An analysis of scores of lawsuits filed against banks in the months following the rollout of the Paycheck Protection Program reveals that PPP litigation is likely to trend in four preliminary categories: agent fees, false certifications, loan eligibility, and loan prioritization.
These litigation trends, tracked on a PPP bank litigation tracker that our task force has created, reveal key indicators and risk mitigation strategies for the court battles ahead regarding the $659 billion program.
Agent-fee lawsuits have quickly become a fastest-growing category of PPP litigation in federal courts across the U.S., and are poised for consolidation in multidistrict litigation.
Under the PPP, an agent, such as an accountant or a consultant, may assist a lender with originating and preparing a loan application. Agents have filed lawsuits claiming that banks unlawfully withheld fees owed to them for assisting in the application process.
Many agents lacked a clear agreement with banks regarding compensation, and many banks have taken the position that no compensation is due in the absence of a written agreement. Even absent a written agreement, agents have asserted federal law claims for violation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Small Business Administration’s 7(a) loan program, referencing the SBA interim final rule, which establishes the maximum fee an agent may collect from a lender; and the PPP information sheet for lenders (PPP ISL), which provides, in part, that “[a]gent fees will be paid out of lender fees.”
Some lawsuits have also asserted state law claims for unfair business practices, violation of consumer protection laws, and unjust enrichment, among others.
One indicator for the direction of agent-fee litigation emerged during the June 30 hearings before the House, when Treasury Secretary Steven Mnuchin clarified that the agent-fee guidance “was intended to be based on a contractual relationship between the agent and the bank.”
Mnuchin also indicated that clarifying guidance on this issue was forthcoming. This signals a Treasury position that may align with that of some banks—that the guidance on agent fees was merely a reference to the permissibility of banks to engage and compensate agents under the SBA 7(a) regulations.
As these lawsuits progress, the Treasury’s position may not foreclose agent-fee disputes, particularly where lawsuits have asserted state law claims, but an interpretation of the PPP regulations that requires a contractual relationship for the payment of agent fees may curb the viability of many agent-fee claims.
False Claims Act Litigation
The next wave of PPP litigation may center on certifications made by PPP borrowers. Under the False Claims Act, the Department of Justice may bring an enforcement action against a person for knowingly or recklessly submitting a false claim for payment to the federal government. The FCA permits private persons to file a civil suit for violations of the FCA on behalf of the government and authorizes various relief, including the potential for treble damages, civil penalties, and criminal liability.
FCA actions could be brought against borrowers based on allegations of ineligibility, false certifications or calculations, and noncompliance with PPP requirements, among other things. Borrowers are required to certify, for example, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant, [and] the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments….” SBA Form 2484.
On July 6, the SBA and Treasury released detailed loan-level data regarding PPP loans, including the identity of PPP recipients and a dollar range of the loan amount. This information—publicly available without the need for a subpoena or formal request—may heighten scrutiny and lower the barriers to FCA actions.
As to lenders, the SBA has indicated it will “hold harmless” lenders that rely on borrower attestations and documentation, though scope and application of the hold-harmless provision is largely untested, particularly in instances where a lender may have had knowledge that contradicts a borrower’s certification. As FCA actions ramp up, the DOJ and court scrutiny of borrower certifications—and lender conduct vis-à-vis those certifications—will inform the scale of this category of PPP litigation going forward.
Prospective PPP loan applicants have filed lawsuits claiming they were unable to apply because of lender-specific policies that unlawfully restricted PPP eligibility, such as a requirement that applicants have a preexisting borrowing relationship or deposit account with the bank, or that applicants not have a credit or borrowing relationship with another bank.
Based on that alleged conduct, these lawsuits have asserted federal law claims for violation of the CARES Act and the SBA’s 7(a) loan program, along with various state law claims.
An early key indicator for the direction of loan-eligibility litigation was the Profiles court opinion that the CARES Act did not establish a private right of action against banks. Profiles Inc. v. Bank of America Corp., No. 1:20-cv-00894, ECF No. 17 (D. Md., filed April 13, 2020).
In other words, under the Profiles opinion, PPP loan applicants cannot bring civil suits against PPP lenders to enforce rights under the CARES Act. Profiles may signal more reliance on state law claims grounded in consumer protection and unfair business practices, perhaps with a corresponding focus of civil actions in jurisdictions that impose a more consumer-friendly statutory framework.
The Profiles opinion is the subject of ongoing litigation, the outcome of which is likely to have a ripple effect throughout PPP litigation nationally regarding the viability of federal law claims against banks.
PPP loan applicants have filed lawsuits claiming that their loans were denied because of lender-specific policies that prioritized certain PPP loan applications. Applicants allege that banks did not process their PPP applications on a first-come, first-served basis, and that their applications were denied because banks prioritized applications with higher loan amounts and origination fees, or favored a particular client relationship.
These loan-prioritization lawsuits tend to rely on the SBA interim final rule, which contains a “first-come, first-served” reference, and the PPP ISL, which delineates the processing fees paid by the SBA to lenders.
The Profiles opinion may also serve as a key indicator in loan-prioritization litigation because it stands for the proposition that the CARES Act does not prohibit a bank from considering various criteria when deciding from whom to accept applications, or in what order to process applications it accepts.
As a result, loan-prioritization litigation has trended toward claims under state law, rather than federal law, including unfair business practices, violation of consumer protection laws, negligence, breach of fiduciary duty, fraudulent concealment, false advertising, breach of contract, and unjust enrichment.
Litigation Risk Mitigation
To protect against litigation risk, banks should consider measures to:
- disclose the terms of the bank’s PPP program, including any protocols for processing applications;
- maintain consistent internal communication and documentation regarding the bank’s PPP program and lending practices;
- document all agreements with agents and third parties, including terms of payment;
- prevent fraudulent or inaccurate calculations;
- carefully consider and document the rationale for any PPP program practices that are subject to unclear Treasury guidance;
- ensure fair lending, Bank Security Act, customer identification program, and other compliance;
- avoid conduct that could be interpreted as benefiting the bank to the detriment of applicants; and
- address other issues that may be appropriate given the specifics of the bank’s PPP loan program, procedures, size, and customer base.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Graham H. Ryan is co-chair of the PPP Bank Litigation Task Force and a business litigation partner at Jones Walker LLP.