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Financial Services Law Insights and Observations


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  • SBA rolls out pilot program to bolster small business’ cybersecurity infrastructures

    Privacy, Cyber Risk & Data Security

    On January 21, the SBA announced $3 million in funding for the agency’s Cybersecurity for Small Business Pilot Program. The funding is intended to help state governments assist emerging small businesses develop their cybersecurity infrastructures to combat increasing and evolving threats. Applications will be accepted from January 26 through March 3. “Throughout the COVID-19 pandemic, small businesses have adopted technology at high rates to survive, operate, and grow their businesses. As a result, cybersecurity has become increasingly important as now, more than ever before, small business owners face cyber risks and challenges that could disrupt their operations and competitive advantages. As we seek to build a stronger and more inclusive entrepreneurial ecosystem, we must innovate and provide resources to meet the evolving needs of the growing number of small businesses. With this new funding opportunity, the SBA intends on leveraging the strengths across our state governments, territories, and tribal governments to provide services to help small businesses get cyber ready and, in the process, fortify our nation’s supply chains,” SBA Administrator Isabella Casillas Guzman said in the announcement.

    Privacy/Cyber Risk & Data Security SBA Small Business Covid-19

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  • District Court grants SBA’s summary judgment in Covid-19 relief disclosure case


    On December 13, the U.S. District Court for the District of Columbia granted summary judgment in a Freedom of Information (FOIA) case in favor of the U.S. Small Business Administration (SBA) (defendant), resolving allegations that the agency improperly withheld loan payment status and tax-identification numbers for recipients of loans under its Paycheck Protection Program (PPP). As previously covered by InfoBytes, national-news organizations filed an action against the SBA seeking disclosure of loan recipient information, after the rejection of their FOIA requests. The court previously ordered the SBA to disclose some information—loan amounts, names, addresses—but later gave the SBA a second chance to argue against disclosure of default status and tax-identification numbers.

    According to the most recent opinion, the SBA ultimately satisfied Exemption 4 to FOIA (related to confidential or privileged commercial or financial information) as to the current loan status of the PPP loans by filing declarations from lenders stating that they “customarily and actually treat interim PPP loan status as confidential.” The court also concluded that disclosure would concretely cause harm to an interest protected by the FOIA exemption, accepting the agency’s arguments that identifying a delinquent borrower, even if that status is temporary or ultimately irrelevant, could “negatively impact the borrower’s reputation or creditworthiness, or adversely affect its survivability and growth,” and that “disclosure would cause ‘regulated lenders [to] lose confidence in the agency’s future ability to protect confidential information . . . creat[ing] an incentive not to participate in the agency’s programs.’” Regarding tax-identification numbers, the court accepted the SBA’s assertion that it could not separate Social Security Numbers (SSN) from Employer Identification Numbers (EIN) and only release the EINs. Withholding the identification number data set was therefore permissible under Exemption 6 to FOIA, regarding “unwarranted invasion of personal privacy.” The SBA had attempted to get the help of the IRS and Social Security Administration to differentiate the numbers, but both agencies concluded they could not legally release that information to the SBA.

    Courts SBA CARES Act Covid-19 FOIA Small Business Lending Disclosures

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  • District Court says bank’s arbitration clauses apply to PPP loans


    On November 23, the U.S. District Court for the District of New Jersey granted a national bank’s motion to compel arbitration in an action concerning the bank’s alleged mishandling of Paycheck Protection Plan (PPP) loan applications. The plaintiff filed a lawsuit claiming the bank’s PPP loan disbursement process allegedly favored wealthy clients over smaller, less wealthy clients to maximize the bank’s origination fees. The plaintiff alleged that because the bank did not process applications on a “first-come, first-served” basis, the plaintiff did not receive its PPP loan in a timely manner. The bank moved to compel arbitration, “arguing that questions of arbitrability are for the arbitrator to decide in the first instance.” The plaintiff argued that the arbitration clauses in the bank’s agreements applied only to disputes regarding bank deposit accounts, and not to other financial products such as PPP loans. The court stayed the case and granted the bank’s motion to compel arbitration, noting that the bank’s deposit account agreement and online services agreement both include arbitration clauses. These clauses, the court stated, are “clear evidence” that the bank intended an arbitrator to decide questions related to scope. “Accordingly, Plaintiff must bring its claim before the arbitrator in the first instance, even if it contests the scope of arbitrability,” the court wrote.

