifeline to small concerns that didn’t have access to capital markets -- Treasury Secretary Steven Mnuchin said borrowers had criminal liability for taking loans they didn’t need.

Borrowers suspected of committing fraud in taking relief loans are being prosecuted. The Justice Department last week brought the first criminal case related to the program when it charged two New England businessmen with fraud and alleged that their applications falsely claimed employees they didn’t have. A reality television personality bought diamond jewelery and a Rolex watch after tapping $2 million from the program, U.S. prosecutors said Wednesday.

President Donald Trump told reporters on Wednesday that companies that took PPP loans improperly will have “big problems” and “if there’s any companies that got loans they weren’t entitled to, we’ll go after them very seriously.”

The program allows loans to small businesses of as much as $10 million that can be become grants if proceeds are spent mostly on payroll for two months after they are received. It’s meant to keep workers employed and firms ready to re-open when state stay-at-home orders are lifted.

After Shake Shack Inc. and the Los Angeles Lakers got loans -- and later returned them -- at the expense of mom-and-pop operations, the SBA and Treasury issued guidance April 23 saying companies with “substantial market value and access to capital markets” would be unlikely to qualify. Borrowers had to certify on their applications that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business.

The new guidance doesn’t specify how the SBA would determine in its audits whether a borrower had “adequate sources of liquidity” and “lacked an adequate basis for the required certification concerning the necessity of the loan.”

But groups representing both small businesses and lenders praised the new guidance, saying they were looking for answers and help in complying with the program. It will be a relief to many who were wary about accepting a loan or unsure about whether they should have taken the money, said Paul Merski of the Independent Community Bankers of America.

“This is going to ease a lot of that anxiety,” Merski said.

It would have been difficult for the government to make a case that a borrower certified the need for a loan in bad faith, said Alan Roth, a partner at Winston & Strawn LLP. The new guidance is pragmatic given the volume of loans, he added.

“I think the government is trying to take a reasoned approach to this,” Roth said.

The SBA and Treasury haven’t disclosed how many companies have returned or canceled loans and in what amounts. Public companies have reported returning 61 loans worth $411 million as of Wednesday evening, according to data compiled by FactSquared.

(Updates with Trump comment, in eighth paragraph.)

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