Wednesday, April 22, 2020

Spectre at the feast: Post-Crash False Claims Act Enforcement Looms Over Large Banks and the Paycheck Protection Program

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

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