Best Practices: PPP Loan Lender Liability

Shortly after the CARES Act was enacted, and the PPP loan program began, the lawsuits started.  From the beginning, there was concern that the PPP loan demand would exceed the amount of funding resulting in legal battles.  Class action lawsuits were filed claiming that the “first come, first served” rule was being ignored by large commercial banks who were favoring existing customers over new customers.  Other class action lawsuits were filed by persons claiming entitlement to a commission for assisting an applicant in getting a PPP loan.  These actions claimed a violation of the CARES Act.  However, the courts have consistently held that the CARES Act did not provide for a private right of action (See, e.g., Profiles, Inc. v. Bank of America Corp., 453 F. Supp. 3d 742, 751 (D. Md. April 13, 2020)), essentially meaning that a private person has no legal right to sue a lender for having violated the CARES Act.  However, this hasn’t stopped the lawyers or the threats of lawsuits.

There are many PPP loan applicants who are frustrated because they did not receive PPP funds to which they believe they were entitled.  The reasons for not getting a PPP loan are varied:  the loan may not have been approved because the PPP loan application was denied; or the application may not have been processed before the available funds were exhausted.  Some frustrated potential borrowers believe that the failure to obtain the PPP loan is the fault of the lender to whom the application was made, and not the result of anything that the applicant did wrong.   These potential borrowers are looking to hold the lender liable for the PPP loan that was not received.

Because there is no private right of action under the CARES Act, lawyers for frustrated PPP borrowers are looking to theories of lender liability under common law, including negligence and breach of contract, to make claims against lenders.  Negligence includes a lender’s conduct that falls below the standards of reasonable care with regard to a duty that is owed to the potential borrower, causing injury to a borrower.  This can include the failure to process a loan application with reasonable care.  See, First Federal Savings & Loan Ass’n v. Caudle, 425 So. 2d 1050 (Ala. 1982).  However, what constitutes reasonable care in a “first-ever, do it as soon as possible program,” a program which required lenders to ignore traditional underwriting and collateral rules and, instead, asked lenders to follow Notices, FAQs and other guidance being disseminated on an almost daily basis?  What is “reasonable care” when loan administration resources were stretched beyond anything previously experienced due to a national emergency and a call-to-arms?

A contract exists only when there is a legally enforceable agreement.  When during the application process did the lender agree to the loan?  In a fast-tracked lending process, is the agreement to lend money also fast-tracked?  What is the legal effect of an SBA loan number being received by the applicant?  Was a promise to lend entered into when a lender had a prospective PPP borrower sign a promissory note in anticipation of the approval of the loan in order to expedite distribution of the funds?

These questions cannot be answered here.  No two situations will be exactly the same.  Each circumstance will depend on its own facts.  However, in light of the national emergency that the PPP loan program addressed, and the herculean effort of the financial services industry to accommodate the needs of America’s small businesses, it seems likely that the courts will require different and more difficult burdens of proof for a frustrated borrower to meet before a PPP lender will be held liable for a borrower not receiving a PPP loan.

Our recommendation is that lenders should treat rejected PPP loan applications and related documents with the same level of care as they would with other SBA loans.  At a minimum, this means that lenders should examine 13 CFR Section 120.461.  The regulation sets forth the duties of SBA Supervised Lenders to retain all “applications for financing” as well as all “other documents and supporting material relating to such loans, including correspondence.”  These records should be retained “for at least 6 years” following the final disposition of each SBA loan.  In addition, it would be wise to consult with bank counsel and examine your institution’s internal policies for retention of rejected loan files in case they impose lengthier requirements.  In the event that any claim is made, or if the SBA OIG ever requests information on a rejected applicant, the bank will be able to address either circumstance and demonstrate its approach to prudent lending and its commitment to its safety and soundness responsibilities.

For more information, or to speak to one of our attorneys, call us at 215.542.7070.