US banks sweat regulatory exposure of pandemic loans
BOSTON / NEW YORK / WASHINGTON (Reuters) – Banks that facilitated the U.S. government’s paycheck protection program initially saw the effort as a small revenue accelerator with a patriotic bonus, securing $ 525 billion loans to businesses slammed by the fallout from the COVID-19 pandemic.
But as taxpayers begin to bear the cost of canceling these loans, lenders like JPMorgan Chase & Co, Wells Fargo & Co, and Bank of America Corp, are bracing for what will likely be years of regulatory oversight for their businesses. role in distributing money, according to industry insiders, securities deposits and government watchdogs.
“The feeling of anxiety is high,” said Vivian Merker, management consultant for financial services companies at Oliver Wyman in New York. “They are bracing themselves for years of demands from regulators and there is always a reputational risk of PPP fraud even though they have done everything they can to follow the rules of the program.”
Banks participating in the Paycheck Protection Program (PPP) have issued more than 5.2 million loans, to be repaid by the government as long as borrowers demonstrate financial need and have used most of the money to carry out the payroll.
Fraud by borrowers emerged almost as quickly as the program, overseen by the Small Business Administration (SBA), began in April. The Justice Department has so far laid charges against 82 people in 56 cases for about $ 250 million in loans, according to a review by Project On Government Oversight.
So far, the burden on lenders has been mainly administrative. A senior lawyer who advises major banks on compliance matters said clients respond to as many as 20 police subpoenas per week, producing documents and making employees available for interviews.
However, there is growing concern that lenders themselves face legal challenges regarding P3s, already leading to internal compliance reviews, investor warnings and even outright sale of loan portfolios, according to reports. public statements and people familiar with the situation.
At least four banks have warned investors in documents filed by shareholders about the regulatory and legal risks of PPPs. Bank of America, for example, said in a July filing that its participation in government stimulus programs “could result in reputational damage and government actions and procedures, and has resulted, and may continue to result, in litigation,” including class actions ”.
“We are fully cooperating with government investigations,” said Bill Halldin, spokesperson for Bank Of America.
Among the possible dangers, experts pointed to potential violations of the program’s first-come, first-served enforcement rules, putting minority and women-owned businesses at a disadvantage; maintain adequate documentation, especially for loan forgiveness requests; and by following broader “know your customer” rules, which could have detected more fraud.
Congress passed the Cares Act’s $ 2.2 trillion bailout in March, which included nearly $ 350 billion in P3 loans, with the pot subsequently rising.
Under pressure to get the money out quickly, banks were initially worried about taking too much responsibility, even though they had to charge up to 5% origination fees and 1% interest payments on loans. guaranteed by the government. The lenders got a promise from the government that they would not be held accountable if borrowers broke the rules of the program.
An October Congressional report found that several lenders, including JPMorgan, PNC Financial Services Group Inc and Truist Financial Corp, were processing larger PPP loans for high net worth clients at two to four times the speed of small loans for high net worth clients. small businesses most in need.
He also said that some banks are limiting their PPP loan programs to existing customers.
The move, according to the report, had a disproportionately negative effect on women-owned and minority-owned businesses because they are less likely to have pre-existing banking relationships, according to data from the U.S. Federal Reserve. Depending on the circumstances, policies that harm these “protected” groups – even inadvertently – can break fair lending rules.
Citing an internal presentation from April, the report states that Citigroup identified the negative effect on these businesses as a possible compliance risk, but decided to initially prioritize existing customers as demand was high and required less intervention. manual. Citi declined to comment.
A spokesperson for Truist said it was processing PPP requests through a single portal on a first come, first served basis, “with no preference for larger or more affluent customers.”
JPMorgan declined to comment. PNC did not respond to requests for comment.
Banking groups pushed back the House report. The Consumer Bankers Association said lenders have been denied waivers that would have made lending easier to new borrowers, and larger borrowers have dedicated staff and documentation to expedite their applications.
“When Congress, the SBA, and the Treasury designed the Paycheck Protection Program, they prioritized money in the hands of small businesses very quickly, issuing confusing and shifting operational and legal guidance for banks, “said Greg Baer, CEO of the Bank Policy Institute.
REVIEW OF PPP LOANS
People familiar with the situation say that virtually all of the major PPP lenders, including JPMorgan, Citi, Truist and KeyBank, have performed standard internal reviews to detect violations by their own employees of the program’s rules.
“As we participate in efforts to make critical government stimulus packages available … we continue to run our checks to identify, process and report fraud,” a Truist spokesperson told Reuters by email.
KeyBank declined to comment.
Wells Fargo said in a May filing that it had received “formal and informal inquiries from federal and state government agencies regarding its P3 loan offer.”
Wells Fargo spokesman Manny Venegas said the file referred to regulators’ industry-wide investigations into PPP fraud, which the bank had made efforts to spot and report. He declined to say whether the investigations also involved employees or banking processes.
Regulators have signaled that there is much more to come. The SBA plans to review PPP loans over $ 2 million and its Inspector General recently said there were “strong indicators of widespread potential abuse and fraud.”
A recent analysis by the United States House of Representatives committee found that tens of thousands of PPP loans could be subject to fraud, waste or abuse, including over $ 1 billion in loans multiple to the same company, a violation of the rules of the program.
James Stevens, an attorney who advises lenders at Troutman Pepper in Atlanta, said banks were doing their best to provide money to needy small businesses, but the rapidly changing program rules were creating “fertile ground.” for fraud and internal errors.
“The regulatory review of banks is always retrospective,” Stevens said. “It will come.”
Report by Lawrence Delevingne in Boston, Koh Gui Qing in New York and Michelle Price in Washington. Editing by Tom Lasseter and Nick Zieminski