What Financial Institutions Must Know About PPP Suits Against Big Banks

The Paycheck Protection Program has stirred up considerable controversy in a bit more than a month of existence as part of the federal government's COVID-19 business relief effort. Small businesses around the country have sued Chase, BofA, PNC, and Wells Fargo over alleged improper actions in the first PPP round.

No chapter or subpart of the CARES Act or other federal coronavirus legislation mentions anything about making fresh work for the legal profession. But employment for lawyers has turned out to be an unintended byproduct of the Act’s Paycheck Protection Program.

Major banks face lawsuits filed in the course of the first round of the federal COVID-19 economic relief program, which ended April 18. Generally the suits are attempting to attain class-action status, based on one firm or a handful of firms claiming that they have been damaged by policies or practices of the defendant banks during round one which prevented them from obtaining PPP funds. The suits request a variety of forms of relief, often a selection of types of damages for the plaintiffs, but some also seek to force the banks involved to give up profits made as a result of allegedly improper behavior.

Another type of lawsuit has been filed on behalf of loan agents. These suits claim that banks and other companies processing PPP applications to which agents brought PPP prospects did not pay them a portion of the fees for finding the applicants. One such case names several major banks, PayPal, two nonbank small business lenders and nearly 5,000 additional unnamed lenders.

How Round Two Is Proceeding So Far

As the suits percolate in various federal courts, the second round of PPP funding continues to be drawn down. A joint Treasury-Small Business Administration announcement said that 2.2 million loans have been made to small businesses and other eligible entities from April 27 to May 1, totaling $175 billion.

Round two was officially funded at $310 billion and some large recipients of round one funding have since announced that they would return their loans to the government for recycling for other borrowers. The government reported that the average loan size for round two is $79,000 so far, versus $206,000 in round one. The latest average figure is being cited as an indication that funds are reaching true small businesses. Likewise, the fact that about a third of the round two loans are being made by lenders with $10 billion or less in assets.

In round two, lenders over $50 billion in assets have made 53% of loans so far, in dollars. Lenders with $10 billion to $50 billion in assets have made 16% of the loans. Those with under $10 billion in assets have made 32%. A subset of the last group, institutions under $1 billion in assets, have made about 15% of round two loans, in dollars.

From the launch of PPP on April 3, the statement added, over 3.8 million loans have been made totaling over half a trillion dollars.

Meanwhile, the lawsuits remain to be dealt with. Generally, according to press accounts and other sources, banks involved have typically either denied the claims of the suits or declined to comment, sometimes making reference to general statements on their websites regarding their progress. In one case, a suit against Bank of America, lawyers for the bank filed a response to the plaintiff’s request for a temporary restraining order.

All of the cases summarized in this article were filed in federal district courts.

PNC Financial Services Group and PNC Bank, N.A.

In an April 23 filing, Lincoln Network, Inc., a nonprofit firm working on government technology projects, filed suit against PNC claiming that it violated PPP requirements to process applications on a “first come, first served” basis.

Instead, Lincoln, which is a PNC customer, alleges that PNC gave priority to large companies in order to realize higher fee income. The PPP program provides for processing fees based on the size of loans given. Beyond that immediate advantage, claims Lincoln, “PNC’s illegal practices enabled it to mitigate its own risk exposure to default by large, existing clients with whom PNC maintained outstanding credit lines or other capital commitments.” (Other than mortgage interest, PPP proceeds cannot be used directly to retire other debt.)

Lincoln claims that it submitted its application and supporting documentation on April 3 through the bank’s online portal. The suit states that on April 17 — when round one funds were exhausted — the bank told Lincoln that “its application had not been timely submitted” and that it would be submitted if additional funding became available. Then, on April 18, the suit claims, the company said it had been unable to complete its review before SBA announced that it could no longer take applications. (This was prior to the second allocation of funds by Congress.)

The suit states: “As a result of Defendants’ greed and focus on their own financial incentives, countless small businesses were prevented from benefitting from the program designed to help them survive during the current Coronavirus crisis. Moreover, the delay and uncertainty caused by preferring bigger loan applications or ‘concierge’ customers has wreaked devastating harm on Plaintiffs.”

In a general news release concerning its PPP efforts, PNC stated that: “The demand for PPP loans both at PNC and across the nation, has been extraordinary and unprecedented. We took our obligations with respect to each one very seriously, working as quickly as possible to fully process every, single one.”

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JPMorgan Chase and Chase Bank, N.A.

Several suits have been filed against Chase, all in later April, all claiming that the company prioritized the applications of large current business customers over smaller firms.

In an April 20 filing, Hyde-Edwards Salon & Spa claimed that Chase put larger firms’ requests first to obtain maximum dollars in PPP fee income. Among the loans cited were ones made to Shake Shack, Ruth’s Chris Steakhouse, Potbelly Sandwich Shop and Texas Taco Cabana. All four have since announced that they would return the loans.

