Lenders Face Uncertain Legal Risks Amid PPP Fraud Investigations

Source: American Banker

As the number of investigations into Paycheck Protection Program loan fraud grows, experts are split on whether the first-ever penalty against a participating bank is likely to be the start of a trend.

In September, Houston-based Prosperity Bank reached a settlement that federal prosecutors touted as the first of its kind with a PPP lender.

Some experts saw the settlement as a rare example of a bank that lowered due diligence standards to quickly approve a PPP loan application.

But others said the case may be part of a pattern of scrutiny of the role that lenders played in disbursing around $800 billion in federal funds to help stimulate a shuttered pandemic-era economy. These observers say such cases could prove to be expensive for banks even if they do not ultimately result in large penalties.

In just the first 14 days of the PPP, the U.S. Small Business Administration disbursed $343 billion to applicants through private-sector lenders. Since then, there is growing evidence that a substantial percentage of the applications were fraudulent.

In June, DOJ Inspector General Michael Horowitz said in congressional testimony that an estimated 10% of funds disbursed under the PPP and another pandemic-era program for small businesses, the Economic Injury Disaster Loan program, did not conform with income eligibility requirements. In August, President Biden signed legislation extending the statute of limitations to pursue PPP fraud cases.

The PPP contained certain legal protections for lenders, and some experts argued that the government will have to meet a high standard to show that banks and fintechs engaged in wrongdoing.