U.S. banks sweat regulatory exposure from pandemic loans

In this news, we discuss the U.S. banks sweat regulatory exposure from pandemic loans.

BOSTON / NEW YORK / WASHINGTON (Reuters) – The banks that facilitated the U.S. government’s paycheck protection program initially saw the effort as a small revenue boost with a patriotic bonus, managing $ 525 billion in loans to companies criticized by the fallout from the COVID-19 pandemic.

But as taxpayers begin to bear the cost of canceling these loans, lenders like JPMorgan Chase & Co, Wells Fargo & Co, and Bank of America Corp, prepare for what will likely be years of regulatory scrutiny for their role in distributing money, according to industry insiders, securities deposits and government watchdogs.

“The feeling of anxiety is high,” said Vivian Merker, management consultant to financial services companies at Oliver Wyman in New York. “They are bracing themselves for years of demands from regulators and there is always a reputational risk associated with PPP fraud, even though they have done everything to adhere to the rules of the program.”

Banks participating in the Paycheck Protection Program (PPP) have issued more than 5.2 million loans, to be repaid by the government provided borrowers have demonstrated financial need and have used most of the cash to pay the loan. pay.

Borrower fraud emerged almost as quickly as the program, overseen by the Small Business Administration (SBA), began in April. The Department of Justice has so far laid charges against 82 people in 56 cases for about $ 250 million in loans, according to a review by Project On Government Oversight.

So far, the burden on lenders has been mainly administrative. A senior lawyer who advises large banks on compliance matters said clients respond to up to 20 subpoenas per week, producing documents and making employees available for interviews.

However, there is growing concern that lenders themselves face legal challenges regarding PPPs, which are already leading to internal compliance reviews, investor warnings and even outright selling of portfolios. of loans, according to public statements and people familiar with the situation.

At least four banks have warned investors in shareholder deposits about the regulatory and legal risks of PPPs. Bank of America, for example, said in a July filing that its participation in government stimulus programs “could result in reputational damage and government actions and proceedings, and has resulted, and may continue to result in litigation, including including collective actions.

“We are cooperating fully with government investigations,” said Bill Halldin, spokesperson for Bank Of America.


Among the possible dangers, experts pointed to potential violations of the rules of application of the program on a first come, first served basis, disadvantaging minority and women-owned businesses; keep adequate documentation, in particular for loan forgiveness requests; and adherence to broader “know your customer” rules, which could have detected more fraud.

Congress passed the $ 2.2 trillion Cares Act bailout in March, which included nearly $ 350 billion in P3 loans, with the pot later rising.

Under pressure to get the money out quickly, banks were initially worried about taking on too much responsibility, even if they were to earn set-up fees of up to 5% and 1% interest on government guaranteed loans. The lenders got a promise from the government that they would not be held responsible if borrowers broke the rules of the program.

An October Congressional report said several lenders, including JPMorgan, PNC Financial Services Group Inc and Truist Financial Corp, processed larger PPP loans for high net worth clients at two to four times the speed of smaller loans for high net worth clients. small businesses most in need.

He also said that some banks are limiting their PPP loan programs to existing customers.

The move, according to the report, had a disproportionately adverse effect on women-owned and minority-owned businesses because they are less likely to have pre-existing banking relationships, according to data from the U.S. Federal Reserve. Depending on the circumstances, policies that harm these “protected” groups – even inadvertently – can break fair lending rules.

Citing an internal presentation in April, the report said Citigroup identified the negative effect on these companies as a possible compliance risk, but decided to initially prioritize existing customers because demand was high and required less manual intervention. Citi declined to comment.

A spokesperson for Truist said it is processing PPP applications through a single portal on a first come, first served basis, “with no preference for larger or more affluent customers.”

JPMorgan declined to comment. PNC did not respond to requests for comment.

Banking groups have pushed back the House report. The Consumer Bankers Association said lenders have been denied waivers that would have made lending easier for new borrowers, and larger borrowers have dedicated staff and documentation to expedite their requests.

“When Congress, SBA, and Treasury designed the Paycheck Protection Program, they prioritized getting money into small business hands very quickly, issuing confusing operational and legal guidance. and changing for banks, ”said Greg Baer, ​​CEO of the Bank Policy Institute.


People familiar with the situation say that virtually all of the major PPP lenders, including JPMorgan, Citi, Truist, and KeyBank, have performed standard internal reviews to spot violations by their own employees of the program’s rules.

“As we participate in efforts to make essential government stimulus packages available… we continue to run our checks to identify, address and report fraud,” a Truist spokesperson told Reuters by email.

KeyBank declined to comment.

Wells Fargo said in a May filing that it had received “formal and informal requests from federal and state government agencies regarding its P3 loan offer.”

Wells Fargo spokesman Manny Venegas said the case referred to industry-wide inquiries from regulators about P3 fraud, which the bank had made efforts to spot and report. . He declined to say whether the investigations also involved employees or the bank’s processes.

Regulators have signaled that there is much more to come. The SBA plans to review PPP loans over $ 2 million and its Inspector General recently said there were “strong indicators of widespread potential abuse and fraud.”

A recent analysis by a US House committee found that tens of thousands of PPP loans could be subject to fraud, waste or abuse, including over $ 1 billion in loans multiple at the same company, a violation of program rules.

James Stevens, an attorney who advises Troutman Pepper’s lenders in Atlanta, said banks were doing their best to get money from small businesses in need, but the rapidly changing program rules created “ground. fertile ”for fraud and internal errors.

“Regulatory oversight of banks is always retrospective,” Stevens said. “It will come.”

Report by Lawrence Delevingne in Boston, Koh Gui Qing in New York and Michelle Price in Washington. Editing by Tom Lasseter and Nick Zieminski

Original © Thomson Reuters

Originally posted 2020-10-21 04:26:14.

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