Recently,
I was reading the Washington Post’s Finance 202 Newsletter about the Small
Business Administration’s Paycheck Protection Program (PPP). Right next to the
article was an ad from a plaintiff’s law firm soliciting whistleblowers to
report fraud. Such advertisements are just a small reminder that whistleblower
firms are looking for opportunities to bring False Claims Act cases in
connection with the more than $2 trillion in government aid being dispersed in the
Coronavirus Aid, Relief, and Economic Security Act.
While
banks are making most of the PPP loans, some large banks are especially
sensitive to the down-the-road threat from False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) suits. The
Washington Post reports that several large banks were concerned that they may
later face lawsuits for their loans from whistleblowers or the U.S. Department
of Justice (DOJ). As a result, these banks were either not participating in the
program or were being “extra diligent,” which delayed the dispersal of the
loans. Sen. Marco Rubio, one of the chief sponsors of the program, complained
on Twitter that “some banks were putting crazy restrictions on who could apply
for a loan through the program.”
The
reluctance of some large banks to participate in the PPP or to quickly process these
loans stems from the numerous FCA and FIRREA suits brought against them after
the 2008 financial crash. According to the Washington Post, large banks
remember all too well how the DOJ sued numerous large banks for allegedly
failing to strictly enforce standards for mortgage loans either insured by the Federal
Housing Administration (FHA) or which were later bought by Fannie Mae or
Freddie Mac. Those suits led to settlements in the billions of dollars. Bank of America, for example, settled for $9.65 billion and provided an additional $7
billion in consumer relief. Citibank and JP Morgan Chase settled for $7 billion
and $13 billion, respectively, in combined payments and consumer relief. Many
of these suits turned on a “false certification” theory of liability, whereby
the banks were accused of falsely certifying their compliance with mortgage
loan underwriting standards.
The
present-day reluctance of lenders to issue federally backed loans or to
participate in federal loan programs due to FCA and FIRREA exposure should not
be a surprise. Secretary of U.S. Department of Housing and Urban Development (HUD),
Ben Carson, noted last year that depository banks previously issued almost 50
percent of all FHA loans, but “that number is down to less than 15 percent.” The
DOJ, Carson explained, was “so vigorous” in its pursuit of banks who issued FHA
loans for alleged fraud that “they basically drove them away because, in many
cases, the banks had been involved in some version minor, non-material defect
in the process and were slammed with enormous fines and suspension.” To entice
these lenders to return to the FHA lending program, HUD recently
entered into a “memorandum of understanding” with the DOJ that provides for
“prudential guidance on the appropriate use” of the FCA for violations by lenders.
Along with the agreement, HUD recently unveiled a new certification that
“limits the banks’ liabilities for some loan errors.”
Like
the broad certifications of compliance formerly required by banks for FHA
loans, lenders issuing PPP loans also make broad certifications and representations, including:
· For
purpose of making covered loans, the lender is responsible, to the extent set
forth in the PPP loan requirements, for all decisions concerning the
eligibility (including size) of a borrower for a covered loan.
· By
making any demand that SBA purchase the guaranteed portion of a loan, the lender
will be deemed thereby to certify that the covered loan has been made, closed,
serviced and liquidated in compliance with the PPP.
· The
lender consents to all rights and remedies available to the SBA under the Small
Business Act, the PPP and its Loan Program Requirements, as each of those are
amended from time to time, and any other applicable law.
· To
the best of its knowledge, the lender certifies that it is in compliance and
will maintain compliance with all applicable requirements of the PPP and its
Loan Program Requirements.
· Certification
that “all representations made are true and correct” that “any false statements
made to the U.S. Small Business Administration and the Department of Treasury
can result in . . . imposition of civil monetary penalties under 31 USC 3729
[of the FCA].
The Washington Post quoted a senior SBA official who was frustrated with how slow
the banks had been to help small businesses as saying, “There really is no risk
to the banks.” Also, the SBA and U.S. Department of the Treasury issued an Interim
Final Rule as well as a set of answers to Frequently Asked Questions, in which
they state that the “U.S. government will not challenge lender PPP actions that
conform to this guidance.” But as a recent Wall Street Journal editorial
pointed out, “This [statement]was followed with a footnote: ‘This document does
not carry the force and effect of law independent of the statute and
regulations on which it is based.’ In other words, trust Treasury guidance at
your own risk.” Such skepticism is well taken. The DOJ’s own Brand Memo
prohibits converting “agency guidance documents into binding rules.” Perhaps in
the short term as the country wrestles with the COVID-19 crisis, the DOJ will
follow Treasury’s guidance, which claims to apply to all U.S. departments and
agencies. But does that apply to regulators who may seek to bring FCA suits
against banks for alleged fraudulent certifications of PPP loans? What about
for DOJ down the road a year or two?
The
FCA and FIRREA are both akin to legal thermonuclear weapons. Their widespread
use by DOJ against banks and other commercial lenders after the 2008 crash has
caused some of these institutions to be understandably cautious about dispersing
large amounts of government loans and funding. If Congress wants to encourage participation
in its relief programs and the rapid dispersal of funds, it may wish to
consider other means to enforce compliance with these desperately needed
funding programs.
A. Brian Albritton
April 22, 2020
