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FTC settles with company posing as SBA lender
On September 25, the FTC announced a settlement with a Rhode Island-based company and its owner (defendants), resolving allegations that the defendants violated the FTC Act by claiming to be an approved lender for the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) even though the defendants are neither affiliated with the SBA nor an SBA-authorized lender. As previously covered by InfoBytes, the FTC filed an action against the defendants in April, alleging that the defendants made deceptive statements on their websites, such as “WE ARE A DIRECT LENDER FOR THE PPP PROGRAM!,” and directly contacted small businesses claiming to represent the SBA in order to solicit loan applications on behalf of the businesses’ banks. The settlement prohibits the defendants from engaging in the conduct subject to the action, including misrepresenting that they are affiliated with the SBA and that they are authorized to accept or process applications on behalf of the SBA. Moreover, the defendants are prohibited from disclosing or benefitting from consumer information obtained prior to the settlement without express, informed consent from the consumer, and are subject to certain reporting and recordkeeping requirements.
IRS: Lenders should not report PPP debt forgiveness
On September 22, the IRS released Announcement 2020-12 notifying lenders that they should not report the amount of qualifying loan forgiveness for covered loans to qualifying small businesses made under the Paycheck Protection Program (PPP).The IRS code generally requires lenders to file a Form 1099-C for any discharge of indebtedness of at least $600. However, the IRS’ announcement specifies that when a portion or all of the principal is forgiven under the requirements of Section 1106 of the CARES Act, lenders, for federal income tax purposes only, should not “file a Form 1099-C information return with the IRS or provide a payee statement to the eligible recipient under section 6050P of the Code as a result of the qualifying forgiveness.”
District court dismisses six PPP agent fee class actions
On September 21, the U.S. District Court for the Southern District of New York dismissed six class actions alleging that the Paycheck Protection Program (PPP) and its implementing regulations entitle accountants who assist borrowers in securing PPP loans to a portion of the fees banks receive from the Small Business Administration (SBA).The six class actions were brought by a collection of accountants and accounting firms alleging that the banks did not pay agent fees reportedly due under the PPP, even though they had not entered into agreements with the banks to receive the fees. The district court, following a similar decision by a Florida federal district court (covered by InfoBytes here), dismissed the class actions, concluding that absent an agreement to do so, banks are not required to pay agent fees under the CARES Act—which created the PPP—and its implementing regulations. Specifically, the court noted that although the law and implementing regulations impose limits on agents fees, those limits “do not entitle agents to fees but simply regulate how such fees would be paid when they are to be paid.” The court also rejected a variety of state law and common law claims, which were “largely premised on the same theory,” and dismissed all six class actions in their entirety.
DOJ official discusses PPP fraud enforcement
On September 10, in remarks at the Paycheck Protection Program (PPP) Criminal Fraud Enforcement Action press conference, Acting Assistant Attorney General Brian Rabbitt provided an overview of recent PPP enforcement actions and noted that “[m]any financial institutions have been strong partners” in assisting the DOJ with “detecting and investigating potentially fraudulent activity in connection with the PPP.” In addition to partnerships with private institutions, Rabbitt emphasized the agency’s data analytics capabilities as a key component in their ability to bring PPP fraud cases quickly—within six months, the DOJ has charged 57 defendants in at least 19 federal judicial districts. Moreover, Rabbitt discussed commonalities among the cases, including the “defendants’ use of their stolen PPP funds for entirely illegitimate purposes” having nothing to do with the intended relief. In total, according to the DOJ, the current charges against the 57 defendants “involve attempts to steal over $175 million from the PPP” and over $70 million in “actual losses to the federal government.”
SBA clarifies PPP forgiveness for certain business owners, non-payroll costs
On August 27, the Small Business Administration (SBA) issued a new interim final rule (IFR), which provides additional guidance for Paycheck Protection Program (PPP) lenders on the treatment of business owners and the forgiveness of certain non-payroll costs. The new IFR specifies that “owner-employees with less than a 5 percent ownership stake in a C- or S- Corporation are not subject to the owner-employee compensation rule.” The SBA explained that the exemption, which was decided upon in consultation with the Secretary of Treasury, is intended to cover owner-employees who “have no meaningful ability to influence decisions over how loan proceeds are allocated.” With respect to the forgiveness of certain non-payroll costs, the SBA clarified that costs attributable to the business operations of tenants or sub-tenants of a PPP borrower or, for household expenses of home-based businesses, do not qualify for forgiveness. However, rent payments to a related third party are eligible for loan forgiveness under certain conditions. The IFR takes effect upon publication in the Federal Register. Comments on the provisions are due within 30 days.
