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Banking Law

Banks Fast-Tracked Large PPP Loans to Max Out Fees, Suits Allege (2)

April 20, 2020, 4:24 PM; Updated: April 20, 2020, 6:51 PM

Bank of America, Chase Bank, US Bank, and Wells Fargo moved larger borrowers to the front of the line of a federal small business lending program in order to maximize their origination fees on the loans, four class actions filed in California allege.

The suits allege the banks violated the California Unfair Competition Law by encouraging small business applicants to hurry to apply for loans through the $349 billion federal Paycheck Protection Program, which the banks said would be processed on a first-come, first-served basis, according to the complaints.

“Thousands of small businesses that were entitled to loans under the PPP were left with nothing” because the banks chose to maximize origination fees, the complaints said.

The class actions, all filed Sunday in the U.S. District Court for the Central District of California, are a new wrinkle in small business grievances over banks’ processing of loans in the Paycheck Protection Program.

The program, which launched April 3, is part of U.S. government efforts to help keep small businesses afloat during the economic crisis caused by the Covid-19 pandemic.

Other small businesses have filed suit against Bank of America for prioritizing PPP applications from existing customers over new ones, or those with only certain types of accounts.

Participation Incentives

The structure of the federally backed loan program pays financial institutions an origination fee on a sliding scale for their participation, ranging from 5% on smaller loans to 1% on the largest loans.

The structure incentivized banks to front-load larger loans, the suits claim, by offering up to $100,000 in fees for processing loans between $2 million and $10 million.

By contrast, smaller-dollar loans would earn a far smaller origination fee per loan, up to just $17,500 for processing loans up to $350,000.

Had the banks informed applicants they they were allegedly prioritizing some loans over others, the plaintiffs would’ve gone to a community bank or elsewhere with their application, the complaint said.

Each suit claims financial harm exceeds at least $5 million.

Lending Data

To support their claims, the complaints cite two sets of data released by the Small Business Administration, which administers the program with the Treasury Department, just before and after the $349 billion program ran out of money on April 16.

Plaintiffs said the data shows that lenders participating in the program processed loan applications for $150,000 or less at twice the rate of larger loans in the last three days of the program, compared to the first 11 days.

“This data demonstrates that banks front-loaded applications for the largest loans because, if applications were being processed on a first-come, first-served basis as required, the percentage change in applications submitted in the last three days of the program would be consistent among all application types,” the complaints said.

However, the SBA data didn’t break out funds processed by specific lenders, without which it might be difficult to pinpoint lending patterns specific to each financial institution.

The plaintiffs include two law offices, a restaurant, an optometrist and cybersecurity, marketing, and construction companies.

All are represented by the Stalwart Law Group, a Los Angeles-based law firm.

US Bank said it “vigorously defend” itself and said the case was without merit, according to an emailed comment from a spokeswoman. “The cumulative industry data provided by the SBA is not reflective of U.S. Bank’s practices or results. We continue to serve our small business customers and are prepared to process loans as quickly as possible should additional funds become available,” the spokeswoman said.

Spokespeople for the other three banks didn’t immediately respond to requests for comment.

The cases are Law Office of Sabrina Damast, Inc. v. Bank of America Corp., C.D. Cal., No. 20-3591, complaint filed 4/19/20, Cyber Defense Group, LLC v. JPMorgan Chase & Co., C.D. Cal., No. 20-3589, complaint filed 4/19/20, Law Office of Irina Sarkisyan, Inc. v. U.S. Bancorp, C.D. Cal., No. 20-3590, complaint filed 4/19/20 and BSJA, Inc. v. Wells Fargo & Co., C.D. Cal., No. 20-3588, complaint filed 4/19/20.

(Updates with US Bank comment in second to last paragraph)

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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