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Litigation Issues for Lenders Related to PPP Loans: False Claims Act

by on Financial Services. Published November 4th, 2020
Litigation Issues for Lenders Related to PPP Loans: False Claims Act

Our firm has been at the forefront of the Payroll Protection Program “agent fee” litigation—advising and defending banks in purported PPP class actions. This post discusses the potential for government investigations and additional PPP litigation under the federal False Claims Act (“FCA”), 31 U.S.C. §3729 et seq. The FCA allows the government to bring suit for recovery of civil penalties and treble damages from persons or entities, including lenders, who knowingly submit or cause to be submitted false or fraudulent claims to the government for money or property.

The Justice Department began investigating PPP loan fraud in August and has brought over 35 cases against dozens of defendants under the FCA. To date, no lenders have been prosecuted.

Fortunately for lenders, the government has a high burden for proving FCA violations. Liability under the FCA requires proof of some level of knowledge of the fraud, or scienter. The US Supreme Court has held that this scienter requirement must be strictly enforced. Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). Generally, a lender can be liable for a borrower’s fraud, concealment, or false statement only when the lender (1) had actual knowledge of the fraud; (2) should have known of—but recklessly disregarded—the fraud; or (3) was willfully blind to the fraud.

An FCA investigation into a PPP lender will focus on one or more of the three phases of PPP loans: loan approval, loan servicing, and loan forgiveness.

PPP Loan Approval. PPP regulations allowed lenders to rely on “borrower documentations and attestation[s].” This concession encouraged lenders to begin approving PPP loans and process them quickly. However, the SBA’s regulations also required lenders to conduct a “good faith review” of PPP loan applications and did not relieve them of their obligations under other statutes, such as the Bank Secrecy Act. Thus, while PPP lenders could rely on a borrower’s documents and statements, they still had a duty to access and consider all available information, particularly where a review would have shown glaring inconsistencies. For example, where a PPP loan was extended to an existing bank customer, the bank would have had access to significant data on the borrower’s past performance, deposits, balances, withdrawals and more. Was the lender required to review the information? Did the lender review the information? Was that information facially at odds with the borrower’s documentation provided on the PPP loan application? These are the sorts of questions that a lender should be prepared to answer in an FCA fraud investigation.

PPP Loan Servicing. A PPP lender could also be liable under the FCA if it learned—or should have learned—post-approval that the borrower’s documentation contained false or fraudulent statements. Whether lenders have a duty to actively look for fraudulent information remains to be seen; but they should be careful to document loan servicing activities and communications and be prepared to defend them if the government comes calling.

PPP Loan Forgiveness. With the PPP moving into the forgiveness phase, lenders again bear much of the responsibility for preventing fraud and could potentially incur FCA liability if they fail to exercise care. If a PPP borrower applies for forgiveness, the lender must review the documentation and certify to the SBA the amount of the PPP loan eligible for forgiveness. Again, lenders are permitted to rely on the borrower’s documentation, but they still must evaluate all reasonably available data and information. Lenders should exercise a high degree of diligence in their review of forgiveness applications and consider implementing bank-specific protocols to ensure each application receives the same level of scrutiny before submitting a certification to the SBA.

Contact Johnston Clem Gifford

For more information, contact Johnston Clem Gifford. Our lawyers have significant experience with financial services matters. Contact us online or by calling (214) 974-8000.