The Paycheck Protection Program was supposed to help struggling small businesses weather pandemic fallout, but many business owners claim they were sidelined by big banks instead.
Business Insider found that at least five separate class action lawsuits have been filed in federal court against banking giants including JPMorgan Chase, US Bank, Bank of America, and Wells Fargo. Another class-action suit omits US Bank and names CitiBank instead.
Five of the lawsuits usesimilar language, arguing that the banks "prioritized corporate greed" in how they allocated millions in government relief funds meant for small businesses. And the sixth alleges anticompetitive behavior by four major banks.
Business Insider looked at the court documents and the loan program's data, and spoke to key players to find out how the lawsuit claims matched up with where the loans ended up.
A government lifeline was supposed to help struggling small businesses weather mandated closures, employee layoffs, and plummeting revenues. But several reports have emerged to suggest that the big chains and corporations have gobbled up too much of the available cash, leaving crumbs for the businesses that needed it most.
Now some small businesses are saying big banks limited access to these government funds — and they're suing over it.
Business Insider has located five lawsuits seeking class-action status that were filed in federal court that allege banking giants including JPMorgan Chase, Bank of America, US Bank, and Wells Fargo "prioritized corporate greed" to allocate millions in government relief funds meant for small businesses to companies with more than 500 employees. A separate class-action suit brings antitrust claims, arguing that JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo "limit[ed] their applications under the PPP to existing customers in order to protect their market share and to limit competition with one another."
Representatives from JPMorgan Chase and Wells Fargo declined to comment on the case itself, and both said the banks are working as quickly as possible to help small business customers, given the timing and regulatory constraints.
"The vast majority of the PPP loans Chase secured went to our smaller business clients," the JPMorgan Chase representative told Business Insider in an email.
Wells Fargo cited an increased effort to smooth out the PPP process: "We have mobilized thousands of employees and launched new technology to better assist customers seeking assistance via the Paycheck Protection Program."
A Bank of America representative said the company disputes the allegations of the case made in California. For the case filed in Maryland, the bank filed an opposition to a temporary restraining order, and the judge rejected the plantiffs' request for relief.
US Bank and CitiBank did not immediately respond to requests for comment.
BI looked at the data on where the loans went, and spoke to key players involved, to see how those claims match up with what happened.
Where did all the loans go?
The Small Business Administration released a report showing how the $349 billion in the first round of funding was allocated by state, industry, and lender. Of the 1.6 million loans allocated before funding ran out, the average dollar amount was $206,000.
Businesses in Texas received the highest number of individual loans, at 134,737 approved, while California received the most in total funding, at more than $33 billion.
Professional, scientific, and technical services received the highest number of individual loans, at 208,360 approved. The construction industry received the most in total funding at more than $44 billion.
JPMorgan Chase lent more than any other bank, allocating $14 billion in PPP loans.
Lending Tree surveyed 1,260 small business owners and found that while 60% applied for funding, just 5% of business owners received a PPP loan.
Big banks sought bigger loans and shut smaller applicants out
When the Paycheck Protection Program opened on April 3, Bank of America was one of the first lenders to begin accepting applications. But on day one, it wouldn't accept applicants who weren't already active borrowers at the bank. This special restriction contradicted the CARES Act, which stated that loans would be processed on a first come, first serve basis. On day two, the banking giant amended this restriction to include preexisting customers as long as they did not have a credit or lending relationship with another bank. But a restriction remained, still contrary to the CARES Act.
A Bank of America spokesperson noted that its application of the CARES Act has been allowed by federal District Court Judge Stephanie Gallagher. "BofA has made a compelling argument that prioritizing existing borrowers will expedite the processing of loan applications," Judge Gallagher wrote, while also noting that "Given the plain statutory language, the Court is not at liberty to impose further limitations on lenders."
The lone class-action suit found by Business Insider that brings antitrust claims in this matter noted that the four major banks — Bank of America, JPMorgan Chase, CitiBank, and Wells Fargo — not only announced that applicants would have to be existing clients to qualify, but that they timed their announcement "at or around the same time." The lawsuit further argues that the four banks agreed to limit their applications under the PPP to existing customers in order to protect their market share and to limit competition with one another with respect to the $349 billion PPP fund.
The law firm Rifkin Weiner Livingston filed one of the class-action lawsuits against Bank of America for denying qualified small businesses access to PPP loans. In the complaint, obtained by Business Insider, the firm stated that Bank of America "privileged discriminatory policies of corporate greed over the needs of America's small businesses."
