In response to the devastating economic impact of the COVID-19 pandemic, the U.S. Small Business Administration (“SBA”), along with support from the Department of Treasury, implemented the Pay Check Protection Program (“PPP”) – a program meant to provide small businesses across the country with funds to protect their payroll costs. The PPP was authorized to fund $350 billion worth of forgivable loans to qualifying small businesses in its first round, however those funds were depleted in less than two weeks, leaving tens of thousands of small businesses without the funds needed to keep them afloat. 

PPP applications were meant to be processed by financial institutions on a first come, first serve basis. Instead, recent law suits filed in federal district court accuse four of America’s largest banks of prioritizing larger loan applications from their bigger clients.

The four major banks being sued for their alleged practice of “frontloading” larger loans are JP Morgan Chase, Bank of America, Wells Fargo, and US Bank. The plaintiffs allege that the motivation for putting large companies seeking larger loans ahead of small businesses was to maximize the loan origination fees generated by the transaction, and in turn the bank’s profits. Of the thousands of applications JP Morgan’s commercial bank received, all were processed prior to the PPP funds being depleted, yet of the hundreds of thousands of applications JP Morgan’s small business bankers received, only a few thousand were processed before depletion. Similarly, data from the SBA indicates that as the PPP funds ran out, the rate of loans distributed by Wells Fargo over the amount of $5 million tapered off while the rate of loans distributed under $150,000 more than doubled in the finals days. Plaintiffs in the suit against Wells Fargo allege that this data indicates the bank first processed the larger loan applicants to maximize their fees before turning to the smaller businesses as the funds grew dry.

Several large publicly traded companies—each of which received more than $10 million in loans–have since decided to return the funds in the wake of public backlash. The founder of Shake Shack – a global burger chain that makes hundreds of millions annually and a recipient of a $10 million loan from the PPP – issued a statement on April 20, 2020 indicating they have “decided to immediately return the entire $10 million PPP loan we received last week to the SBA so that those restaurants who need it most can get it now.” Other notable restaurant chains such as Ruth’s Chris Steak House, recipient of a $20 million loan, and Potbelly, recipient of a $10 million loan, have made similar decisions. 

President Donald Trump has since signed a second spending package that would provide another round of funding to small businesses totaling $310 billion. The expectation is that the burn rate of this money will be even higher than the first round, as the SBA has announced there will likely not be a third round of funding. The large banks that are currently under fire for their alleged self-interested loan practices throughout the first round of the PPP will certainly be under close scrutiny by the millions of small businesses who fell short. How and if the banks change their practices during the second round could potentially have a significant impact on the pending lawsuits against them.