Federal agencies and CSBS to hold webinar on PPP
On August 20, the FDIC, Federal Reserve Board, OCC, NCUA, and the Conference of State Bank Supervisors announced that a webinar will be held with SBA officials discussing the loan forgiveness process and recent changes in the Paycheck Protection Program on Thursday, August 27 from 11:00 a.m. to 12:00 p.m. (EDT). Participants must preregister for the webinar and are encouraged to email questions in advance to asktheregulators@stls.frb.org. An archive of the webinar materials will be available here, a few hours after the webinar ends.
District court: Lender does not owe PPP fees to accountant without contract
On August 17, the U.S. District Court for the Northern District of Florida dismissed an action alleging an accounting firm is entitled to a portion of the fees paid by the Small Business Administration (SBA) to lenders making loans under the Paycheck Protection Program (PPP). According to the order, an accounting firm filed an action against a lender alleging the lender did not pay “agent fees” reportedly due to it under the PPP. The accounting firm argued that the PPP and its implementing regulation require lenders to pay agent fees “irrespective of whether there is an agreement between the agent or borrower and the lender to do so.” Moreover, the accounting firm asserted the fees were required based on “equitable principles [] under state common law,” because the lender was “aware of and benefitted from the work [the accounting firm] did on the borrowers’ PPP loan applications.”
The district court dismissed the action, concluding that the CARES Act—which created the PPP—and its implementing regulation do not “require lenders to pay the agent’s fees absent an agreement to do so.” According to the court, the CARES Act establishes a ceiling on fees an agent may collect in preparing an application for a borrower and the applicable interim final regulation (IFR) “simply explains that, if an agent is to be paid a fee, the fee must be paid by the lender from the fee it receives from the SBA.” The court noted that the SBA’s existing Section 7(a) lending requirements establish that fees charged by an agent require a “compensation agreement” to be provided to the SBA, and because these existing Section 7(a) program requirements “do not conflict with the IFR, they apply to agents who assist borrowers in obtaining loans under the PPP.” Because there was no contractual agreement between the parties, the court concluded that the financial institution had no legal obligation to pay the accounting firm agent fees. Lastly, the court rejected the state common law claims, concluding that the accounting firm did not establish that it directly conferred a benefit on the financial institution, noting that the SBA fees were “merely an incidental benefit of [the accounting firm]’s work for the borrowers.”
SBA issues new PPP FAQs and clarifies appeals process
On August 11, the Small Business Administration (SBA) updated the Paycheck Protection Program (PPP) FAQs to include two new questions clarifying that (i) payment or nonpayment of fees of an agent or other third party will not affect the guarantee of a PPP loan or the SBA’s payment of lender fees; and (ii) vision and dental benefits are included in the payments required for the provision of group health care benefits. The SBA also published three new FAQs on PPP loan forgiveness, addressing PPP loan forgiveness when the borrower has also received an Economic Injury Disaster Loan (EIDL) advance. Additionally, the SBA issued a new interim final rule, which informs 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.
SBA issues new FAQs on forgiving PPP loans
On August 4, the Small Business Administration (SBA) issued new FAQs on Paycheck Protection Program (PPP) loan forgiveness. The FAQs note that borrowers and lenders may rely on the FAQs as the SBA’s interpretation of the CARES Act, the Paycheck Protection Program Flexibility Act (Flexibility Act), and all of the Paycheck Protection Program Interim Final Rules (available here). The FAQs cover various topics including (i) general loan forgiveness; (ii) loan forgiveness of payroll and nonpayroll costs, and types of costs that constitute payroll and nonpayroll costs; and (iii) loan forgiveness reductions. For continued InfoBytes coverage on PPP loan forgiveness see here.
Louisiana Office of Financial Institutions extends relief provided to state-chartered financial institutions
On July 24, the Louisiana Office of Financial Institutions issued an emergency declaration continuing relief previously provided to Louisiana-chartered financial institutions, as provided in an earlier declaration previously covered here. Among other things, the declaration extends parity granted to loans made under the Main Street Lending Program established by the Federal Reserve System and loans made under the Small Business Administration's Paycheck Protection Program. The declaration also extends relief relating to temporary branch office closures, relocations, reduced operations, and annual meetings.