WASHINGTON — When big businesses like Shake Shack and the Los Angeles Lakers basketball franchise took millions of dollars’ worth of emergency loans intended for small businesses, Treasury Secretary Steven Mnuchin called such borrowing “outrageous,” narrowed eligibility and threatened to hold companies criminally liable if they did not give the money back.
But in the last month, large companies have continued to take out big loans through the Paycheck Protection Program, including publicly traded firms with ready access to other forms of capital.
That is posing a critical test for Mr. Mnuchin, who had set a Thursday deadline for firms that did not need the money or had other ways of obtaining capital to return their loans or face a government review and potential legal repercussions. Mr. Mnuchin’s threat is likely to set off a wave of new government audits and legal fights over who is entitled to money that was meant to keep small businesses afloat during the pandemic. Late on Wednesday, the Treasury extended the deadline, for a second time, to May 18.
“I’ve spent the better part of the last two weeks talking with clients about whether or not to return the funds,” said Paul J. Pollock, a lawyer at Crowell & Moring who has been advising about 100 companies on their loans. “Suddenly everybody needed to re-evaluate whether they met the eligibility requirements.”
That decision has been complicated by a series of rule changes enacted by the Treasury Department in the weeks since the program began. The new guidelines are intended to make it harder for big companies to qualify for loans but have been criticized for cutting off funds to companies that need money and have no other government help available to them.
In another last-minute twist on Wednesday, the Treasury said that loans for less than $2 million would be assumed to have been taken in “good faith,” relieving pressure on the millions of companies that received smaller loans. But it does nothing for the thousands of other firms that were approved for loans worth more than $2 million and claim they both qualified for and need the money.
Many companies have opted to risk Mr. Mnuchin’s scrutiny. In recent weeks, companies including the ONE Group Hospitality, Calumet Specialty Products Partners and XpresSpa have taken out millions of dollars’ worth of Paycheck Protection Program loans. Some of those firms have disclosed to investors that they have other available sources of credit, seemingly violating a requirement that Mr. Mnuchin tucked into the program’s guidelines late last month dictating that firms should not apply for funds if they were not in dire need of cash.
The small-business lending program is the centerpiece of the $2 trillion economic relief effort to cushion the blow to businesses that were shuttered because of the coronavirus pandemic. The rollout of the program has been marred by complicated restrictions that have changed on the fly, leaving borrowers fearful that loans they assumed would be forgiven will actually leave them saddled with debt.
The program has also become a political vulnerability for President Trump, as big-name corporations received funds while smaller mom-and-pop shops missed out. This week, former Vice President Joseph R. Biden Jr. said that if he is elected he will “review every single stimulus loan given to big companies and political insiders.”
That has put pressure on Mr. Mnuchin, who oversees the program, which is run by the Small Business Administration which has been racing to fix technology glitches and issue new rules to make the program more equitable. Mr. Trump has publicly praised the program, but some of his economic advisers have complained that Mr. Mnuchin overpromised and failed to deliver on the lifeline for small businesses. In a sign of the political importance of the program, Mr. Mnuchin recently dispatched his deputy, Justin Muzinich, to the Small Business Administration to ensure that things run more smoothly.
While the complex web of requirements and the crush of bad publicity appear to have slowed demand for the loans, many big companies have continued to hold onto the money.
A manufacturer of hydrocarbon products, Calumet Specialty Products Partners, received $31.4 million in funds through the program on May 1, according to a securities filing. While some of the loans were secured before the new guidance, the company acknowledged that if it were found to have violated the new rules it could face “significant civil, criminal and administrative penalties.”
XpresSpa Group, which runs airport spas and is hoping to repurpose its infrastructure for coronavirus testing, said on April 6 that it expected to raise roughly $3 million in a stock sale. On May 1, it obtained a $5.7 million P.P.P. loan through Bank of America
The ONE Group Hospitality, operator of the glossy STK steakhouses, obtained $9.8 million in loans through the program on May 4, according to securities filings. The company said that it could not obtain new capital and “has restrictions under its existing credit facility that limit its ability to borrow, raise equity or take on additional debt.”
Other restaurant groups continued applying for loans even as high-profile industry players like Shake Shack returned their funds from the program’s first round, often saying that they are unable to access capital elsewhere.
Ark Restaurants, which owns a number of upscale restaurants including the Bryant Park Grill in New York and Sequoia in Washington, D.C., received a $9.4 million loan. Its chief executive, Michael Weinstein, said that many of its restaurants could not yet reopen and that it was not able to sell more stock or take out additional private loans.
“Everyone thinks we’re making fortunes and we have access to capital,” he said. “It couldn’t be further from the truth.
Jeff Crivello, the chief executive of BBQ Holdings, which owns the Famous Dave’s chain, said that it was able to “certify with a high level of confidence that we meet the requirements” of the $13 million in loans obtained through its subsidiaries.
Last Friday, a group of lawmakers including Representative Jim Clyburn, the South Carolina Democrat who chairs the Select Subcommittee on the Coronavirus Crisis, demanded that five public companies return their loans. One, MiMedx Group, quickly did so; a spokeswoman said that the repayment had been planned before Mr. Clyburn sent a letter.
Two others indicated that they planned to keep the funds.
EVO Transportation and Energy Services said that it tried and failed to access new capital in March and that its investors were not able to sell their shares.
“EVO has and will continue to use the P.P.P. proceeds for payroll,” the company said.
A spokesman for Quantum Corporation, another publicly traded recipient mentioned by Mr. Clyburn, said that it would “demonstrate why Quantum not only falls within the technical eligibility requirements of the P.P.P. loan program, but also falls squarely within the spirit of what was intended by the CARES Act.”
The Treasury has been the subject of intense lobbying for changes to the program. Mr. Mnuchin believes his hands are largely tied by the intent of Congress to ensure that most of the money is directed toward keeping workers on payrolls. But he raised hopes this week in a CNBC interview that there could be adjustments to give the restaurant industry more flexibility over how and when restaurants spend the loan money.
“Many restaurants have just been sitting on their loans,” said Sean Kennedy, a spokesman for the National Restaurant Association.
Mr. Mnuchin is also under pressure from lawmakers to use his regulatory power to make lenders prioritize underserved borrowers such as women and minorities. A report by the Small Business Administration’s inspector general said those borrowers were getting insufficient access to loans.
The Trump administration has also faced criticism for a rule that has prohibited some people with criminal records from getting loans.
Senator Cory Booker, Democrat of New Jersey, raised the issue with Mr. Mnuchin during a call with the Small Business Committee last week, according to a Senate aide, who said Mr. Mnuchin was receptive to easing the restrictions that have led to rejections of applicants who have felonies on their records from the last five years.
The rocky rollout of the program has put its future in doubt. While about $540 billion of the $660 billion in loan money has been allocated, Congress does not appear eager to refill the pot and there are signs that the strings attached to the loans are starting to slow applications.
Asked about waning demand, Senator Marco Rubio, a Republican from Florida who chairs the Small Business Committee, said uncertainty surrounding the rules was a factor, as well as some independent contractors not realizing their eligibility.
Mr. Weinstein, the Ark Restaurants executive, said that while some companies might have misused the program, small public firms like his should not suffer as a result.
“It’s sort of been poisoned by certain companies that have taken advantage where they shouldn’t have taken advantage, but we have a need,” he said. “We’re out of business without that money.”
Emily Cochrane contributed reporting