As the number of investigations into fraud in the Payment Protection Program increases, experts are divided on whether the first penalty for a participating bank should start to appear.
In September, Prosperity Bank in Houston reached a settlement that federal prosecutors called the first of its kind with a PPP lender.
Some experts saw the settlement as a rare example of a bank lowering standards in an effort to quickly approve a PPP loan application.
But some said the case was part of an investigation into lenders’ efforts to pay $800 billion in federal funds to help the economy during the pandemic. . According to these analysts these cases prove to be costly for the banks even if they do not end up with huge penalties.
Prosperity, a subsidiary of Prosperity Bancshares, was accused of approving a $213,400 loan to a doctor who bank employees knew was facing criminal charges. Criminal charges, related to prescribing opioid medication, made the doctor ineligible for PPP funding.
The Justice Department said Prosperity was not entitled to the $10,670 processing fee it received. The $37.8 billion real estate bank agreed to pay nearly $18,670 for allegedly violating the False Claims Act.
“While the penalty for Prosperity Bank is small,” said Kevin Toomey, a financial services attorney at Arnold & Porter, “it’s not usually the penalty but the investigation that can be very costly and disruptive.”
Toomey said the Prosperity case would mark the beginning of a wave of lawsuits against lenders who have lowered their due diligence standards during the rush to issue PPP loans.
The DOJ’s decision to invoke the False Claims Act shows that the government “has many tools, different legal standards, to go after bad actors,” Toomey said.
A spokesman for Prosperity did not respond to a request for comment. The DOJ said in a press release that the settlement amount reflects the bank’s cooperation and compliance with its obligations.
In just the first 14 days of the PPP, the US Small Business Administration awarded $343 billion to applicants from public lenders. Since then, evidence is growing that a high percentage of applications are fraudulent.
In June, DOJ Inspector General Michael Horowitz said in congressional testimony that 10% of the money provided under the PPP and another program of epidemics for small businesses, the Economic Property Loan program, which does not meet the eligibility requirements. In August, President Biden signed the law delay statute of limitations to pursue PPP fraud cases.
The PPP includes some legal protections for lenders, and some experts have said the government must meet a high standard to prove that banks and financial technology are doing wrong.
“The whole point is to get money out,” said Timothy McInnis, a former assistant U.S. attorney who runs a legal service for PPP fraudsters. “Given the nature of what the SBA is trying to do, and the great freedom they’ve given to banks and lenders, I think the legal risk is at the higher end of the scale to proving ignorance of the idea or lowering the standards of fair practice.”
Prosperity’s settlement is a “very rare case” of a PPP lender facing legal sanctions, McInnis argued.
At least one other PPP provider — Kabbage, which filed for bankruptcy protection but continues to work with creditors under the KServicing brand — has reportedly faced a Justice Department investigation under the False Claims Act. A company spokesman declined to comment.
David Snitkof, former head of analytics and data strategy at Kabbage, which sold shares to American Express before the bankruptcy filing, said the federal government’s guidance to lenders is different the difference in the early days of the epidemic. But he said the basic principle of distributing the money has not changed.
“You can’t turn back the clock,” said Snitkof, who is head of analytics at document technology firm Ocrolus. “The most important thing for a lender now is to maintain a good audit trail for all credit decisions made.”
Lenders and fraudsters “saw a cash cow” in the PPP, said Peter Brill, a lawyer who handled the defense related to the PPP’s alleged fraud. “There’s too much wrong to go around,” he said.
Under normal circumstances, loan officers should let lenders know that certain loan applications are red flags, Brill said. He said that some of the PPP candidates do not have business leadership experience and he said that some of the candidates have no geographical connection to their stated businesses.
“In the rush to generate revenue, the decision was made to limit what was needed to be done more than was necessary,” Brill said. “You’d think, if the banks had the time and the opportunity, they should be able to look into this.”