How to weigh PPP potential scrutiny, due diligence, and forgiveness 

The 335-page CARES Act—co-opted from a bill to provide middle-class tax relief—was cobbled together with bipartisan support and signed into law in a single week (March 20-27). Seven days later, on April 3, the SBA Paycheck Protection Program opened for applications (immediately crashing E-TRAN, the SBA system for accepting loan applications from banks). It’s easier to count the days when Treasury and/or SBA didn’t make changes to PPP, now in its second round. 

Despite changing, conflicting, late, and sometimes non-existent guidance on PPP, banks across the country worked around the clock to help their small business clients get access to the funds available. Community banks, in particular, received accolades for their efforts from lawmakers, media (like the Washington Post), and even Secretary-Designee of the Wisconsin Economic Development Corporation Missy Hughes, who said in a public hearing on April 30 Wisconsin banks had “punched above their class” with regard to PPP loans, “a testament to community banks … working tirelessly to process applications on behalf of their borrowers.” 

That Was Then... 

Now, the winds are changing. The near-constant and evolving guidance from Treasury and SBA have transformed some of the fundamental aspects of PPP from CARES statutes into a different, slightly stricter program. Some politicians and officials, including the IRS and Justice Department, are starting to throw around the F-word: fraud

On April 23, Sen. Elizabeth Warren wrote a letter to the inspector generals of the SBA and Treasury requesting an investigation of the implementation of PPP to “ensure that these funds are helping the businesses they are designed to help, and that they are being distributed consistent with the law and without waste, fraud, and abuse.” 

U.S. Senators Charles Schumer, Sherrod Brown, and Benjamin Cardin also sent a letter requesting an SBA investigation on the grounds that certain lenders “prioritized the applications of their larger and wealthier clients to the detriment of smaller businesses adversely impacted by the coronavirus pandemic.” 

Treasury Secretary Steven Mnuchin has now said the SBA will review every PPP loan over $2M, for which businesses can be held “criminally liable” if they didn’t meet the program's revised terms. 

Most of these objections are to aspects of the PPP rollout not required by law. As Don McGahn, a partner and co-head of the government regulation practice at law firm Jones Day, wrote in a recent Wall Street Journal op-ed, the CARES Act was not written to be overly prescriptive, and “its loose language was sold as a feature, not a bug.” 

Washington moved PPP’s goalposts, forcing businesses to weigh the risks of keeping a loan they obtained in good faith but is determined to be unnecessary after the fact. In addition to helping their customers weather the pandemic, banks now also need to worry about how to respond to state and federal investigations into their lending practices related to PPP. 

Banks shielded by statute? 

Especially in the early stages of the PPP rollout, bankers lacked guidance on how to process the loans and disperse the funds. Under pressure from small businesses, regulators, and lawmakers, the banking industry jumped in with both feet anyway and worked around the clock to get approval for nearly 1.7 million loans in the first phase of PPP. The industry’s quick action with little direction allowed the government to get cash into the hands of thousands of small businesses that would have gone under without that lifeline. 

Because banks and other PPP lenders acted as intended by the CARES Act, the nonprescriptive language in the statues may provide some protection against regulatory scrutiny. 

Public perception is another matter. Not long after SBA started releasing information on which companies had been approved for PPP loans, banks and their customers were in the crosshairs. Politicians, government officials, and other public figures expressed shock and disappointment that businesses had applied for and received funds under the PPP rules as written. Companies like the Los Angeles Lakers and Shake Shack returned the money in an effort to save face. 

Banks were accused of prioritizing current customers (which was an expeditious way of adhering to BSA/AML and “know your customer” regulations while keeping up a breakneck pace for loan processing). Some small business owners have filed lawsuits against the nation’s largest banks (including Bank of America, JPMorgan Chase, U.S. Bancorp, and Wells Fargo) claiming they favored larger clients. Future claims, including discrimination and disparate-impact suits, could be forthcoming for smaller institutions, too. 

Borrowers in the hot seat 

On May 13, Treasury and SBA released an FAQ regarding their interpretation of a borrower’s good-faith certification on PPP applications. The agencies declare PPP borrowers with original principal amounts less than $2M will be given safe harbor for their good-faith certification concerning the necessity of their loan request. PPP guidelines require borrowers to certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 

However, all loans above $2M are subject to review by SBA for compliance with PPP’s requirements (as set forth in the SBA’s Interim Final Rule and in the Borrower Application Form). To that end, on May 14 SBA notified PPP lenders that certain loans in their portfolios may require review for accuracy and completeness. SBA required lenders with these loans, marked by SBA as being in “research” status, to verify the borrower’s name, EIN, or SSN via SBA’s Capital Access Financial System (CAFS). 

Caught between a rock and hard place 

Facing reputational risk for participating in PPP and not participating, banks could now be caught between the federal government’s changing rules and customers on the hook for loans they thought they were allowed to take and have forgiven. 

Seitz is WBA operations manager and senior writer.