Agent Fee Suits and PPP Loans: Clarity Could Be Coming

During a House Financial Services Committee (HFSC) oversight hearing on June 30, 2020, Treasury Secretary Steven Mnuchin hinted that clarification may be coming on whether agents helping small businesses apply for Paycheck Protection Program (PPP) loans are entitled to automatic fee reimbursements from PPP lenders.  This clarification comes on the heels of class-action lawsuits alleging that lenders issuing PPP loans have been improperly withholding fees from the accountants and other agents assisting small businesses with their PPP applications.

These lawsuits allege that, under the PPP provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), lenders are required to pay an agent’s costs out of the fees lenders receive from the Small Business Administration (SBA).  These arguments primarily hinge on the SBA first interim final rule (First IFR).  The First IFR establishes that “[a]gents may not collect fees from the borrower or be paid out of the PPP loan proceeds.”  At the same time, however, the rules state that “[a]gent fees will be paid by the lender out of the fees the lender receives from SBA.”  According to an SBA information sheet, agents eligible to be compensated by lenders include “[a]ny . . . individual or entity representing an applicant by conducting business with the SBA,” including attorneys, accountants, consultants, and loan brokers.  These agents thus argue that the First IFR—using the term “will be paid by the lender”—requires automatic reimbursement of agent fees.

But lenders disagree.  For example, in a motion to dismiss filed in Sport & Wheat CPA PA v. Servisfirst Bank Inc., et al, No. 3:20-cv-5425 (D. Fla.) on July 3, 2020, one bank argues that neither the CARES Act nor the First IFR impose an affirmative reimbursement obligation on lenders.  The bank relies primarily on the plain text of a CARES Act provision noting that “[a]n agent that assists an eligible recipient to prepare an application for a covered loan may not collect a fee in excess of the limits established by the [SBA] Administrator.”  15 U.S.C. § 636(a)(36)(P)(ii).  This “unequivocal restraint on agents,” according to the bank, “cannot impose an affirmative duty on lenders” to reimburse agent fees.  The bank further argues that, even if the SBA’s First IFR does create such an affirmative obligation (which it does not concede), the SBA exceeded its authority in enacting such a rule.  According to the bank, because the CARES Act provides that the SBA “shall reimburse a lender” at “set rates,” the SBA has essentially “rewrit[ten] the statute” by allowing for the “subtract[ion] from those set rates varying amounts of agent fees.”  This, in the bank’s view, is “contrary to the SBA’s limited delegation of authority and to the statute’s unambiguous language.”  The bank further argues that even if the First IFR is a valid exercise of the SBA’s power, it still does not create an affirmative obligation, but instead “imposes caps on the ‘total amount that an agent may collect.’”

The bank’s arguments are bolstered by Secretary Mnuchin’s comments late last month.  At the HFSC hearing, Secretary Mnuchin explained that his department’s guidance thus far has said that banks “could pay agent fees out of the fees that they received”—not necessarily that they must.  Mnuchin additionally explained that the intent was not to make such reimbursement automatic, but for it to “be based upon a contractual relationship between the agent and the bank.”

It remains to be seen what type of clarifying measures the Treasury will take in response to the competing views of agents and lenders.  But once issued, the impacts could be twofold: providing clarity to banks and agents going forward, and potentially impacting pending agent-fee suits like Sport & Wheat.