Are You Prepared to Defend Your PPP Lending?
While the Department of Justice has been actively pursuing borrowers who made fraudulent claims when applying for loans from the Paycheck Protection Program (PPP), a recent report from Reuters suggests that financial institutions should also expect scrutiny from regulators.
When PPP was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it came with certain lender protections. Lenders were permitted to rely on borrower representations, including a “good faith review” of borrowers’ calculations and documentation for payroll costs. They were also expected to follow existing fair lending rules, including those related to overt discrimination, disparate treatment, and disparate impact.
Related: What is Fair Lending Discrimination?
When PPP first came out, we warned that the program presented lenders with a variety of potential pitfalls particularly because the emergency nature of the program required a mad scramble to prepare for and meet the huge demand for forgivable small business loans.
We stressed a focus on reviewing and updating policies and procedures to ensure consistency in loan decisioning and equal treatment. This included everything from processing times and requirements. We also warned against cherry-picking loans instead of using first-in-first-out underwriting practices and using common sense to identify applicants—especially those that obviously did not need PPP loans as a matter of survival (Disapproving shout out to the L.A. Lakers and their $4.6 million PPP loan, which they eventually gave back on account of the bad PR and concerns they might get in trouble).
Now, as we predicted, some regulatory agencies are allegedly following up to ensure that lenders were maintaining compliance in their PPP lending practices.
PPP: Where are the agencies looking?
Reuters says that the Federal Deposit Insurance Corporation (FDIC), New York Department of Financial Services (NYDFS), and the Justice Department “have shown interest in whether banks provided equal access” to all PPP borrowers. Meanwhile, as we reported this summer, the Consumer Financial Protection Bureau (CFPB) is planning to review PPP loans for fair lending to assess compliance with the Equal Credit Opportunity Act (ECOA).
We already know what the CFPB plans on looking at:
- The steps an FI is taking to ensure it complies with fair lending laws when implementing the program
- Additional restrictions the institution has placed on PPP loans that exceed the SBA’s requirements for the program
- Steps were taken to ensure the institution complies with Regulation B’s adverse action notice requirements
What about the other agencies? According to one unnamed source in the Reuters report, “investigators were looking for signs that lenders did not follow procedures, such as failing to properly vet borrowers’ payroll expense calculations; whether staff knowingly helped ineligible borrowers get loans; if lenders favored or discriminated against a borrower or group of borrowers; or had inconsistent lending processes or policies.”
While the good faith rule will shield lenders if borrowers broke the rules and lied on their application, lawyers told Reuters, “banks could be held accountable if they failed to comply with the PPP’s first-come-first-served and equal access standards or other regulations.”
When asked by Reuters about its intentions, an FDIC spokesperson said, “We would pursue any evidence of race-(based) lending discrimination wherever it may lead, and whether it involves the PPP or any other consumer lending program.”
Meanwhile, studies have found that Black business owners had a harder time than their white counterparts when trying to access PPP loans. A review by the New York Federal Reserve found less PPP lending in areas with the greatest density of Black-owned firms. For example, nationally an estimated 17.7 percent of firms received PPP loans compared to just 7 percent in the Bronx.
Have You Conducted a PPP Audit?
The PPP rollout was so fast, your financial institution probably didn’t have the chance to conduct a risk assessment before launching the program, but that doesn’t mean you can’t take steps now to manage PPP risk.
When prioritizing internal and independent audit programs, make sure you review your PPP lending program including:
- The existence of policies and procedures to guide decision making
- Whether those policies and procedures were followed consistently by staff
- Whether data analysis was conducted to ensure that similarly situated individuals were given similar treatment
- Whether steps have been taken to address any deficiencies (disciplinary action for failing to follow policies/procedures, revising policies/procedures, building policies and procedures into your compliance management system to ensure compliance when lightning-quick implementation is required)
PPP lenders should rightfully be proud of the Herculean efforts they put in to ensure small business customers were able to access PPP loans to help them survive. But they should also be double-checking their work to uncover and address any deficiencies. Do not wait for someone else to go looking for a problem. Be proactive in assessing your PPP performance.