False Claims Act action begins against PPP lenders
After the subprime mortgage crisis of 2008, the Justice Department settled False Claims Act claims against the nation’s largest mortgage lenders for billions of dollars. When Congress approved the Paycheck Protection Program in response to the Covid-19 pandemic, many predicted another wave of big-dollar FCA settlements.
But Small Business Administration guidelines later cast doubt on the likelihood of such lawsuits, explicitly allowing PPP lenders to rely on borrower certifications.
In this context, the DOJ’s recent announcement of its “first-ever” FCA regulation with a PPP lender for $18,673 may not seem like big news. But don’t let the dollar amount fool you. The prosperity bank The settlement reflects the DOJ’s view that, despite SBA guidelines, PPP lenders can face FCA liability for borrower fraud, at least in certain circumstances.
The borrower in prosperity bank falsely certified eligibility for a PPP loan. But the DOJ still sued Prosperity Bank, alleging it knew about the falsehood. This approach should put other PPP lenders on alert.
The DOJ could take—and has historically taken—a broad view of when lenders “know” of borrower fraud, building on the FCA’s definition of “knowing” to include willful and even carelessness.
Initiative and consequences
After the mortgage crisis, the DOJ filed dozens of FCA lawsuits on behalf of the US Department of Housing and Urban Development. Rather than prosecute based on individual mortgages, the DOJ has targeted banks and lenders that have certified thousands of mortgages for HUD insurance programs.
The effort, known as the Big Lender Initiative, accused lenders of “recklessly” pressuring underwriters to approve loans, ignoring the risk that many will not meet HUD’s eligibility criteria. The DOJ ultimately recovered more than $4.75 billion from more than 20 lenders, including many household names.
When Congress passed the CARES Act in 2020, many anticipated a second big lender initiative. The PPP provided $349 billion in loans, processed through private lenders, to borrowers who met certain eligibility requirements regarding ownership, operations, number of employees and use of company funds.
Observers have predicted that if lenders rush to certify PPP loans, ignoring the risk that borrowers will not meet eligibility requirements, they could face the same FCA allegations that lenders encountered a decade earlier.
The SBA, however, appeared to eliminate much of the threat. In an interim final rule issued in April 2020, the SBA allowed “lenders to rely on specified documents provided by the borrower to determine the eligible loan amount and eligibility for loan forgiveness.” As long as lenders collect the required information from borrowers, they would be “held harmless in the event of borrowers failing to meet program criteria.”
Subsequent events may have caused the government to regret the reign of the SBA.
A investigation by the House Select Subcommittee on the Coronavirus Crisis found widespread fraud in PPP loans – up to $4.6 billion. No less than $3.6 billion has been paid out to borrowers under the Treasury Department’s ‘Don’t Pay’ campaign listing. Another $402 million went to borrowers whose tax IDs were created after the PPP deadline, and who were therefore likely not in business before the pandemic.
The alleged fraud apparently affected some lenders more than others. According to the subcommittee, fintech lenders processed 15% of PPP loans, but were associated with 75% of loans suspected of fraud. Some fintech lenders reportedly approve loans in “as little as an hour”, often with little or no human review.
For many of these lenders, more than 25% of their loans showed signs of potential fraud, according to a University of Texas. study. A fintech lender, Kabbage Inc., recently admitted in a court filing that the DOJ was investigating under the FCA, “the theory that Kabbage improperly approved PPP loans that were either manifestly fraudulent or not in compliance with the law. “. [SBA] settings.”
The settlement with Prosperity Bank highlights potential FCA actions that the DOJ could pursue against other PPP lenders. Prosperity Bank has approved a $213,400 PPP loan to Woodlands Pain Institute. The sole owner of this business falsely certified that he was not facing criminal charges, hiding his business’s ineligibility to receive the loan.
Although Prosperity Bank could rely on this certification under the SBA’s Interim Final Rule, the DOJ still pursued an FCA claim, alleging that “Prosperity Bank employees knew [the owner] was facing charges. The parties then settled $18,673, nearly double the 5% processing fee Prosperity Bank received for the loan.
The settlement says the DOJ will not credit reliance on borrower certifications that a PPP lender knows to be false. However, it is unclear how the DOJ will apply this principle in practice, and could ultimately create tension with SBA guidelines that lenders would be “held in the event of borrowers failing to meet the criteria.” from the program “.
The FCA definition of “know” further complicates the issue. This definition explicitly includes “willful ignorance” and “reckless disregard” of the truth or falsity of information. If a potential borrower has submitted manifestly deficient documentation, will the DOJ impute “knowledge,” “willful ignorance,” or “reckless disregard” of that deficiency on the lender, particularly if the lender is a fintech that did not perform any human review?
Such theories of liability could lead to lawsuits akin to the Big Lender Initiative. They would attempt to hold PPP lenders accountable for widespread breaches of eligibility criteria. It’s unclear whether the DOJ will pursue these theories, but the description of the Prosperity Bank settlement as the “first ever” promises it won’t be the last.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Caleb Hayes-Deats is a partner at MoloLamken, where he represents companies and individuals in False Claims Act and other types of whistleblower litigation. Previously, he served as an Assistant United States Attorney for the Southern District of New York.