“Defendants not only decided to line their own pockets at the expense of Plaintiff and the Class [action] members, they affirmatively chose to not disclose to any small business owner that they were prioritizing larger business loans and not following the PPP’s official guidelines of ‘first come, first served’,” the suit says.

In another case, also filed on April 20, Outlet Tile Center, a longtime Chase customer based in California as well, charged that while activation of a Chase PPP portal was delayed, “Chase solicited PPP loan applications personally from its best clients before it made applications available to small business clients.” The suit claims that Chase “strung small business owners along” and “callously ignored or openly lied to hundreds of thousands of their small business customers…”

In a third case, filed April 30, a Colorado-based cupcake decorating company, Ladaga Ventures LLC, made similar claims.

“Had Chase disclosed its self-serving prioritization, plaintiff could have, and would have, submitted their PPP applications to other financial institutions that were actually processing applications on a first-come, first-served basis,” the Ladaga Ventures suit states.

On its website Chase has published a FAQ about PPP. While not a direct response to the suits, it states, in part:

Q: I heard that Chase prioritized bigger clients over smaller clients, is that true?

“No. Chase served clients as they came to us, and no business or client segment was prioritized over another. In Chase Business Banking, we serve millions of smaller businesses. We set up a digital application to process as many loans as possible from our queue, understanding that a given loan may take more or less time to review. We made every effort to serve as many clients as possible, in a race against time and limited funding.

Q: Did Chase make loans to smaller businesses?

Chase Business Banking is especially proud to have secured funding for smaller businesses.

To date:

  • About half of our PPP loans have been for less than $100,000
  • More than 60% went to clients with less than 25 employees
  • 80% of our PPP loans have been for businesses with less than $5M in revenue”

As reported in The Financial Brand‘s Coronavirus Insights, Treasury Secretary Steven Mnuchin said during an April 28 appearance on CNBC’s Squawk Box that some institutions had attempted early on to prioritize larger customers and that the government told them to stop that.

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Bank of America Corp.

In Profiles, Inc., et al v. Bank of America Corp. the megabank is accused of initially restricting access to its PPP efforts to existing lending customers, in spite of a rapid first-day buildup of applications for the program. Later, the suit alleges, BofA shifted to requiring at least a depository relationship. The suit states that neither requirement is permitted under the CARES Act. The bank also introduced a requirement that applicants demonstrate that they not have a business credit or borrowing relationship with another bank. The suit says this is contrary to what the CARES Act sets forth.

Among the plaintiffs are a public relations firm, a manufacturer of auto roof racks, a hair salon and a private security firm, based in either Maryland or Connecticut.

Initially the early April filing sought a temporary restraining order on BofA’s policies. “The purpose and motivation behind BOA’s discriminatory practice is transparent: it is using the PPP as a credit enhancement — a strategy for improving its own credit risk profile — by giving priority to its clients with preexisting BOA debt at the expense of small business customers who have lending relationships with other banks,” the suit states.

BofA opposed the request for a temporary restraining order. The bank’s opposing brief made a number of points, including that the CARES Act does not require banks to participate in PPP.

“And contrary to Plaintiffs’ allegations, beyond setting minimum eligibility criteria, the Act nowhere prohibits participating lenders from determining how best to prioritize to whom they will lend under the Program,” the bank’s response states.

The response also states: “BofA’s decision to prioritize lending to clients who do not have lending relationships with other banks is simply an effort to direct its resources quickly and efficiently. Because lenders already have information about their existing clients, prioritizing those clients streamlines the application process, meaning more loans are processed faster.”

The response also states that the act nor other federal laws create a private right of legal action. And specifically, the response states that nothing in the act requires banks to extend PPP credit to all comers nor bars a bank from prioritizing its own existing customers.

In an interesting wrinkle, the response cites the behavior of other lenders, including Wells Fargo, Live Oak Bank and Chase, as examples of institutions imposing some restriction on PPP applications. It also cites several surveys indicating that prioritizing existing customers was not unusual.

In mid-April a federal judge denied the request for the temporary order, following the reasoning that the CARES Act didn’t create a legal right of action to sue lenders. The plaintiffs are appealing the case.

Wells Fargo & Co. and Wells Fargo Bank, N.A.

This suit by two small firms — an auto shop and a frozen yogurt store — accuses Wells of prioritizing larger loans to earn more in processing fees.

“Wells Fargo concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money,” the suit states. Smaller applicants could have gone elsewhere for PPP loans, the suit says, had they known this was the case.

In late April, in a similar case filed by businesses in Texas and California, the plaintiffs pressed for restraints on Wells Fargo. This is similar to the request denied in the BofA case. The request in the Wells case was also denied.

While some community banks also prioritized PPP loans to existing customers, many others specifically offered PPP assistance to non-customer businesses. Some have said that they hope their rapid action will convince firms to move their business banking relationships to the smaller players.

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