PPP Oversight Efforts May Impact Lenders

June 25, 2020

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PPP Oversight Efforts May Impact Lenders

Recent press coverage concerning transparency and oversight with respect to the Paycheck Protection Program (“PPP”) has largely focused on PPP borrowers and the ability of Congress and federal inspectors general to obtain PPP borrower data from the Small Business Administration (“SBA”).  The SBA has announced that it will release certain information about the loans PPP lenders issued.  However, given limitations on the information that will be disclosed, Congress and federal inspectors general may also seek detailed PPP borrower and other information directly from lenders.  The latter scenario could lead to requests for PPP lenders to provide data and respond to pointed questions.  This memorandum outlines issues which lenders may wish to consider in anticipation of such information requests.

Treasury Secretary Steven Mnuchin surprised many on June 10, 2020, when he stated that details about PPP borrowers and their loans was “proprietary” and “confidential,” and would not be disclosed.1 This surprised many PPP borrowers because the SBA PPP loan application states that borrower information will be “automatically released.”2  However, after several congressional leaders urged the SBA to provide greater transparency, the SBA and the Treasury Department agreed on June 19, 2020, to make certain PPP loan data public.  Specifically, for PPP loans of $150,000 or more, the SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs supported and loan amount ranges.3  The SBA estimates that this will account for nearly 75 percent of the loan dollars approved.

While the practical effects of the SBA’s announcement remain uncertain, PPP lenders should consider how to prepare for questions and scrutiny about the criteria and the processes they used to award the loans.  Questions might come from Congress, inspectors general, regulatory agencies, law enforcement agencies, investigative journalists, or the public.  Outlined below are key areas of likely questions and potential risks lenders may wish to consider.

1.   Lenders should consider whether they have put in place systems, policies, and procedures that adequately respond to recently issued SBA regulations and guidance.

Since the inception of the PPP, the SBA has issued a dozen Interim Final Rules and 48 FAQs.  Many of the rules and FAQs significantly alter lenders’ previous understandings of their responsibilities under the PPP.  Lenders should consider how effectively they have distilled the SBA’s rules and guidance into systems, policies, and procedures that are compliant with the SBA’s expectations.

In particular, lenders may wish to evaluate the SBA’s June 1, 2020 Interim Final Rule, which details the level of review that the SBA expects lenders to conduct on PPP borrowers’ applications for forgiveness.4  Lenders may also want to consider whether they carried out an appropriate level of review of PPP borrowers’ initial applications, and whether the advice lenders gave to applicants concerning PPP loan eligibility and allowable uses of loan proceeds was, and remains, correct under the SBA’s rules and guidance.

It is notable that under the latest Interim Final Rule, lender processing fees are subject to clawback if a lender has not fulfilled its obligations under the PPP regulations.5

2.   Lenders should expect questions about the locations and demographics of the PPP borrowers which they approved and what steps, if any, each lender took to ensure that PPP loans were issued to small businesses, to borrowers in underserved and rural communities, and to women- and minority-owned businesses.

From the inception of the PPP, numerous questions have arisen about whether the program was benefiting appropriate borrowers.  Public perceptions and the text of the CARES Act and SBA guidance have not always been aligned on who the “right” type of borrower is.6 As a result, lenders may face questions about how, where, and to whom they lent.

3.   Lenders should expect questions about whether they prioritized some PPP applications over others, and if so, how and why.

Early SBA guidance to lenders made clear that lenders were generally not required to conduct new customer identification processes for existing customers who applied for PPP loans.7  This made it less cumbersome and time-consuming for lenders to approve PPP loans to their existing customers.  One question that lenders may be asked is whether they prioritized loans to existing customers to the detriment of applicants who were not existing customers.

4.   Lenders should be aware that scrutiny of their PPP borrowers could lead to questions about whether a lender adequately met its Bank Secrecy Act / Anti-Money Laundering (“BSA/AML”) and Office of Foreign Assets Control (“OFAC”) sanctions obligations.

Lenders were not required to refresh or re-verify the identity of their existing customers, in part on the assumption that each lender had already vetted existing customers in order to comply with BSA/AML and OFAC requirements.

But some lenders’ existing customers may have been vetted years or even decades ago.  Lenders may wish to consider whether their BSA/AML and OFAC programs are currently adequate and up-to-date, and whether the information which they used to conduct due diligence on a specific existing customer remains adequate and up-to-date.

Lenders may also wish to consider whether the BSA/AML and OFAC vetting that they applied to PPP applicants who were new customers was adequate.  This is especially true for lenders that did not have a BSA/AML program (or an agreement to rely on another financial institution’s BSA/AML program) in place prior to issuing PPP loans.8

In addition, lenders may wish to consider, with the benefit of hindsight, whether pressure to disburse PPP loans caused them to cut corners in any of their underwriting, BSA/AML, or OFAC processes.  Similarly, lenders may wish to evaluate whether they are now adequately monitoring their PPP borrowers for suspicious activity, including by reviewing the information in PPP borrower loan applications and applications for loan forgiveness, and the borrower’s financial transactions following loan disbursement.

If any shortcoming is identified, lenders should consider both addressing the shortcoming and potentially disclosing the remedied deficiency to their regulator before a regulatory audit or inquiry occurs.

