PPP Loan Investigations: What’s On The Horizon for Banks?

By 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 government-mandated pandemic shutdowns, Congress asked financial institutions to expediate the delivery of these funds. Speed, not compliance, was the watchword.

That was then.

Banks will likely be targeted in the coming months for their roles with the Paycheck Protection Program and other lending during the pandemic. This will take the form of government and whistleblower investigations, including False Claims Act claims related to loans that went to companies (and fraudsters) that should not have received these loans. It may also include class actions from frustrated companies that did not receive timely loans, as well as actions from creative plaintiffs’ attorneys who are using federal and state laws to create new hooks for litigation.

Banks can take steps right now to prepare for these types of governmental and private inquiries, including auditing not only the PPP applications they received but also the process they used to administer them. Banks should also consider certain proactive communications with prosecutors and regulators if potential issues are identified.

What banks are likely to face

Some banks have already received subpoenas from U.S. attorneys’ offices related to their PPP lending, and there will likely be many more that follow. Those attorneys and the Department of Justice more broadly have been increasing the number of their investigations tied to the program. While the initial round of investigations has largely focused on the companies and individuals who fraudulently received or tried to receive PPP loans, later investigations may also target the banks who lent at higher rates to those fraudulent companies or individuals.

In addition, the Consumer Financial Protection Bureau has “identified certain issues that may pose fair lending risks,” notes the agency’s winter Supervisory Highlights. Given the pressure banks were under to get PPP loans out the door very quickly, some banks restricted access to preexisting customers, in part to protect themselves from claims of anti-money laundering and other risks tied to working with new customers. While CFPB examiners “found that the institutions’ stated reasons for adopting their overlays reflected legitimate business needs,” the examiners nevertheless “determined that an overlay restricting access to PPP loans for small businesses that do not have an existing relationship with the institution, while neutral on its face, may have a disproportionate negative impact on a prohibited basis” and potentially violate the Equal Credit Opportunity Act. The CFPB is likely to dig into the individual practices of banks to determine whether there were concrete violations.

Banks may also receive attention from both federal investigators and private whistleblowers pursuant to the False Claims Act. Whistleblowers often lead the charge: They are incentivized by potential bounties of between 10 and 30 percent of the government’s recovery in a False Claims Act case. In fact, plaintiffs are already bringing these cases over PPP application fees. Plaintiffs have suggested that banks inadvertently—and inappropriately—charged fees in the rush to process applications. Plaintiffs’ counsel have alleged that those fees constituted illegal kickbacks or double-dipping because the federal government reimbursed the banks.

In addition, plaintiffs’ counsel have filed individual lawsuits and class actions claiming that banks prioritized certain businesses over others in violation of the Coronavirus Aid, Relief, and Economic Security Act, the federal law that created the PPP. So far, those cases have been unfruitful, as a consensus appears to be forming within the federal district courts that the CARES Act does not create a private right of action for PPP lending. But it remains uncertain whether all courts, including appellate courts, will agree.

Even if judges continue to deny those claims, plaintiffs’ attorneys will seek creative ways to frame their claims by using other regulatory schemes—such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, or other federal or state laws—that do include a private right of action. An example could be a class action alleging a bank discriminated against minority or women-owned businesses based on their receiving a disproportionately low share of the banks’ PPP funds. Plaintiffs’ attorneys may also use state consumer protection laws to access a private right of action.

How banks can prepare and defend themselves

The more that banks can be proactive in preparing for these inquiries—or applying lessons learned from inquiries they have already faced—the better they will be able to defend themselves going forward.

Now that speed is no longer the watchword, one step they can take is to review and audit every PPP application. Banks should ensure they have thorough documentation that matches the requirements set forth by the government, which were the subject of evolving guidance from SBA and Treasury. If banks currently lack complete documentation, they should go back to the customer to supplement their files. Banks should think through all the potential questions a federal prosecutor may ask and make sure they have answers for them.

It is helpful not only to audit the applications themselves but also to audit the processes for handling them and how those processes varied across the bank’s lines of business. Given that many banks employed an all-hands-on-deck approach to the PPP, conceivably there could have been occasions where employees who were new to lending were called in to help. And it is possible they used materials—such as cheat sheets or other informal guides—that the legal or compliance departments had not approved. That could lead to a host of regulatory compliance issues. For example, use of informal practices could raise fair lending concerns.

If a bank uncovers instances where employees informally imposed an additional requirement to process an application that could be perceived as improper, serious consideration should be given to self-reporting the issue to the CFPB or other regulators. There can be, of course, significant benefits to self-reporting, including the potential for regulators to close an enforcement investigation without taking action or, in taking action, provide the bank with cooperation credit that mitigates the cost and reputational damage.

Self-disclosure can also make sense when considering fees that implicate the False Claims Act. If banks uncover a subset of PPP loans where they did impose fees, they could consider reimbursing the customers for those fees and then self-disclosing the error and the solution to the Department of Justice.

Depending on what banks find in their audits, banks could also consider other proactive communications with regulators. An example could be engaging counsel to interface with the U.S. attorney’s office and offer the bank’s services in assisting with investigations. Speaking from experience as one of us is a former assistant United States attorney, as well as from years of experience representing clients who have been under investigation by federal prosecutors, we can represent that this type of proactive collaboration can pay dividends for companies.

To restate the obvious: There are risks to be weighed with any of the proactive steps outlined above. In considering these steps, banks should lean on their in-house and outside attorneys who are experienced dealing with government prosecutors and self-reporting. Even if a bank ultimately decides that self-reporting is not necessary, the process of considering it will put the bank in a stronger position to deal with the issue at hand and avoid similar issues in the future.

Steve Carey, Brian Cromwell, and Todd Sprinkle are partners in Parker Poe’s Financial Services industry team. They can be reached at [email protected], [email protected] and [email protected].