PPP Loan Investigations: What’s Next for Banks on the Horizon?


Steve Carey, Brian Cromwell and Todd Sprinkle

When the federal government flooded the economy with liquidity to avoid a complete economic collapse in response to a government-sanctioned pandemic shutdown, Congress asked financial institutions to expedite these funds. The watchword was speed, not compliance.

What happened then.

Banks are likely to be targeted in the coming months for their role in the Payroll Protection Program and other types of lending during the pandemic. This will take the form of government investigations and whistle-blower investigations, including the requirements of the False Claims Act related to loans that were given to companies (and fraudsters) that should not have received these loans. This could also include class action lawsuits from frustrated companies that did not receive timely loans, as well as actions by plaintiffs’ attorneys who use federal and state laws to create new litigation traps.

Banks can now take steps to prepare for these kinds of government and private requests, including auditing not only the PPP applications they receive, but the process they used to administer them. Banks should also consider actively engaging with prosecutors and regulators when identifying potential problems.

What banks may face

Some banks have already received subpoenas from US prosecutors for their PPP lending, and there are likely to be many more. These attorneys and the Department of Justice as a whole are increasing their investigations into the program. While the initial round of investigations mainly focused on companies and individuals that fraudulently obtained or attempted to obtain PPP loans, later investigations may also target banks that lent at higher rates to these fraudulent companies or individuals.

In addition, the Bureau of Consumer Financial Protection “has identified certain issues that can pose risks to fair lending,” the agency notes. Highlights of winter surveillance… As banks were pressured to get PPP loans very quickly, some banks restricted access to existing clients, in part to protect themselves from anti-money laundering claims and other risks associated with new clients. While CFPB experts “found that the institutions’ stated reasons for adopting their overlays reflect legitimate business needs,” the experts nonetheless “determined that an imposition restricting access to PPP loans for small businesses that do not have an existing relationship with institution, while neutral at first glance, may have a disproportionately negative impact on a prohibited basis ”and potentially violate the Equal Credit Opportunity Law. The CFPB is likely to examine individual bank practices to determine if specific violations have occurred.

Banks can also attract the attention of both federal investigators and private whistleblowers under the False Claims Act. Whistleblowers are often at the forefront of allegations: they are incentivized by potential rewards of 10 to 30 percent of government reimbursement for false claims. In fact, plaintiffs are already filing these claims in excess of the PPP application fees. Plaintiffs suggested that banks inadvertently – and inappropriately – charged fees in a rush to process applications. The plaintiffs’ lawyer argued that the fees represented illegal kickbacks or double benefits because the federal government reimbursed the banks.

In addition, plaintiffs’ lawyers filed individual and class action suits, arguing that banks favored certain businesses over others in violation of the Coronavirus Aid, Aid and Economic Security Act, the federal law that created PPPs. So far, these cases have not been successful, as there appears to be a consensus in federal district courts that the CARES Act does not create a private right to sue for PPP lending. But it remains unclear whether all courts, including the courts of appeal, agree.

Even if judges continue to deny these claims, plaintiffs’ attorneys will seek creative ways to substantiate their claims through other regulatory frameworks such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, or other federal or state laws that include private right of claim. An example is a class action lawsuit alleging that a bank discriminates against businesses owned by minorities or women on the basis that they receive a disproportionately low share of bank funds in PPPs. Plaintiffs’ attorneys can also use state consumer protection laws to gain access to a private right to sue.

How banks can prepare and protect themselves

The more banks become more active in preparing for these requests – or applying the lessons learned from the requests they have already encountered – the better they will be able to protect themselves in the future.

Now that speed is no longer the motto, one step they can take is to test and validate every PPP application. Banks must ensure that they have detailed documentation that meets the requirements set by the government, which have been the subject of evolving guidance from the SBA and the Treasury. If banks do not currently have complete documentation, they should go back to the client to complete their files. Banks should consider all possible questions a federal attorney might ask and make sure they have the answers.

It is useful not only to check the applications themselves, but also to check their processing processes and how these processes have changed in different areas of the bank’s activities. Considering that many banks used an integrated approach to PPPthere may have been cases when employees who were new to lending were called for help. And they may have used material – such as cheat sheets or other informal guides – that were not approved by the Legal or Compliance Department. This can lead to many compliance issues. For example, the use of informal practices can raise concerns about fair lending.

If a bank finds instances where employees have unofficially introduced an additional requirement to process an application that could be perceived as inappropriate, serious consideration should be given to reporting the issue to the CFPB or other regulators themselves. Of course, self-reporting can have significant benefits, including the ability for regulators to stop law enforcement investigations without taking action or, when action is taken, provide the bank with a cooperative loan that reduces costs and reputational damage.

Self-disclosure may also make sense when dealing with fees associated with the False Claims Act. If banks find a subset of PPP loans for which they do charge fees, they can consider reimbursing customers for those fees and then report the error and decision to the DOJ on their own.

Depending on what banks discover in their audits, banks may also consider other proactive communications with regulators. An example is the use of an attorney to liaise with the US Attorney’s Office and offer the bank services to assist with the investigation. Based on experience, as one of us is a former Assistant U.S. Attorney, and years of experience representing clients who are under investigation by the Federal Attorney’s Office, we can argue that this type of active collaboration can pay dividends to companies.

To reiterate the obvious: there are risks that need to be weighed using any of the proactive steps outlined above. In considering these steps, banks should rely on their in-house and external lawyers with experience working with public prosecutors and self-reporting. Even if the bank ultimately decides that self-reporting is unnecessary, the review process will give the bank a stronger position to address the issue and avoid similar issues in the future.

Steve Carey, Brian Cromwell and Todd Sprinkle are partners with the Parker Poe financial services industry group. You can contact them at stevecarey@parkerpoe.com, toddsprinkle@parkerpoe.com as well as briancromwell@parkerpoe.com

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