The firm's managing partner, Alan Rifkin, told Business Insider that many customers who had long-standing relationships with Bank of America were "gated" out of the federal program. Rifkin said Bank of America's defense in this case was that businesses could find another bank to approve their loans.
"The money was going and draining fast," Rifkin said. "And a small business owner was being told by its own bank, 'Go pound the pavement, go find another bank. Good luck in the midst of a pandemic.'"
Lawsuits allege discrimination against the little guy
The lawsuits allege that lenders prioritized preexisting borrowers as well as applying companies with higher payrolls, which would lead to larger loans to maximize loan origination fees, or the processing fee lenders receive from the government. Whether this prioritization was intentional or unintentional is a point of contention.
JPMorgan told CBS that the bank processed loans on a first come, first serve basis as required by the CARES Act, but that some divisions of the bank processed PPP loans for their own clients. When Business Insider asked a representative from JPMorgan to elaborate on this comment, they referred us to an FAQ on its website that explains each division of its business: business banking funded around 18,000 loans; other divisions that serve different businesses, including commercial banking, dealer commercial services, and the private bank, all combined funded roughly 8,500 loans.
"Business banking, Chase's bank for our smaller business customers, processed loan applications generally sequentially, understanding that a given loan may take more or less time to process," the page reads.
Some applicants say banks have used the program as a way to shore up their relationships with big companies, ignoring the clients who needed the funding most. An Associated Press investigation found at least 75 publicly traded companies received a combined $300 million in PPP loans. Eight of those companies received the maximum amount available, $10 million.
After the hotel and restaurant industries successfully lobbied to be included in the PPP program, at least six restaurant chains with more than 1,000 employees received more than $80 million in coronavirus relief loans. These chains were able to qualify because the bill said eligible businesses must have no more than 500 employees at any one location. After backlash, burger chain Shake Shack returned its $10 million PPP loan, while two subsidiaries of Ruth's Hospitality Group, the owner of Ruth's Chris Steak House, held onto $10 million each.
Critics say the program exacerbated racial bias
Apart from the legal claim that banks discriminated based on company size, other critics have claimed that there's another layer of racial bias.
Minority business owners already have statistics to point to, showing they face a tougher time obtaining small business loans, including large disparities in access to capital and higher interest rates on the loans they do receive, according to a report by the Minority Business Development Agency.
One study showed that businesses owned by people of color were cut out of the last $349 billion stimulus because they are less likely to have existing relationships with banks or SBA lenders. A study by the Center for Responsible Lending said 95% of black-owned businesses and 91% of Latino-owned businesses had a lower change of receiving a PPP loan through a mainstream bank or credit union. The study also said that banks are lending to firms that have larger payrolls than most minority-owned businesses have.
Among these critics is Senate Minority Leader Chuck Schumer, who told CNN's "State of the Union" in an interview Sunday that smaller businesses and those without a robust history of credit, or the "unbanked," had a harder time getting loans in the last round of PPP funding.
The government's next round of relief funding will include $60 billion for small lenders, of which half is allocated to institutions dedicated to minorities and disadvantaged communities. But that $60 billion is a relatively small amount when compared to the $320 billion in that bill allocated for small businesses.
Precious funds went to essential businesses, public companies, and firms struggling before the pandemic
The PPP program doesn't require applicants to prove financial impact directly from coronavirus, only asking the applicant to certify that current economic uncertainty makes their loan request necessary.
According to the AP investigation, several companies who received PPP loans were experiencing financial turmoil long before the coronavirus slammed the US economy. The AP found that 25% of the publicly traded companies who received PPP loans, such as Helius Medical Technologies and Enservco Corp., had warned investors of questionable viability months ago. And some companies' stocks, such as Wave Life Sciences USA Inc., were already performing poorly before coronavirus caused a national crash.
Entrepreneur, investor, and Columbia University instructor Nathalie Molina Niño told Business Insider that original legislation for the PPP could have incentivized banks to prioritize businesses with the biggest need. Instead, she views banks' cherry-picking of existing lending relationships as code for "no people of color," based on historical lending data.
"The majority of the PPP money went to a category of business that frankly shouldn't have been included at all because the whole idea was to focus on people that were most severely impacted by COVID," Molina Niño said.
For example, construction companies have been deemed essential businesses, yet they received the most funding of any industry. "The fact that construction companies as a category are even in there is problematic and goes against the spirit of what they're trying to do," she said.