Remedies for Disappointed Prospective Borrowers Under the Paycheck Protection Program
This article discusses one of the first judicial opinions to engage with the merits of a controversy arising from the Coronavirus.
Profiles v. Bank of America, 20-0894, 2020 WL 1849710 (D. Md. April 13, 2020), holds that a prospective borrower does not have a cause of action against a bank for refusing to accept or process its application based upon the bank’s own criteria for accepting and processing Paycheck Protection Program applications. Bank of America’s initial criteria required that an applicant have a preexisting banking and borrowing relationship with the bank. Id. at *1. Later, Bank of America loosened this criteria to simply require a banking relationship, as long as the applicant does not have a borrowing relationship with another bank. Id. at *2.
Previous cases have held that the SBA does not provide a cause of action for a disappointed applicant. Id. at *6. This conclusion is supported, at least in part, by the fact that the SBA loan program has a specific provision for civil and criminal enforcement, which mentions civil action by the SBA against lenders, but omits any mention or implication of any private right of action. Id. at *6.
Lenders might prioritize favored customers for PPP loans or punish customers who also bank or borrow elsewhere. More perniciously, banks may direct PPP loans to borrowers to whom the bank has already extended credit, using the funds to improve the overall financial position of its borrower in order to reduce the bank’s credit risk. These incentives may limit the usefulness of the PPP.
Notwithstanding the policy problems with the CARES Act as written, Congress has apparently determined that banks should process forgivable loans, presumably because their relationship with customers will allow them to process loans and verify customer assertions.¹ Congress could have established a grant program administered by the SBA itself, without bank intermediaries (and without the significant fees involved), could have established further criteria for allotting limited funds, could have provided that loans would be funded pro rata based upon the relationship between total loan eligibility and available funds, or could have established another scheme. Instead, it established a “first-come-first-serve” system without requiring banks to process loans in the order applications are received (or in any other nonarbitrary manner). However, the court followed the legislative scheme. As the court notes, Congress did not provide applicants with any statutory right to apply through any particular lender or to have those loans processed in any order or within any timeframe. Id. at *7. The court further noted that Congress may create a statutory right or cause of action in any future amendment or further legislation. Id. at *7.
Profiles does not foreclose other claims by disappointed borrowers. However, most of the lender liability statutes are limited to the consumer context, whereas the PPP is limited to businesses. Thus, lender liability statutes are largely inapplicable to PPP loans. FDUTPA does not apply to banks and certain other regulated entities. In specific circumstances, other common law doctrines or statutes could give rise to a cause of action.
Profiles deals with origination, not payment, collection, recoupment, or forgiveness. Because the SBA contemplates a cause of action for collection, the PPP must at least contemplate an affirmative defense of loan forgiveness. Thus, most litigation under the PPP is likely to arise on the back end, in the form of litigation over forgiveness eligibility or, as noted in a previous article, under the False Claims Act for improper loan requests.
¹The PPP, however, does not actually require banks to verify borrower assertions in applications for loans or for forgiveness.