    Courts Covid-19 SBA Arbitration CARES Act State Issues Small Business Lending

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  • District Court dismisses PPP putative class action against nonbank


    On November 24, the U.S. District Court for the Central District of California dismissed, with prejudice, a putative class action alleging that a nonbank lender prioritized high-dollar Paycheck Protection Program (PPP) loan applicants. The plaintiff’s complaint—which alleged claims of fraudulent concealment, fraudulent deceit, unfair business practices, and false advertising—claimed, among other things, that the lender (i) was not licensed to make loans in California when she applied; (ii) did not have adequate funding to make the loans; and (iii) advertised it would process loan requests on a first-come, first-served basis, but actually prioritized favored customers and higher-value loans that yielded higher lending fees. The court granted the lender’s motion to dismiss. According to the court, the plaintiff’s allegation that the parties were “transacting business in order to enter into a contractual, borrower-lender relationship” was not supported by any facts, and that while the plaintiff claimed she submitted a PPP loan application to the lender, a confirmation e-mail from the lender did not mention a submitted application—only a loan request. “This court cannot, therefore, assume the truth of Plaintiff’s allegation that she submitted a loan application, let alone her conclusory allegation that the parties entered into a borrower-lender relationship or engaged in any other transaction,” the court stated. The court also determined that the plaintiff’s fraudulent deceit claim failed because her allegation, made on information and belief, that the lender prioritized large loans had no factual foundation, and the plaintiff failed to plead the elements of that claim.

    Courts Covid-19 Small Business Lending SBA Class Action CARES Act Nonbank State Issues California

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  • SBA updates Covid-19 EIDL guidance

    Federal Issues

    On November 19, the Small Business Administration (SBA) announced updated guidance for Covid-19 Economic Injury Disaster Loan (EIDL) program applicants while funding remains available. The updated guidance provided that (i) the deadline to submit EIDL loans and targeted advance applications will be December 31 (loans will continued to be processed after this date until funds are depleted); (ii) supplemental targeted advance applications will also be accepted through December 31, however SBA noted that it may not be able to process applications submitted near the deadline due to legal requirements (SBA encouraged applicants to apply by December 10 to allow for adequate processing time); (iii) borrowers may request increases “up to their maximum eligible loan amount for up to two years after their loan origination date, or until the funds are exhausted, whichever is soonest”; and (iv) appeal requests for Covid-19 EIDL applications that are received on or before December 31 will be accepted and reviewed provided they are received within the regulation’s timeframes (i.e., “six months from the date of decline for reconsiderations and 30 days from the date of reconsideration decline for appeals—unless funding is no longer available”). SBA further directed applicants to review enhancements made to the EIDL program in September.

    Federal Issues SBA Small Business Lending EIDL Covid-19

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  • SBA issues final rule on PPP appeals process

    Federal Issues

    On September 16, the SBA published a final rule in the Federal Register informing Paycheck Protection Program (PPP) borrowers and lenders of the appeal process for certain SBA loan review decisions under the PPP to the SBA Office of Hearings and Appeals. The final rule adopts, with changes, certain portions of an interim final rule published in August 2020 (covered by InfoBytes here). Among other things, the final rule dispenses the 30-day delayed effective date to allow SBA to immediately issue decisions and provide certainty concerning the appeals process to potential appellants without further delay. Because the final rule further “provides increased accessibility to borrowers in response to comments previously received by the public, allowing the borrowers that receive an appealable final SBA loan review decision to immediately appeal under the final rule is in the best interests of the borrowers.” The final rule became effective September 14.

    Federal Issues SBA Covid-19 CARES Act Small Business Lending

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  • OCC issues bulletin to community banks on SBA lending activities

    Agency Rule-Making & Guidance

    On August 5, the OCC issued Bulletin 2021-34 to inform banks and examiners on risk management principles consistent with safe and sound banking practices when engaging in SBA guaranteed lending programs. According to the OCC, “[a] bank’s SBA lending activities, including purchasing investments backed by SBA-guaranteed loans, should be consistent with the bank’s overall business plans, strategies, risk appetite, and sound risk management.” The bulletin notes that primary risk areas associated with SBA lending activities are credit, operational, compliance, liquidity, price, and strategic risks. The bulletin also highlights sound risk management principles, such as strategic planning, policies and processes, personnel, and control systems, and highlights that the bank’s board “should have satisfactory knowledge of and engage in sound oversight of SBA lending.”

