April 9, 2020 - Barack Ferrazzano Client Alert

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Client Alert: Mitigating Risk From PPP Loans

Loan Information Your Bank Needs To Know

Action Items

• Create written policies and procedures on Paycheck Protection Program (PPP) application priority issues.
• Communicate to PPP applicants if you are receiving a high volume of applications.
• Include waiver language in your applications and PPP promissory notes.
• Add PPP disclaimers on your website.

Interest in PPP loans and other loan modifications suggested by regulators has increased activity at banks to record highs. Banks are processing these requests as quickly as they can, but the volume of requests, coupled with the SBA’s ongoing efforts to address PPP loan volume, has resulted in longer than anticipated wait times for approval and processing.

The speed at which the PPP was launched has left open many questions, among them whether banks can adopt their own policies addressing from which small businesses to take applications. In the absence of guidance, banks have adopted their own policies, including taking applications from small businesses that have an existing lending relationship with the bank.

A putative class action challenging that widespread policy was filed on April 3, 2020 against Bank of America (BofA) in Maryland federal court, Profiles Inc. v. Bank of America Corp. Case No. 1:20-cv-00894. On April 7, 2020, the plaintiffs moved for a temporary restraining order requiring BofA to accept applications from any small business. As of the time of this alert, the court has not yet rendered a decision.

Banks Could Face Litigation In Connection With PPP

With demand for PPP funds exceeding availability, and in the absence of guidance on how to prioritize loans, litigation was inevitable. Indeed, the apparent goal of the policy at issue in the Maryland litigation was to get funds in the hands of small business as quickly as possible, the precise goal of the PPP. Time will tell if the policy holds up in court, but the downside of any policy that prevents or delays a business from applying for a loan could be significant.

If a business that does not get PPP funds closes its doors, the business owners may look to sue others for the loss. As the lawsuit in Maryland suggests, banks will be among those targeted.

The outcome of any lawsuit, and its expense and burden, will depend on the specific facts of each case. Those facts are being created in real time, and they include the efforts that you take now to mitigate risk in connection with PPP loans.

What Can You Do To Mitigate Risk?

Eliminating all risk is not possible, but you can take steps to mitigate risk from your decisions surrounding PPP loans. We recommend the following:

• Create written policies and procedures on PPP application priority. You should create written policies and procedures regarding how you are prioritizing PPP loan applications and other loan modifications that should focus on the goals of the PPP.
• Communicate to PPP applicants if you are receiving a high volume of applications. If you are only able to take loan applications from existing borrowers, you should make that known to applicants. You can do this when borrowers call to inquire, through notices on your website, and in your applications. The longer that you wait to inform potential borrowers of your procedures and possible wait times, the greater the likelihood that the borrower will assert that it relied on your lack of notice when it decided not to apply at another bank.
• Include waiver language in your applications and PPP promissory notes, and disclaimers on your website. You should include waiver language in your PPP loan applications, PPP form promissory notes and your website. That verbiage will help manage applicant expectations and mitigate litigation risk and exposure to your bank.

We Can Help You

In view of the speed at which the PPP has been launched, the level of demand versus available funds, and the gravity of the moment, lawsuits against some banks are inevitable. Although the risk of litigation cannot be foreclosed, and the potential exposure cannot be completely eliminated, there are steps that you can take to maximize your protection.

Barack Ferrazzano attorneys can review your PPP loan policies and form promissory notes, as well as counsel you on appropriate disclaimer language and waiver language that will increase the likelihood of a positive outcome in any litigation. And if a potential borrower raises concerns with your bank, bringing the specter of litigation, our attorneys can help you address the situation to increase the likelihood of resolving the dispute quickly and to create a record that will strengthen your case.

COVID-19 Resources

We recommend reviewing the following pandemic-related business and legal considerations we have been discussing with our clients:

• Barack Ferrazzano Financial Institutions Group's COVID-19 Resource Center