Economic Necessity: An Update on CARES Act Compliance and Enforcement

Kelley Drye Client Advisory

Our previous alert on CARES Act enforcement and corporate compliance cautioned about False Claims Act exposure and other risks posed by CARES aid eligibility certifications. Since that alert there have been significant developments regarding borrower eligibility and, in particular, the economic necessity certification.

Although the CARES Act waived for Paycheck Protection Program (PPP) loans the requirement that borrowers be unable to obtain credit elsewhere,[1] the PPP loan application requires borrowers to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”[2] On April 23, the SBA and Department of Treasury added Q&A 31 to its FAQ guidance which explains that borrowers’ certifications as to necessity must be made in good faith” and must take into account their current business activity and ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”[3] In particular, the guidance cautions, “[I]t is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.” Further, it states, Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

On April 28, the Secretary of the Treasury announced that all loans over $2 million will be given a full review” to ensure legitimate economic need before they will be forgiven.[4] (Q&A 39 in SBA’s FAQ guidance, as of April 29, states that additional guidance is forthcoming regarding this review.[5]) That same day, the SBA published an interim final rule to supplement previous rules on PPP implementation, with clarification regarding eligible businesses. The April 28 regulation, previewed on SBA’s website on April 24, provides for limited safe harbor” regarding the economic necessity certification, as teased in the FAQ guidance, for those businesses having applied for a PPP loan before the regulation’s issuance that repay the loan in full by May 7, 2020.[6]

Borrowers are to assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application” and there is no mandatory change to the applicable certification for borrowers.  That said, SBA notes that borrowers who applied before the guidance may” revise their applications based on clarifications in the guidance.[7] Borrowers who believe the new regulation and guidance may call their eligibility into question should therefore take steps immediately to review their current business activity” and ability to access other sources of liquidity.” A business that has already submitted its application should, at a minimum, gather supporting documentation to confirm the earlier economic necessity certification. This assessment, in consultation with the company’s compliance officer, should be conducted promptly, in case the business needs to take advantage of the safe harbor expiring May 7, 2020. Those businesses retaining PPP loans must establish measures in their compliance programs to ensure that use of funds is documented for use in accordance with the PPP terms, i.e., for the business’s payroll, mortgage, lease, or covered utility payments, to ensure they may be forgiven. Finally, businesses may encounter challenges to the basis of their economic uncertainty certification narrative from the SBA (in a loan forgiveness application or subsequent full review” of a company’s PPP loan eligibility) or to the Special Inspector General for Pandemic Recovery (SIGPR). For those businesses, further discussion with counsel can identify the best path forward.

Attorneys in Kelley Drye’s White Collar, Investigations and Compliance and Government Contracts practice groups are monitoring developments related to the COVID-19 pandemic and advising clients with respect to the obligations they create. Clients should feel free to contact the authors or any other Kelley Drye attorney they work with to further discuss the topic. Kelley Drye will provide any updates and further information on our COVID-19 Response Resource Center as this situation develops.


[1] See CARES Act, Pub. L. No. 116-136, § 1102(a) (amending 15 U.S.C. § 636(a) to add 36(D)(iv) and 36(I)); see also 13 C.F.R. § 120.101 (setting forth credit not available elsewhere” test).
[5] See supra note 3, Q&A 39.
[6] See 85 Fed. Reg. 23450, 23451 (Apr. 28, 2020).
[7] See supra note 3, Q&A 31 and Q&A 17.