Early CARES Act Ruling Recognizes Broad Discretion for Participating Lenders
By: Michael Ross and Jake Alderdice
On April 13, 2020, a federal district court in Maryland issued one of the first rulings to interpret the provisions of Congress’s Coronavirus Aid, Relief and Economic Security Act (the CARES Act), signed into law by President Trump on March 27, 2020. At issue before the Court was whether Bank of America could be prevented from adding eligibility restrictions, beyond those in the Act, on small businesses applying for forgivable loans under the CARES Act’s $349 billion Paycheck Protection Program (PPP). In denying relief to the prospective borrower, the district court found that the bank could impose additional eligibility criteria and that private parties were powerless to bring private actions to enforce the terms of the program. Although just one data point, the early ruling may signal that courts will give lenders latitude in how they are carrying out CARES Act programs.
Title I of the CARES Act established the Paycheck Protection Program (PPP), which provided for $349 billion in loans to small businesses. These loans become fully forgivable if the businesses use them for certain purposes, such as maintaining their payroll. Demand for the emergency loans quickly ate up the funding, with the entire $349 billion fund depleted by April 16, 2020, based on 1.4 million approved applications. Congress is currently debating providing additional funding for the program.
The CARES Act set out eligibility requirements for PPP borrowers, including, among others, that the businesses, with some exceptions, need to have fewer than 500 employees. Following the program’s launch, news reports indicated that lenders were imposing additional requirements on potential borrowers, particularly to ensure borrowers had certain preexisting relationships with the lender. In the case of Bank of America (BofA), early reports claimed that the bank required applicants to have both a preexisting deposit account and a lending account in order to apply for a PPP loan. BofA later changed that requirement so that it only required a deposit account with the bank, and that the applicant not have a lending relationship elsewhere. BofA included simply having a credit card with another bank as a “lending relationship.”
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