A group of small businesses allege in a new lawsuit that Bank of America left them with unforeseen debt after overstating the amount of their pandemic aid that was eligible for loan forgiveness.
In a suit that seeks class-action status, three small businesses accused BofA of marketing Paycheck Protection Program loans to firms that used independent contractors on the basis that the debt would be forgiven by the U.S. Small Business Administration.
The PPP's guidelines excluded compensation paid to independent contractors — sometimes called 1099 workers, a reference to the tax form used to report payments they receive — in calculating loan amounts. Independent contractors had a separate way to apply for PPP support.
"Bank of America knew, or should have known, that the SBA would only approve forgiveness of loans to business owners that used PPP loans to pay retained employees, not 1099 employees," the businesses allege in their complaint.
In a statement responding to the lawsuit's allegations, a BofA spokesperson placed responsibility on PPP borrowers for the representations they made in loan applications.
"We processed Paycheck Protection Program loans based on loan amount requests and representations made by businesses. It is the borrowers' responsibility to follow SBA rules regarding loan amount eligibility," the bank spokesperson said.
"In the forgiveness process, we are required to follow SBA rules about what expenses qualify to be forgiven," the spokesperson continued. "Certain expenses, such as payments made to contractors, do not meet the requirements for loan forgiveness."
The lawsuit stems from federal stimulus funding authorized by Congress in March 2020 to offset economic disruptions from the COVID-19 pandemic.
Under the Paycheck Protection Program's guidelines, businesses with fewer than 500 employees were allowed to apply for up to $10 million in forgivable loans to help cover up to two months of employee payroll, rent and mortgages, utilities and other expenses.
The SBA offered banks, and later fintech companies, processing fees based on the size of loans, which ranged from 5% for loans of $350,000 or less to 1% for loans of $2 million. Those processing fees gave BofA an incentive to increase the size of PPP loans, according to the small businesses that are suing the $3.05 trillion-asset bank.
The plaintiffs in the case are a San Francisco firm that provides health and safety compliance services; a marketing and sales agency in Santa Ana, California; and a dog boarding and training facility in Sherman Oaks, California.
They allege that BofA loan processors used high-pressure sales tactics to convince PPP applicants to increase the size of their loan requests. The complaint was filed Feb. 22 in U.S. District Court in the Central District of California.
The agencies produced an application process that includes favorable interpretation of qualifying expenses.
The small businesses accused BofA of informing PPP applicants that they "qualified for additional funding pursuant to some unstated Bank of America formula." The Charlotte, North Carolina-based bank "even threatened not to submit the applications if plaintiffs did not apply for the loan amounts Bank of America insisted upon," the complaint alleges.
Emily Kirk, a lawyer for the plaintiffs, said that Bank of America must be made responsible to the small business owners.
"They did what Bank of America told them to do to obtain forgiveness, but now Bank of America refuses to forgive these loans as it promised to do," Kirk said in a written statement.
BofA approved PPP loans totaling $34.4 billion, which made it the program's second-largest lender, according to data from the congressionally established Pandemic Response Accountability Committee. Of the $792.6 billion in small-business loans that were distributed under the PPP, the SBA has forgiven $758.2 billion.
The lawsuit filed last week is not the first case brought against a bank in connection with the submission of independent contractor expenses by PPP applicants.
Last year, small businesses filed related lawsuits, which are still pending, against both BofA and PNC Financial Services Group. Both banks have filed motions to dismiss the suits.
While there is uncertainty about how courts will rule on cases related to PPP loan forgiveness, blame surrounding the "sloppy" rollout of PPP funding should be shared by everyone involved, including banks, the SBA and borrowers, said Chris Marinac, an analyst at Janney Montgomery Scott.
He said that banks are "vulnerable" to these issues and should have "thought in the back of their mind about contingencies for how this plays out. They were obviously booking a lot of income on PPP loans during the process."
It's unclear if cases such as the one brought last week against BofA are "material at this point," Marinac said. Still, he noted, the legal saga around the PPP won't be resolved anytime soon.
"It's going to continue to have twists and turns," Marinac said. "It's like a good murder mystery. It's a three-hour show that has just started."
