A safe harbor is a legal provision to reduce or remove legal or regulatory liability in certain situations, provided that certain conditions are met. Safe harbor, as it relates to PPP loans, help businesses qualify for forgiveness even if they don’t meet all of the criteria outlined in PPP loan forgiveness.
The SBA is offering a “limited safe harbor” window to borrowers who are finding that they borrowed more than they “need,” and who based their loan application on the ambiguous instructions that were available at the time they applied.
Other safe harbor rules apply in accordance with the loan amount as detailed below:
These organizations are deemed to meet the safe harbor as these borrowers are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This should provide economic certainty to these borrowers to retain and rehire employees. It’s also a move to conserve SBA resources to focus on its review of larger loans. For these borrowers, there is no need to return loan funds by May 18th to have safe harbor.
Borrowers that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification based on their individual circumstances. As we know, the SBA and Treasury have indicated that these loans will be reviewed by the SBA to determine if they meet the certification requirements set forth in the PPP Interim Final Rules and in the Borrower Application. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.
The SBA issued guidance in the form of FAQ #46 on certification concerning the necessity of a borrower’s PPP loan and the May 14,2020 safe harbor date to return PPP funds (recently extended to May 18). This appears to be a move toward a reasonable middle ground approach given the incredible uncertainty of the current economic circumstances and the challenges that have been voiced by many organizations struggling to interpret the vague existing guidance and apply it to an unknown future.
The safe harbor provides welcome relief for organizations with smaller loans that have spent a considerable amount of effort trying to apply their individual facts to what was vague guidance. These organizations still need to meet the certification requirement, but they should breathe easier knowing that they automatically meet the safe harbor.
For organizations with larger loans, continue to analyze whether the current economic uncertainty makes the loan necessary for ongoing operations and prepare for SBA review of your position. The good news for organizations on the fence about whether they meet the certification requirement, given the overall uncertainty of the overall economic impact to their business and other sources of liquidity, is that civil and criminal penalties won’t apply as long as the organization made a good faith effort.
Upon review, if the SBA disagrees with a borrower’s eligibility, they will be required to repay the outstanding loan balance and forfeit loan forgiveness. For most organizations that are still weighing their options, this gives them flexibility to keep the funds without the concern of criminal or civil penalties.