    Agency Rule-Making & Guidance OCC Small Business Lending SBA Bank Regulatory

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  • SBA explains discontinuation of loan necessity questionnaires

    Federal Issues

    On July 29, the SBA added question #69 to its Paycheck Protection Program (PPP) frequently asked questions explaining why the agency is discontinuing the use of two Loan Necessity Questionnaires (SBA Form 3509 or 3510). Borrowers that received PPP loans of at least $2 million were required to complete the questionnaires to back up their good faith certification “that economic uncertainty made the loan request necessary to support ongoing operations.” However, SBA noted that following a notice and comment period, the majority of commentators objected to the questionnaires. Based on the results of completed loan reviews so far, the agency believes that “audit resources will be more efficiently deployed across all loans if the loan necessity questionnaire is discontinued.” The SBA noted that these reviews “are lengthy and have caused delays beyond the 90-day statutory timeline for forgiveness, thus negatively impacting those borrowers that made their loan necessity certification in good faith.”

    Federal Issues Covid-19 SBA CARES Act

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  • SBA to open PPP direct borrower forgiveness platform

    Federal Issues

    On July 28, SBA announced the launch of a streamlined application program to allow borrowers with Paycheck Protection Program (PPP) loans of $150,000 or less to apply for direct forgiveness through SBA, thereby reducing the burden on participating lenders to service forgiveness applications. The new direct forgiveness platform will start accepting applications from borrowers on August 4. Under the interim final rule (IFR), lenders who choose to participate will be required to opt-in to the program and will be provided a single secure location for all of their borrowers with loans of $150,000 or less to apply for loan forgiveness using the electronic equivalent of SBA Form 3508S. When notice is received that a borrower has applied for forgiveness through the platform, lenders will review both the borrower’s loan forgiveness application and issue a forgiveness decision to SBA inside the platform. Additional procedural guidance will be released in the near future to provide information on (i) the opt-in process; (ii) how qualified borrowers can access the platform and submit loan applications; and (iii) how lenders can access and review forgiveness applications, issue forgiveness decisions, and request forgiveness payments from SBA. During the transition period after the launch of the platform, SBA expects lenders that opt-in “to complete the processing of any loan forgiveness applications that have already been submitted by borrowers to the lender and should inform such borrowers not to submit a duplicate loan forgiveness application through the [p]latform.”

    The IFR also extends the loan deferment period for PPP loans in circumstances where a borrower timely files an appeal of a final SBA loan review decision with SBA’s Office of Hearings and Appeals. Additionally, the IFR permits lenders to use a “COVID Revenue Reduction Score” at the time of forgiveness in order to document the required revenue reduction for second draw PPP loans of $150,000 or less, exempting those borrowers from supplying required documentation demonstrating a 25 percent revenue reduction or more in at least one quarter of 2020 compared to the same quarter in 2019.

    The IRF takes effect immediately.

    Federal Issues SBA CARES Act Small Business Lending Covid-19 Agency Rule-Making & Guidance

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  • SBA outlines guaranty purchase, charge-off process for PPP loans

    Federal Issues

    On July 15, the SBA issued Procedural Notice 5000-812316 to remind lenders of their servicing responsibilities and provide guidance on the agency’s guaranty purchase process for Paycheck Protection Program (PPP) first-draw and second-draw loans. Lenders may submit requests for SBA to purchase and charge off PPP loans in instances where a borrower (i) is past due 60 days or more on scheduled loan payments where the default has not been cured; (ii) has permanently closed and does not intend to submit a forgiveness application; (iii); has filed for bankruptcy; or (iv) is deceased in the case of self-employed individuals, sole proprietors, single-member LLCs, or independent contractors. In circumstances where a borrower or any owner of 20 percent or more of the borrower has been indicted for, or convicted of, a felony related to a PPP loan, or in a case where a borrower has appealed an SBA loan review decision, the lender may request guaranty purchase without charge-off from SBA. Additionally, SBA outlines procedures for lenders when a borrower submits a forgiveness application after the lender has submitted a request to SBA for guaranty purchase. Guidelines for submitting guaranty purchase and charge-off requests are provided in the procedural notice.

    Federal Issues SBA PPP Covid-19 CARES Act Small Business Lending

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