The past few weeks have seen increasing scrutiny of the lenders and borrowers participating in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), including by the Treasury Department, SBA Inspector General, U.S. Department of Justice, and Congress with the Special Inspector General for Pandemic Recovery surely soon to follow.
Against this backdrop, the Consumer Financial Protection Bureau (“CFPB”) has recently raised concerns related to fair lending for lenders participating in the PPP. On May 6, 2020, the CFPB issued guidance related to the timing for Equal Credit Opportunity Act (“ECOA”)-mandated adverse action notices under the PPP. On April 27, 2020, the CFPB published a statement in which the Bureau emphasized that lenders must comply with ECOA when extending small business credit, outlining key bases for discrimination claims under ECOA and encouraging women and minority-owned businesses who feel they have suffered lending discrimination to submit complaints to the CFPB through its complaint portal.
The CFPB’s recent focus on institutional fair lending compliance accords with that of federal banking regulators. For example, on April 27, 2020, the Office of the Comptroller of the Currency released “OCC Bulletin 2020-45,” which, among other things, encourages institutions to “prudently document their implementation and lending decisions” under the SBA’s PPP.
Given recent regulatory focus on fair lending compliance in connection with PPP lending, banks and other lenders should consider the following proactive risk mitigation steps.
Evaluate lending guidelines.
The PPP was designed to encourage lending broadly; program underwriting requirements are expressly limited and new guidance has been rolling out on a daily basis. Lender guidelines, therefore, can also be changeable. As you consider existing guidelines or changes thereto, evaluate whether they could result in a potential racial or gender disparity arising from borrower geography or business classification. Adjust your policies to mitigate against these potential risks.
Document bases for policies.
Document in written policies the legitimate, non-discriminatory business justification for those policies and that you considered less discriminatory alternatives to them. Doing so avoids downstream claims that you are justifying business decisions made today in post-hoc fashion. As the OCC indicated in the Bulletin referenced above, legitimate business justifications can include “estimates of resources needed to implement and offer the SBA PPP, current available resources (including staff resources) and ability to access needed information about an applicant in a timely way.” They can also include, among other things, the need to comply with Bank Secrecy Act and Anti-Money Laundering laws and fraud protection.
Monitor and report.
Even the best-designed policies and procedures can have impacts in the real world that are not as intended. Lenders should keep tabs on the impact of their policies and procedures and decision-making process and make sure the desired results are being achieved. This is a crucial step in the feedback loop: without good information about the effects of a lender’s programs, the lender cannot know what changes to make. Monitoring includes tracking, responding to and assimilating information from borrower complaints. It also may include statistical back testing of lending decisions to understand whether any potential disparate impact on a protected class exists.
Lenders should also continue to track guidance from federal and state regulators. The CFPB’s recent FAQs on adverse action notices under the PPP, for example, recently clarified that a PPP application is only a “completed application” once a loan number or response about the availability of funds is received from the SBA and, thus, the time spent waiting for information from the SBA does not count toward the 30-day notice requirement.
Given the pace of the CARES Act and PPP, lenders have had to adapt quickly. Fortunately, most of the guidance we have seen has been supportive of good-faith efforts and recognizes the quick-moving environment and difficult circumstances in which these decisions are being made. It is impossible to know what future requirements or regulatory efforts will look like, but lenders who establish consistent guidelines, thoroughly document decisions, and monitor and report on results will position themselves well when faced with regulatory inquiries.