A class of plaintiffs sued Wells Fargo WFC in federal district court just days ago, alleging that the bank improperly “reshuffled” Round 1 PPP applications to favor larger borrowers in an effort to “maximize profits for the bank”—all at the expense of smaller businesses. Banks, the plaintiffs claim, received “nearly $6 billion in fees while hundreds of thousands of loan applicants got nothing.” The plaintiffs, an automotive repair shop and a frozen yogurt vendor, have asked for millions in damages against the banking giant. The case is part of the first wave of lawsuits that big banks will face in the fallout of the PPP loan initiative and is substantially similar to suits brought in the same court against Bank of America BAC, JP Morgan Chase JPM, and U.S. Bank.
The PPP Loan Initiative and the Potential Second Round of Funding
The Paycheck Protection Program, also known as the PPP, is a federally-backed loan program that was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). That Act provided for $349 billion in federally-guaranteed loans to small businesses. PPP loans were designed to provide small businesses with a cash infusion that would provide roughly eight weeks of payroll and other costs in an effort to encourage employee retention during the crisis. Most notably, loan recipients who properly use the PPP funds will qualify for complete forgiveness, meaning that the “loan” functions more like a tax-free grant for many.
Sounds pretty good? Indeed, it’s good work if you can get it. The problem is, many could not. Many applicants did not receive funds in the first round. The initial $349 billion in PPP funds ran dry just 13 days after banks opened the door to loan applications. Now, Congress is eyeing a second round of appropriations and appears poised to fund another $310 billion into the program.
Interestingly, the rollout of a second round could provide some fodder for the pending lawsuits. For example, if the banks deliberately change their approach in Round 2, does that imply some recognition of wrongdoing in the first round? Certainly, the lawsuit plaintiffs will argue that it does. But if banks do not change, they will likely face increased PR pressures and—if the public outcry continues—potential congressional inquiries. Banks will be weighing the lesser of two evils.
The Wells Fargo Lawsuit
In the class-action complaint, the plaintiffs allege that the bank “prioritized [PPP] applications seeking higher loan amounts” in an effort to originate higher loan fees under the federal loan program. The plaintiffs allege that the bank “received thousands of applications and chose to prioritize higher loans for bigger companies, despite the SBA requiring a first-come, first-serve distribution of funds.”