Compliance Series Recap: The CARES Act Loan Programs Revisited

On August 19, the City Bar hosted the latest webinar in its ongoing Compliance Round-Up: City Bar Series on COVID-19’s Impact on Ethics and Compliance. The webinar—COVID-19 Lending Programs: Latest Developments—revisited the CARES Act loan programs, in particular, the evolving landscape of the two largest programs: the Paycheck Protection Program and the Main Street Lending Program. The City Bar’s Compliance Committee, led by Patrick Campbell of Baker Hostetler and Adam Felsenthal of Great Point Partners, sponsored the webinar. Lanier Saperstein, Jones Day partner and Compliance Committee member, organized and moderated the panel. 

The panel had originally covered the then-nascent loan programs in April, and they decided, as Mr. Saperstein said during the introduction, “to get the band back together.” The panel included the following distinguished speakers: 

• Maria Vullo, former Superintendent of the New York State Department of Financial Services;
• Cristy Irvin Phillips, GC of Check Technologies, Inc. and former Deputy Chief of the Civil Frauds Unit at the SDNY;
• Lisa Ledbetter, Jones Day partner and former official at Treasury, the FDIC, and Freddie Mac; and
• Rebecca Martin, Jones Day partner and former Co-Chief of the Civil Frauds Unit at the SDNY.

Mr. Saperstein kicked-off the discussion by asking the panelists to compare how their predictions from the spring webinar had stacked-up against developments since then. Maria Vullo had correctly predicted that, unlike the 2008 crisis, banks would not be hit with a wave of lawsuits. As Ms. Vullo pointed out, the current crisis was not caused by any financial product or industry. While Ms. Vullo recognized that the loan forgiveness portion of the PPP is slated to begin soon, she continued to predict that we will not see the wave of lawsuits against financial institutions that we saw in the wake of the 2008 financial crisis.

Ms. Vullo noted that over 5 million loans have been made under the PPP with an average loan size of $101,000. She also noted that the PPP landscape has been modified by several interim rules, the most significant of which were codified in the PPP Flexibility Act, enacted on June 5, 2020, amending the CARES Act. Ms. Vullo explained that the PPP Flexibility Act modified several central provisions of the program. It (i) reduced the portion of the PPP loan required to go to payroll from 75% to 60%; (ii) extended the definition of the “covered period” for loan use and eligibility until December 31; (iii) extended the “covered period” for loan forgiveness from 8 to 24 weeks, providing substantially greater flexibility for borrowers to qualify for loan forgiveness; and (iv) implemented a “safe harbor,” providing that, under certain circumstances, a borrower who is unable to rehire a previous employee will not have its loan forgiveness amount reduced based on the reduction of full-time employees. The PPP Flexibility Act, however, left some rules in flux, including those surrounding loan forgiveness and the application process. 

Cristy Phillips then discussed the PPP from the borrower’s perspective, noting that the rules remaining in flux has made it difficult at times to close loans. Ms. Phillips highlighted several well-known businesses that borrowed millions in forgivable PPP loans, yet due to media attention decided to return the loans. Further, Ms. Phillips noted that the DOJ had already initiated a handful of high-profile prosecutions against individuals who fraudulently obtained PPP loans who the proceeds to purchase, among other items, Italian super cars. On the civil side, Ms. Phillips mentioned that although there has only been once case brought thus far by the FTC, more civil cases are undoubtedly on the way.

Becky Martin then addressed the ample federal oversight of the PPP program including the Treasury and SBA, which will now review all loans over $2M, the newly instated Pandemic Response Accountability Committee and Special Inspector General for Pandemic Recovery, and Congressional and agency oversight.

Lisa Ledbetter then turned to the Main Street Lending Program, which is in earlier stages of implementation than the PPP. Of the five Main Street facilities, the three for-profit facilities became operational with funds flowing in July, while the two non-profit facilities still are under development. Although the impacts of Main Street on lenders and borrowers remains to be seen, Ms. Ledbetter and Mr. Martin believed that the program could raise litigation, regulatory, and enforcement risks. Both borrowers and lenders face risks consequent to the requisite certifications. Lenders may face common-law and statutory claims, e.g., negligence, fraud, and discrimination/ECOA claims in addition to claims for unfair and deceptive business practices, misrepresentation, and privacy and information security claims, such as based on their representations to the public through their websites. Becky Martin discussed the potential for application of the False Claims Act to lenders and borrowers in connection with their certifications to the Main Street SPV as a potential source of risk.

In sum, the panel concluded that in light of the substantial government oversight of both the PPP and the Main Street program, the PPP moving into the forgiveness phase and more Main Street loans are originated, both borrowers and lenders should plan in advance for potential exposure and understand how to best control the risks they face.