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BANKS VIOLATING CARES ACT; SMALL BUSINESSES FILING LAWSUITS
By Anne Wallace
Since the CARES Act (also referred to as the Paycheck Protection Act, or “PPP”) rolled out on April 3, 2020, COVID-19-affected small businesses have claimed that banks processed loan applications to benefit themselves, rather than on the “first-come, first-served” basis, as the law requires. Defendants include Bank of America, JP Morgan Chase, U.S. Bank and Wells Fargo, among others.
The net effect of this preferential processing is that the smallest of small businesses, the “mom-and-pop” shops were left out in the cold when the money ran out. A second tranche of money was authorized in late April, and many wait with mixed expectations.
“Is the PPP [CARES Act] ‘First-Come, First Served’?”
The answer is a model of regulatory brevity – one word: “Yes”
On the other hand, under the title “What do Lenders Need to Know and Do,” the regulations make clear that the Small Business Administration will pay lenders more for processing larger loans. The percentage declines from loans of less than $350,000 to loans of $2,000,000 and more, but five percent of $300,000 is still much less than one percent of $2,350,000. Banks have a financial incentive to process bigger loans.
The class action lawsuits were brought by a range of small businesses that have been caught in the crosshairs of coronavirus containment efforts, including a frozen yogurt shop, law firms, an auto repair company and a cybersecurity firm.
Still other businesses affected by COVID-19 have advanced the argument that large lenders have collaborated to provide CARES Act loans to their larger clients in order to protect their market share and to limit competition with one another in violation of federal antitrust law. This anti-competitive behavior prevents small businesses, like the trucking company plaintiff, from applying for and obtaining a CARES Act loan from another lender.
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LAW VS. LENDERS’ INCENTIVES
The regulations that implement the CARES Act clearly require lenders to process loan applications in the order received. In a Q&A section under the title “What do Borrowers Need to Know and Do,” the question is asked:“Is the PPP [CARES Act] ‘First-Come, First Served’?”
The answer is a model of regulatory brevity – one word: “Yes”
On the other hand, under the title “What do Lenders Need to Know and Do,” the regulations make clear that the Small Business Administration will pay lenders more for processing larger loans. The percentage declines from loans of less than $350,000 to loans of $2,000,000 and more, but five percent of $300,000 is still much less than one percent of $2,350,000. Banks have a financial incentive to process bigger loans.
EARLY LAWSUITS
Some of the earliest lawsuits, which were filed in California, also allege that banks hid the fact that it was reshuffling the CARES Act applications to prioritize the applications that would make the bank the most money. Not only were the applications for lesser sums moved to the bottom of the pile and ultimately left unprocessed, but the banks’ deceptive behavior deprived the smallest of small business of the opportunity to seek other sources of funding or take other business-preserving steps.The class action lawsuits were brought by a range of small businesses that have been caught in the crosshairs of coronavirus containment efforts, including a frozen yogurt shop, law firms, an auto repair company and a cybersecurity firm.
VARIATIONS ON THE THEME OF PREFERENTIAL PROCESSING
Some small businesses in Maryland and Texas have accused banks of permitting only active borrowers or those with pre-existing business accounts to apply for CARES Act loans. Nothing in the CARES Act authorizes or permits banks to pick and choose who would gain access to, or benefit from, the federally backed lending program. In fact, the regulations significantly ease the responsibilities of a lender to establish the financial bona fides of pandemic borrowers.Still other businesses affected by COVID-19 have advanced the argument that large lenders have collaborated to provide CARES Act loans to their larger clients in order to protect their market share and to limit competition with one another in violation of federal antitrust law. This anti-competitive behavior prevents small businesses, like the trucking company plaintiff, from applying for and obtaining a CARES Act loan from another lender.
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If you or your COVID-19-affected small business has suffered damages because your bank unfairly refused a loan under the CARES Act, please click the link below to send your complaint to a lawyer to evaluate your claim at no cost or obligation.Last updated on
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