1   See, e.g., TIME, Names of Small-Business Borrowers From Paycheck Protection Program Won't Be Released, Mnuchin Says (Jun. 12, 2020), https://time.com/5852828/mnuchin-ppp-borrowers-names-secret/; Testimony of Secretary of the Treasury Steven Mnuchin before the U.S. Senate Committee on Small Business & Entrepreneurship, Implementation of Title I of the CARES Act (Jun. 10, 2020), https://www.sbc.senate.gov/public/index.cfm/hearings?ID=C0E44E40-CC47-469C-9404-BE3EB4020AA0, embedded video at 1:23:48 (“as it relates to the names and amounts of specific PPP loans we believe that that’s proprietary information and in many cases for sole proprietors and small businesses is, is confidential information, so the reason why we’re not disclosing the names and individual amounts, unlike in the 7(a) program, is because of that issue.”).

2   U.S. Small Business Admin., Paycheck Protection Program Borrower Application Form, SBA Form 2483 (04/20), https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf (“Information about approved loans that will be automatically released includes, among other things, statistics on our loan programs (individual borrowers are not identified in the statistics) and other information such as the names of the borrowers (and their officers, directors, stockholders or partners), the collateral pledged to secure the loan, the amount of the loan, its purpose in general terms and the maturity.”).

3   Press Release, U.S. Small Business Admin., SBA and Treasury Announce Enhanced Transparency Regarding the Paycheck Protection Program (Jun. 19, 2020), https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-and-treasury-announce-enhanced-transparency-regarding-paycheck-protection-program.

4   U.S. Small Business Admin., Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program—SBA Loan Review Procedures and Related Borrower and Lender Responsibilities § III, 85 Fed. Reg. 33010 (Jun. 1, 2020). 

5   Id at § III.3.c.

6   See, e.g., Cadwalader, Wickersham & Taft, COVID-19 Update: These Are Not the Droids You’re Looking For: The “Wrong” Type of PPP Borrowers May Need to Repay Their Loans or Prepare for an Audit (May 4, 2020, available at https://www.cadwalader.com/uploads/cfmemos/74d4010f9aacae2c09e27632fdaa625d.pdf. 

7   U.S. Small Business Admin., Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program § III.b.iv.I, 85 Fed. Reg. 20811, 20815-16 (Apr. 15, 2020). 

8   Id at § III.b.iv.II.

© Copyright 2020 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume X, Number 174


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Jodi L. Avergun, Cadwalader, Criminal regulatory Matters Lawyer, Foreign Corrupt Practices Attorney

Jodi Avergun’s practice focuses on representing corporations and individuals in criminal and regulatory matters involving, among other things, the Foreign Corrupt Practices Act, securities enforcement, health care, and general white collar matters. Jodi has successfully represented both companies and senior executives in internal investigations, matters before regulatory bodies including the SEC and the U.S. Drug Enforcement Administration, and in civil and criminal matters in federal court. She has also designed and implemented compliance programs for a variety of her...

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Scott Cammarn Financial Law Attorney Cadwalader Law Firm

Scott Cammarn has 28 years of experience in the banking industry and his legal career has spanned all areas of banking compliance and finance law. His practice focuses on regulatory matters, mergers & acquisitions, legislation, transactions, and training. He represents a number of national and international financial institutions and has practiced before the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and numerous state banking departments.

Prior to joining the firm, he was the Bank Regulatory Counsel for Ally Financial (formerly, GMAC Financial Services) where he advised on bank regulatory issues including transactional, examination, compliance, and legislative matters.

Before joining Ally Financial, Scott was the Senior Vice President and General Counsel of LendingTree and served as the Corporate Secretary. At LendingTree, he was responsible for all legal and compliance matters. Prior to joining LendingTree, he served in various legal capacities over his 11 years at Bank of America, including Associate General Counsel, bank regulatory, global marketing and global corporate affairs.

Scott has been selected to The Best Lawyers in America as one of the nation's leading lawyers in Banking and Finance Law as well as in Financial Services Regulation Law. He was also named Lawyer of the Year three times by The Best Lawyers in America, for Banking and Finance Law and for Financial Services Regulation Law.  Additionally, Scott has been consistently recognized as a leading lawyer on the national level in Financial Services Regulation by Chambers USA and named a Rising Star for Financial Services Regulatory by IFLR1000 for the last two years. Scott has also been an adjunct professor at Duke University School of Law, teaching the U.S. Banking Regulation course.  Currently, he is a member of the ABA Business Law Section/Banking Law Committee, a board member of the UNC Banking Law Institute, a Practitioner-in-Residence at UNC School of Law and a board member of Duke’s Global Financial Markets Center. He is a frequent speaker on bank regulatory matters and has provided corporate executive training.

Christian Larson White Collar Defense and Investigations Attorney Cadwalader Washington, DC

Christian Larson is an associate in Cadwalader’s White Collar Defense and Investigations Group. His practice focuses on advising corporations and individuals in connection with financial regulations, internal investigations, and government inquiries. He has extensive experience with U.S. and international anti-money laundering rules and regulations, and related compliance programs. Christian has advised banks, broker-dealers, funds, advisors, securitization parties, cryptocurrency and other money services businesses, national governments, and individuals in relation to the Bank Secrecy Act...

Kendra Wharton, Washington, Associate

Kendra Clayton is an associate in Cadwalader's Washington, D.C. office, where she is a member of the White Collar Defense and Investigations Group. She advises clients in white collar criminal, regulatory, and compliance matters, including alleged violations of the federal securities laws and the Foreign Corrupt Practices Act. Prior to pursuing a legal career, Kendra worked as a legislative aide in the United States Senate.

Kendra received her J.D. from the Georgetown University Law Center, and her B.S., magna cum laude, from the...

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