With the passage of the CARES Act in late March 2020 and the subsequent rollout of the Paycheck Protection Program (PPP), the COVID-19 pandemic is bringing a new species of class action litigation to the country’s largest banks. This litigation will likely soon spread to smaller regional and local banks.

The PPP is a federally funded loan program included in the CARES Act, designed to incentivize employee retention during the COVID-19 pandemic by providing small businesses with loans to meet payroll obligations. Substantial loan forgiveness is available to borrowers who use the funds to meet employee-retention objectives. While the CARES Act initially designated $349 billion for PPP loans, those funds were depleted by April 16, 2020, leaving many small businesses with little choice but to scale back operations, lay-off employees and, in many cases, close.

Though the initial $349 billion designated for PPP loans was gone in just over two weeks, an additional $320 billion was designated for the program on April 24, 2020. Banks began processing the second round of applications on April 27, 2020. With demand for these PPP funds at an apex, it is reasonable to expect that some small businesses unable to secure a PPP loan in this round or the first one, may pursue the litigation approach to capital infusion. 

In fact, some of these small businesses are now alleging misconduct on the part of lenders who processed PPP loan applications and received loan origination fees for their work. In one of the first of these class action lawsuits, plaintiff Shiny Strands, Inc. filed a class action complaint against the nation’s largest bank, JPMorgan Chase & Co. (JPM), alleging the bank prioritized processing applications from select clients and for higher-value loans, rather than processing the PPP loan applications on a first-come, first-served basis. See Shiny Strands, Inc. v. JPMorgan Chase & Co., Case No. 20-cv-02547 (N.D. Ill. Apr. 27, 2020). The plaintiff alleges that, because origination fees are calculated as a percentage of loan principal, such alleged re-ordering purportedly enabled JPM to maximize its own revenues at the expense of the small businesses in direst need of funds. 

Based on purported advertisements and other communications stating loans would be processed on a first-come, first-served basis, the plaintiff in the JPM action has alleged violations of various Illinois consumer protection and consumer fraud statutes, including a false advertising claim. Minnesota, Indiana, Ohio and Kentucky, among other states, have similar consumer protection legislation, and any class actions venued in those states would likely be based on such statutes. Moreover, as of this writing, Bank of America, Wells Fargo and U.S. Bank have also been targeted with class actions involving similar claims related to each bank’s administration of PPP applications.

The aspects of the already-filed and yet-to-be-filed class actions bear similarities to previous class action lawsuits against lenders for, among other things, mortgage origination practices and overdraft/non-sufficient funds fee practices. Taft’s Lending and Finance and Commercial Litigation practice groups have substantial experience in defending against these types of lender-targeted claims and lawsuits. 

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.