Thursday, November 26, 2020

OBA President/CEO Roger Beverage addresses concern for the PPP

MEMORANDUM

TO: All OBA Chairmen, Presidents, CEOs and CFOs

RE: Good Faith Certification

Good afternoon:

Some additional guidance was released by the Treasury Department this week, and I found it very troubling. Here’s why.

Question #31 was added to the Treasury’s list of FAQs last Thursday. You may recall that there has been some controversy about whether large organizations, like Ruth’s Chris Steakhouse and several others, are eligible for a PPP loan. This question is as follows:

Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

The answer to this question is where I think a problem exists for some of your customers. It says this FAQ applies to ALL PPP borrowers, not just the big ones.

Even though the CARES Act does not include a requirement that the customer can’t get credit anywhere else, I think this requirement still exists. You (the lender) may rely on the borrower’s certification of the loan request without any legal exposure to the bank.

While that may be true, there could be exposure for your customer that he/she/it is not going to like, because it gives the SBA a lever to not forgive the loan, and perhaps something even more onerous. My guess is the customer will be unhappy and is likely to blame you!

There is an “out” for the borrowers, however, IF you make them aware of the “new” requirement. If after doing so your borrower begins having “second thoughts” about whether he/she/it really needed the money, as he/she/it certified at the time the application was submitted, then the borrower can repay the loan in full by May 7, 2020 and be considered by the SBA to have made the required certification in good faith. All is well.

If challenged, the customer “should be prepared to demonstrate to SBA, upon request, the basis for he/she/its certification.” I’m not certain what the SBA could or would do to a borrower who didn’t really need the money, as determined by the SBA.

I don’t know what else might confront the customer for, in essence, falsifying a loan application. At a minimum, the SBA is not going to forgive it. I don’t know what that does to your guarantee either, so that’s something to consider.
If the borrower repays the loan by May 7, it’s all good. The problem comes when the SBA makes a subjective judgment that your customer didn’t really need the money but did not pay it back by that May 7 deadline.

It might be a good idea to tell your borrowers about this critical change in the process, especially the ones who, in your view, maybe didn’t really need it. That’s totally your call, but you know your customers better than the SBA. I think it will help you avoid a customer confrontation around the first of July.