Some PPP applicants used agents to help prepare their applications. More than 60 lawsuits, many of them class actions, have been filed on behalf of such agents, claiming that the banks are required to share their CARES Act processing fees with the agents. More than 100 banks have been named as defendants in “agent” lawsuits. In August 2020, the Judicial Panel on Multidistrict Litigation declined to consolidate these cases. At least two federal courts have dismissed the agents’ claims on the ground that the CARES Act does not require banks to pay agents a portion of the PPP processing fees absent an agreement between the agent and lender. See Johnson v. JPMorgan Chase Bank, N.A., No. 20-cv-04100-JRS, 2020 WL 5608683 (S.D.N.Y. Sept. 21 2020); Sport & Wheat, CPA, PA v. Servisfirst Bank, Inc., No. 3:20CV5425- TKW-HTC, 2020 WL 5507551 (N.D. Fla. Sept. 4, 2020). An appeal of the decision issued in Johnson v. JPMorgan is pending before the Second Circuit Court of Appeals, and dozens of these cases continue to work their way through the courts.
A number of small businesses that failed to obtain PPP loans, or were delayed in securing such loans, have also sued banks. In general, the claims in these cases are that the banks fraudulently or negligently delayed processing applications or failed to process PPP loans on a first-come, first-serve basis. In particular, many plaintiffs have alleged that banks improperly prioritized applications for existing customers or larger companies in order to maximize their processing fees.
Litigation has also arisen out of the CARES Act requirement that borrowers with federally backed mortgages may obtain forbearances if they are experiencing financial hardship during the COVID-19 emergency. The CARES Act amended the Fair Credit Reporting Act (FCRA) to require that financial institutions making an “accommodation” to a consumer’s payments on a credit obligation report such credit obligation or account as “current”, and not in “forbearance,” during the period of the accommodation. Numerous suits are pending in which consumers allege that they were: (1) not granted the forbearance required by the CARES Act; (2) “opted in” to a voluntary mortgage forbearance program without proper notification; or (3) negatively impacted by reports made to credit reporting agencies that did not comply with FCRA as amended by the CARES Act. Litigation related to credit reporting was already on an upswing before the pandemic. We expect this trend to accelerate after the CARES Act-mandated forbearance periods end and credit reporting obligations are removed, allowing lenders to make more negative credit reports.
We have also seen some litigation concerning competition for government contracts that relate to the government response to COVID-19 and expect to see more. Moreover, state and local orders that limit business activities in an effort to control the spread of COVID-19 have given rise to a massive wave of insurance litigation, including over 450 actions in federal courts seeking to establish insurance coverage for loss suffered as a result of business closures related to COVID-19, as well as hundreds of other such suits in various state courts.
Finally, federal authorities have reported widespread borrower fraud related to the PPP process and applications for a separate SBA loan and grant program, the Economic Injury Disaster Loan (EIDL) program and its companion grant program, EIDL Advance. In a 7 October 2020 speech, Deputy Attorney General Jeffrey A. Rosen announced that the Justice Department has brought criminal charges against 65 people for defrauding, or attempting to defraud, the PPP program of nearly $227 million. Banks and credit unions, too, have reported skyrocketing levels of suspected business loan fraud filing 1,922 suspicious activity reports with FinCEN (the U.S. Department of Treasury Financial Crimes Enforcement Network) in August 2020; that is roughly 14 times the monthly average number of such reports made over the last six years. The SBA’s inspector general, Hannibal Ware, warned in July 2020 that “pervasive fraudulent activity” affected the EIDL. Such widespread fraud is likely to result in future enforcement activity as well as related civil claims.
Authored by Marc Gottridge, Rebecca H. Umhofer and Allison Funk.
