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Biden signs bills providing 10-year SOL on PPP and EIDL fraud
On August 5, President Biden signed the Paycheck Protection Program and Bank Fraud Enforcement Harmonization Act (see H.R. 7352) and the COVID-19 Economic Injury Disaster Loan Fraud Statute of Limitations Act (see H.R. 7334). H.R. 7352 provides a 10-year statute of limitations for fraud by borrowers under the SBA’s Paycheck Protection Program, while H.R. 7334 establishes a 10-year statute of limitations for fraud by borrowers under the SBA’s Covid-19 Economic Injury Disaster Loan programs.
SBA says larger nonprofits eligible for PPP loan forgiveness
On July 8, the SBA added question #71 to its Paycheck Protection Program (PPP) frequently asked questions clarifying whether 501(c)(3) nonprofit organizations with more than 500 employees are eligible for PPP loan forgiveness. SBA explained that while the CARES Act generally provided that “501(c)(3) nonprofit organizations with a total of 500 or fewer employees were eligible to receive a First Draw PPP Loan,” the American Rescue Plan Act (ARPA) later “increased the size eligibility standard for 501(c)(3) nonprofit organizations for First Draw PPP Loans from a total of 500 or fewer employees to no more than 500 employees per physical location of the 501(c)(3) nonprofit organization.” On March 22, 2021, SBA published an interim final rule (IFR) implementing recent PPP changes that were included in the ARPA enacted on March 11, 2021 (covered by InfoBytes here).
Exercising her broad authority under the PPP, and in light of litigation earlier this year, on July 8 the SBA administrator announced that “any 501(c)(3) nonprofit organization that received a loan before March 11, 2021, but submits a forgiveness application on or after March 11, 2021, will not be ineligible for forgiveness on the basis that they have more than 500 employees in multiple physical locations” provided it has otherwise complied with all applicable PPP rules.
SBA says nonprofit lenders are eligible for PPP loan forgiveness
On May 5, the SBA added question #70 to its Paycheck Protection Program (PPP) frequently asked questions explaining that 501(c)(3) nonprofit lenders are eligible for PPP loan forgiveness provided they have complied with all applicable PPP rules aside from 13 CFR 120.110(b). 13 CFR 120.110(b) provides that non-profit businesses and other financial businesses that are “primarily engaged in the business of lending” are ineligible for SBA business loans. While the CARES Act specifically allowed nonprofit organizations to be eligible for PPP loans, it did not mention financial businesses/lenders, which SBA interpreted as “allowing nonprofits to overcome the 13 CFR 120.110 restriction, but not lenders.” Following a review of the agency’s PPP loan records, SBA found that 501(c)(3) nonprofit lenders were confused as to whether they were eligible for PPP loans. In order to provide clarity, SBA “determined that 501(c)(3) nonprofit lender borrowers reasonably relied on the CARES Act’s nonprofit authority regarding their eligibility for a PPP loan. In addition, enforcing the Forgiveness and Loan Review IFR (86 FR 8283) that provides for denial of forgiveness to 501(c)(3) nonprofit lenders due to application of the PPP eligibility rule incorporating 13 CFR 120.110(b) will negatively affect the remaining small number of 501(c)(3) nonprofit lenders that have not yet received forgiveness.” As such, the SBA administrator has elected to exercise broad discretion “to decline to enforce the Forgiveness and Loan Review IFR rule providing for denial of forgiveness to ineligible borrowers for 501(c)(3) nonprofit lenders” and will allow such lenders to be eligible for forgiveness of their PPP loans.
SBA offers additional deferment for Covid-19 EIDL loans
On March 15, SBA extended the deferment period for the Covid-19 Economic Injury Disaster Loan (EIDL) program, to provide a total of 30 months deferment from inception on all approved Covid EIDL loans. The extended deferment of principal and interest payments on existing EIDL loans approved in calendar years 2020, 2021, and 2022 is intended to provide additional flexibility for small business owners affected by Covid-19. While borrowers are not required to make payments during the deferment period, interest will continue to accrue on the loans during the deferment. SBA warned that deferments may result in balloon payments and will not stop any established preauthorized debit or recurring payments on a loan. Borrowers will need to contact their SBA servicing center to pause recurring payments during the extended deferment period. Once the deferment period ends, borrowers will be required to make regular principal and interest payments beginning 30 months from the date of the note.
DOJ announces $31,000 FCA settlement for duplicative PPP loans
On February 11, the DOJ announced a $31,000 settlement with an IT services company to resolve allegations that it violated the False Claims Act (FCA) by obtaining more than one Paycheck Protection Program (PPP) loan in 2020. According to the settlement agreement, in April 2020 the company received two SBA-guaranteed PPP loans through two different banks. The company agreed to repay the duplicative PPP loan in full to its lender, relieving the SBA of liability. The settlement press release also noted that the settlement with the company resolved a lawsuit filed under the whistleblower provision of the FCA, which permits private parties to file suit on behalf of the U.S. for false claims and share in a portion of the government’s recovery.
Borrowers may request SBA loan review of partially forgiven PPP loans
On January 27, SBA issued Procedural Notice 5000-827666 outlining a new process for borrowers to request an SBA loan review of partially approved forgiveness decisions by their Paycheck Protection Program (PPP) lenders. Effective immediately, when a PPP lender receives a forgiveness remittance from SBA on a partial approval decision (including instances when the lender required a borrower to apply for forgiveness in an amount less than the full amount of the loan), the lender must inform the borrower that the borrower has 30 calendar days from receipt of the notification to seek an SBA loan review of the lender’s partial approval decision. The lender must then notify SBA within 5 calendar days of receiving the borrower’s timely request for review. If SBA selects the loan for review, the borrower must continue to make payments on the remaining balance. Additionally, SBA noted that borrowers should be aware that the agency “may determine that the borrower is entitled to forgiveness in an amount less than what the [l]ender decided (including zero if, for example, the borrower is determined to be ineligible for the PPP loan), an amount more than what the [l]ender decided, or the same amount as the [l]ender decided.” The SBA notice outlined details related to forgiveness payment remittances resulting from a partial approval loan review, and noted that SBA will provide lenders additional guidance through the platform, including step-by-step instructions. The notice expires January 1, 2023.
SBA rolls out small business cybersecurity pilot program
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.
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.
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.
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.