A series of class-action lawsuits out of California allege banks prioritized larger loans instead of handling applications on a first come, first serve basis as required.

By Mike Pomranz
April 22, 2020
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No government program is without its critics, but the nearly $350 billion Paycheck Protection Program (PPP)—included as a part of $2-plus trillion Coronavirus Aid, Relief and Economic Security (CARES) Act—has mostly proven to add insult to injury for companies across America. And now, a series of lawsuits allege that it wasn’t just the federal government that let these small businesses down, but the banks processing the loans as well.

The intent of the PPP was to offer federal loans to small businesses that would be forgiven “if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.” But according to The Motley Fool, only about five percent of all small businesses were approved for these loans before the allocated funds were exhausted in a mere two weeks, despite nearly half of all small businesses (around 15 million nationwide) successfully completing an application. Needless to say, that’s a lot of unhappy owners and employees.

Credit: JOSEPH PREZIOSO / Contributor/Getty Images

Adding to the frustration, however, are some of the companies that did receive these loans. Looking specifically in the restaurant industry, while many independent eateries were left high and dry, plenty of high profile chains landed sizeable chunks of cash, according to Nation’s Restaurant News—including $20 million for Ruth’s Chris, $20 million for Fogo de Chao, and $10 million for Potbelly Sandwich Shop—thanks to a provision that allowed chains to qualify if individual locations met the fewer than 500 employee criteria (the idea purportedly being that these jobs are also “local”). Another company that received funds—the national burger chain Shake Shack—went so far as to promise to return its $10 million after facing sizeable criticism.

At the same time, it’s difficult to completely fault a company for applying for a government program it qualifies for—potentially laying blame on the steps of Congress for including this “loophole.” But a new series of lawsuits allege another major culprit: the large banks handling the applications.

The Los Angeles-based Stalwart Law Group has filed four class action lawsuits against Bank of America, Wells Fargo, JPMorgan Chase, and US Bank on behalf of a group of California small businesses that didn’t receive loans. The Bank of America suit specifically names BNG Restaurant Group as a plaintiff, a company Eater describes as a small frozen yogurt shop. The suits state that rather than processing PPP applications “on a first-come, first-serve basis as required by the rules governing that program,” these bands instead “prioritized loan applications seeking higher loan amounts because processing those applications first generated larger loan origination fees for the banks.” The filings allege that this “dishonest and deplorable behavior” left “thousands of small businesses” with nothing.

According to CNN, Bank of American and US Bank denied the allegations, while JPMorgan Chase and Wells Fargo had declined to comment on the legal action. The lawsuits apparently do not provide any internal evidence of wrongdoing by the banks; instead, they rely on data from the U.S. Small Business Administration which shows that the number of applications for the smallest loans—$150,000 and under—increased significantly in the final three days before PPP funds ran out, implying that larger applications were reviewed first.

Though the lawsuit does point out that processing larger applications was more lucrative for banks than processing smaller one (assuming all applications take similar amounts of time to process), it does not appear to discount other possible explanations: For instance, larger companies may have the resources to file their applications more quickly than smaller operations with less manpower.

However, regardless of how this lawsuit pans out, the federal government is attempting (again) to do its part to alleviate a tense situation. Yesterday, the Senate approved a bill that CNN reports will add another $310 billion into the (PPP)—despite a bit of back-of-the-envelope math showing that demand was closer $3 trillion. The House is scheduled to vote on the bill tomorrow. According to a joint statement from Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer, this new package should help address the previous lender issue by specifically allocating $30 billion “for community-based lenders, small banks and credit unions and $30 billion for mid-sized banks and credit unions.”