Monday, May 11, 2020
Rushed into law to prop up a national economy staggered by COVID-19, the Paycheck Protection Program hasn’t gone as smoothly as hoped.
Last month, the U.S. Justice Department launched a probe into the recently expanded $670 billion initiative in which banks process and provide low-interest, conditional and sometimes forgivable Small Business Administration loans to distressed companies.
Several major banks also are the subject of more than a dozen class-action lawsuits, alleging subjective PPP processing on behalf of big-ticket companies at the expense of modest, more-deserving operations.
Then there are payback rules that many recipients of PPP funds are, at least anecdotally, struggling to understand—for instance, having their loans forgiven only if they spend 75 percent of the money on employees within two months after the check rolls in. Further muddying the waters, many business owners don’t have immediate reason to spend their money since their operations have been shuttered or restricted.
So as variables add up—and with PPP money likely forthcoming—at least one lawyer for a major bank is advising his colleagues to strictly adhere to the feds’ lending requirements, and then some.
For quality control
“Quality over quantity,” says Neil S. Rosolinsky, executive vice president and deputy general counsel for litigation and employment at Citizens Financial Group Inc., which so far hasn’t been targeted by class-action litigation.
“Banks have been called upon to assist as many small businesses as possible under CARES [Coronavirus aid, Relief and Economic Security Act],” he says. “But it’s still paramount to ensure quality in the application process. You can’t do this too quickly. Avoid errors on applications, process in the right manner, and verify.”
The nation’s 13th largest retail bank and the 16th largest overall, Citizens—like other banks—accepts PPP applications. As for what Rosolinsky and others are advising bank personnel during these uncertain times, it includes ascertaining the applicant has:
- Been In business on or before Feb. 15, 2020.
- 500 or fewer employees or is SBA 7(a) loan eligible—less than $7.5 million in annual revenue during the past three years, net income under $5 million, tangible net worth under $15 million.
Meet those standards, and a business owner might be eligible to borrow 250 percent of monthly payroll costs. Meanwhile a self-employed individual with no hired hands might be eligible to borrow 250 percent of monthly net profit. But come payback time, the following rules may apply:
- Loan forgiveness reduced if employer decreases full-time head count.
- Loan forgiveness reduced if salaries and wages decreased by over 25 percent for any employee earning less than $100,000 annualized in 2019.
- Full time employees and salary levels be restored by June 30 for any changes made between Feb. 15 and April 26.
Though that’s not all as the coronavirus turns over business life as we all know it.
New regs everywhere
Citizens having a physical presence in 14 Eastern and Central states, with employees in more than 40, Rosolinsky notes that practically every jurisdiction—and that includes some cities—is creating some sort of regulation.
Social distancing and mandatory masks might be among the easier regs. Among the more complex: New York State requiring all banking institutions to adopt and publicize a loan forbearance application process for residential mortgages, and eliminating ATM, overdraft and late credit fees incurred by any person or entity vexed by COVID-19.
While Citizens entrusts that aspect of compliance to another team, such issues are still among the litigation risks that weigh on Rosolinsky’s mind. As do more basic issues.
“We’re also advising how to respond to customer concerns,” he says. “With PPP, so many businesses don’t understand the qualifications, or they wonder why their loan application hasn’t been processed faster.”
And when the coronavirus crisis has lifted or at least been significantly mitigated?
Well that could present issues for the banking industry at large, warns Rosolinsky, whose historical outlook was forged when he headed employment law for Citizens’ former owner, The Royal Bank of Scotland, during and after the Great Recession.
Rightly or wrongly, banks took much heat for that crisis of 10 or 12 years ago, having created and bought mortgage-backed securities and collateralized debt obligations. The aftermath saw the Dodd Frank Wall Street Reform and Consumer Protection Act that many smaller banks—of which Citizens is not—claimed excessive. But all banks faced some consequences, and Rosolinsky anticipates industry-wide repercussions this time too.
Though it’s a different crisis; the class-action litigation notwithstanding, no reputable source perceives banks as the cause of COVID-19. Rosolinsky would even like to see banks given credit for lessening the economic impact—they’re processing volumes of PPP applications from understandably impatient and worried business owners.
“And actually lending the money,” he reminds while expecting the dissatisfaction over PPP to increase even if the feds enhance the pot.
By advising the rest of the Citizens operation to mind details, consumer complaints and courtroom proceedings involving other financial institutions, Rosolinsky strives to keep his bank out of court where justice can indeed by delayed by the pandemic.
“My group engages in litigation and manages it, and I can tell you the courts are staggered in starts, stops and pauses,” he says. “Dockets haven’t moved in a typical fashion, and video proceedings aren’t the same as in person.”