A new federal class-action lawsuit claims that several of the nation's largest banks prioritized larger loans in the Paycheck Protection Program (PPP) instead of processing loan applications in the order in which they arrived.
The lawsuit, which was filed by small-business owners and has been reported by multiple media outlets, alleges these banks did this in pursuit of the higher fees that came with the larger loan amounts.
After the $2 trillion stimulus bill allocated nearly $350 billion to the U.S. Small Business Administration (SBA), small businesses in desperate need of a lifeline flooded the banks, which were charged with disbursing the funds.
Portions of the loans that businesses use for expenses such as payroll do not need to be paid back, so there is very little interest income that banks can collect on PPP loans.
However, the government, which is fully backing the loans, is offering fees on each loan made.
According to Bloomberg, banks can earn 5% origination fees on loans of up to $350,000; 3% on loans between $350,000 and $2 million; and 1% on loans between $2 million and $10 million. That equals $17,500 for processing a $350,000 loan and $100,000 on a $10 million loan.
Plaintiffs allege in the lawsuit that SBA data shows lenders processed many more of the smaller loans in the final three days before the program ran out than in the first 11 days.
The banks accused of prioritizing larger loans have denied the allegations or declined to comment, but the issue is likely not going away.
The U.S. Senate today passed a new coronavirus relief bill that will allocate another $320 billion to the Paycheck Protection Program.
Meanwhile, the banks all have bulging pipelines of small businesses waiting for relief money -- JPMorgan said its pipeline still includes hundreds of thousands of businesses asking for $26 billion in total loan volume.