In a flurry of new class actions filed on behalf of unhappy small business owners, banks are facing suits alleging they unlawfully prioritized processing large loans under the Paycheck Protection Program (PPP) over smaller ones. Two parallel class actions were filed on April 19, 2020 and April 20, 2020 in California federal court accusing two large banks of reshuffling loan applications instead of processing them on a first-come, first-served basis to purportedly maximize the banks’ profit from the federal loan program. Another similar class action was filed in state court in Texas. The class plaintiffs include a frozen yogurt shop, an auto body shop and a flooring company among others.

The plaintiffs contend, rather than process the applications on a first-come, first-served basis as allegedly required by the SBA, the banks front-loaded applications for the largest loans because those loans resulted in larger origination fees to the bank.

Specifically, the plaintiffs in the California cases assert claims under the California Unfair Competition Law, and allege claims including misrepresentation, false advertising, contractual interference and unfair business practices against the banks. In one of the complaints, the plaintiffs contend “[i]t was the express intent of the US Senate and Congress in passing the CARES Act that the funds be used to support small businesses, particularly rural businesses, veteran owned businesses, woman owned businesses, and businesses owned by socially and economically disadvantaged persons.” Yet, the plaintiffs contend, rather than process the applications on a first-come, first-served basis as allegedly required by the U.S. Small Business Administration (SBA), the banks front-loaded applications for the largest loans because those loans resulted in larger origination fees to the bank. The plaintiffs cite to data by the SBA showing that one of the banks processed loan applications for $150,000 and less at twice the rate of larger loans in the final three days before the program ran out of funds. The plaintiffs contend had the applications been processed as required, the percentage change of applications submitted in the final days of the program would be consistent among all application types.

One of the California complaints goes so far as to seek return of the profits earned by the bank and seeks to rewrite the SBA rules to remove incentives for financial institutions to prioritize larger loans over smaller ones. It is uncertain whether the class plaintiffs will be afforded any relief by the courts. Nonetheless, as more small businesses are faced without relief under the PPP banks can expect to see more claims like these.

Balch & Bingham is monitoring these cases closely and will report on future developments. Among many others, the cases include BSJA, Inc. et al. v. Wells Fargo & Co et al., Case No. 2:20-cv-03588 and Outlet Tile Center v. JPMorgan Chase & Co. et al., Case No. 2:20-cv-03603 in the United States District Court for the Central District of California and Kennard Law PC, on Behalf of Itself and All Others Similarly Situated v. Frost Bank, Case No. 2020-24432 in the Harris County District Court in Texas. Please contact Gregory C. Cook if you have questions.