Did the PPP Create Class Action Liability for Banks?

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The federal government has a history of assisting businesses when a crisis occurs, but one of its latest interventions may have created risk for bank partners providing aid.

Most recently, the CARES Act’s Paycheck Protection Program, commonly called PPP, helped businesses affected by Covid-19 by providing forgivable loans if, among other things, a company used the funds for “payroll costs, interest on mortgages, rent, and utilities” and used at least 60% of the amount forgiven on payroll. The program’s rocky rollout came during an extremely turbulent time, so it should surprise no one that disgruntled applicants and agents have filed a series of class action lawsuits with similar patterns of claims and allegations.

The first PPP class action lawsuits were filed against Bank of America Corp. and Wells Fargo & Co. in early April. In both cases — Profiles v. Bank of America Corp. and Scherer v. Wells Fargo Bank — the plaintiffs alleged the banks improperly restricted access to PPP loans to customers with a pre-existing banking relationship. Per this theory, the banks favored established, pre-existing clients in order to receive larger fees from larger loans at the expense of new customers.

Critically, in Profiles, the district court denied the plaintiffs’ motion to enjoin Bank of America from imposing eligibility restrictions. Specifically, the court held that no express or implied private right of action exists under the PPP, and that only the Small Business Administration could file a civil suit for alleged violations of the PPP. The district court determined the alleged conduct was allowed, stating “[t]he statutory language does not constrain banks such that they are prohibited from considering other information when deciding from whom to accept applications, or in what order to process applications it accepts.”

Recognizing issues with asserting claims directly under the CARES Act, another group of class action plaintiffs brought claims under state law theories in separate cases against Bank of America, JPMorgan Chase & Co, U.S. Bancorp and Wells Fargo in California federal court. These plaintiffs assert that the banks prioritized applications for large loans to generate higher fees in violation of California’s Unfair Competition and False Advertising Laws and engaged in common law fraudulent concealment. The law firms that led the California class actions have filed suits under similar theories in New York against JPMorgan.

Utilizing different theories, class plaintiffs in California argue lenders are failing to process PPP loan applications on a first-come, first-served basis, as purportedly expected by the SBA. In Outlet Tile Center v. JPMorgan Chase & Co, the plaintiffs claimed Chase solicited applications from more-favored clients, making it impossible for the others to obtain loans. Even though there is no express requirement applications be processed on a first-come, first-served basis, plaintiffs claim they gave up opportunities to get loans from institutions that took applications as they came because of their pending applications with Chase. Suits employing this theory were also filed in New York, Illinois and Texas. 

Espousing novel-market theories under the Sherman and Clayton Acts, plaintiffs in Legendary Transport v. JPMorgan Chase & Co. allege lenders conspired to only provide PPP loans to their larger clients as a way to “protect their market share and to limit competition” with respect to PPP funds. That suit also accuses JPMorgan of negligence and misrepresentation in connection with its PPP application process.

Finally, loan seekers are not the only class action plaintiffs seeking relief. Parties purporting to be agents assisting clients with applying for PPP loans are also seeking compensation. Cases in Florida and Ohio assert, despite CARES Act fee requirements, agents including accountants, attorneys, consultants and loan brokers who helped businesses prepare and submit applications are not being paid. These suits allege banks are not properly processing agent fees, intentionally failing to process loans that refer to an agent and/or directing applicants to online portals that do not allow customers to designate an agent.

All of these suits are still in their early stages, and some may be abandoned now that additional PPP funds have been made available and named plaintiffs may have received funds. Nonetheless, class action theories and new targets will evolve and emerge over time. In defending these suits, banks will likely rely upon “no private right of action” rulings, the lack of specific process requirements (as opposed to statutory guidance) and, in cases when only state law actions are pled, federal preemption. Importantly, financial institutions that evaded the first strike of class action litigation should prepare for future attacks utilizing the same or very similar theories of liability.

CFPB Takes Aim at Class Action Waivers in Arbitration

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arbitration-11-30-15.pngOn October 7, 2015, the Consumer Financial Protection Bureau (CFPB) announced that it is considering proposing rules that would prohibit companies from including arbitration clauses in contracts with consumers. This would effectively open up the gates to more class action lawsuits in consumer financial products such as credit cards and checking accounts.

In March 2015, the CFPB released its Arbitration Study: Report to Congress 2015, which evaluated the impact of arbitration provisions on consumers. The CFPB conducted the study as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the study concluded that:

  • arbitration clauses “restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits;”
  • most arbitration provisions include a prohibition against consumers bringing class actions;
  • very few consumers individually pursue relief against businesses through arbitration or federal courts; and
  • more than 75 percent of consumers in the credit card market did not know if they had agreed to arbitration in their credit card contracts.

The advantages and disadvantages of pre-dispute arbitration provisions in connection with consumer financial products or services—whether to consumers or to companies—are fiercely contested. Consumer advocates generally see pre-dispute arbitration as unfairly restricting consumer rights and remedies. Industry representatives, by contrast, generally argue that pre-dispute arbitration represents a better, more cost-effective means of resolving disputes that serves consumers well. With limited exceptions, however, this debate has not been informed by empirical analysis. Much of the empirical work on arbitration that has been carried out has not had a consumer financial focus.

As a result of the study, which allegedly contains the first empirical data ever undertaken on the subject of arbitration clauses, the CFPB is currently considering rule proposals that would:

  • ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts, unless and until the class certification is denied by the court or class claims are dismissed by the court;
  • require companies that use arbitration clauses for individual disputes to submit to the CFPB all arbitration claims and awards (which the CFPB may publish on its website for the public to view) so that the CFPB can ensure that the process is fair to consumers and determine whether further restrictions on arbitrations should be undertaken; and
  • apply to nearly all consumer financial products and services that the CFPB regulates, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.

Critics have found the CFPB’s data and conclusions leave something to be desired. An abstract of a report authored by researchers at the University of Virginia School of Law and Mercatus Center at George Mason University finds that the CFPB report “contains no data on the typical arbitration outcome—a settlement—and it is these arbitral settlements, and not arbitral awards, that should be compared to class action settlements. It does not address the public policy question of whether, by resolving disputes more accurately on the merits, arbitration may prevent class action settlements induced solely by defendants’ incentive to avoid massive discovery costs. It shows that in arbitration, consumers often get settlements or awards, are typically represented by counsel, and achieve good results even when they are unrepresented. In class action settlements, CFPB reports surprisingly high payout rates to class members and low attorneys’ fees relative to total class payout. These aggregated average numbers reflect the results in a very small number of massive class action settlements. Many class action settlements have much lower payout rates and higher attorneys’ fees.”

Needless to say, businesses with arbitration clauses prohibiting class actions wait anxiously for CFPB’s final rules on this subject matter. Is there any doubt what the final rules will contain? We think there will be restrictions on the use of arbitration clauses that prevent consumers from initiating class action lawsuits in contracts for consumer financial products or services.