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Agent Fees and the Payment Protection Program

July 20, 2020

By: Christopher A. McNulty, Allison E. Raley

Category: Banking, Business, Class Action, Coronavirus (COVID-19), Legislative Updates

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Last week, Arkansas saw its first class action where “agents” claimed entitlement to payment of fees under the Payment Protection Program (PPP).[1] This class action illustrates another area of confusion surrounding the administration of the CARES Acts (the “Act”). Congress created the PPP as part of Act in an effort to help small businesses survive the economic turmoil created by Covid-19. Section 1102 of the Act implanted the PPP into section 7(a) of the Small Business Act (SBA) as part of the federal government’s small business loan program. The PPP greatly expanded the pool of small businesses eligible to receive SBA-backed loans to cover payroll and other costs through 2020.[2] While the SBA would guarantee these loans, Congress asked private lenders to process and fund them.[3] Several class actions have been filed across the nation against PPP lenders by agents who claim that they are entitled to an automatic payment from the lender’s fee for helping prepare an application for a small business that received a PPP loan. This most recent class action takes aim at numerous Arkansas-based financial institutions.

JEK Services Inc., et al. v. Simmons Bank, et al.

James E. Kusturin, Jr. and JEK Services Inc., (collectively “JEK”) brought suit as individuals and in a representative capacity against various Arkansas lenders for alleged violations of the CARES Act, the SBA’s 7(A) loan program, 15 U.S.C. § 636(a), and 13 C.F.R. part 120, and for unjust enrichment and conversion.[4] JEK provided accounting services for small businesses applying for PPP loans in Russellville, Arkansas.[5] JEK alleges they are owed agent fees from lenders funding the PPP loans in an amount exceeding five million dollars for applications submitted between March 25, 2020 and June 30, 2020.[6] JEK cites three primary legislative provisions as support for their aggregate damages.[7]

Lender Reimbursement

The Act explicitly states lenders would be reimbursed for funding borrower loans by the SBA– providing that “[t]he [SBA] Administrator shall reimburse a lender authorized to make a covered loan.”[8] The Act additionally listed specific rates the SBA must pay lenders “based on the balance of the financing outstanding at the time of disbursement of the covered loan.”[9] Under this statutory provision, the SBA must reimburse lenders at a rate of:

(I) 5 percent for loans of not more than $350,000;

(II) 3 percent for loans of more than $350,000 and less than $2,000,000; and

(III) 1 percent for loans of not less than $2,000,000.[10]

Any lender that processes a PPP loan is therefore expressly entitled under the statute’s plain language to reimbursement by the SBA in a set amount within five days of the loan’s disbursement.[11]

SBA’s approach to Agent Fees

Congress approached agent fees differently. While the CARES Act’s affirmative requirement that the SBA “shall reimburse a lender” a specific amount based on loan size, the Act addresses only the fee limits applicable to agents.[12] Under the statute, “[a]n agent that assists an eligible [PPP] recipient to prepare an application for a covered loan may not collect a fee in excess of the limits established by the Administrator.”[13] Congress delegated to the SBA the authority to set a maximum limit on the fees that an agent could collect as part of the PPP. However, Congress notably did not provide that agents shall collect a fee, nor did it provide that any particular party shall pay agents any fee. Instead the regulations outline three kinds of agents that borrowers or lenders may authorize to assist them in the loan process.[14] The party that chooses to use an agent and authorizes that agent as its representative is the party that pays the agent.[15] For the type of agent at issue in the JEK Services Inc., matter (a “packager” helping a borrower prepare its application) the borrower authorized the agent and is thus the party that is responsible for paying the agent fee, not the lender processing the loan.[16] This authorization must be in the form of a “compensation agreement” governing the arrangement between the borrower and agent.[17]

First Interim Final Rule

The SBA exercised its authority to limit agent fees when it issued the First Interim Final Rule (the “First IFR”).[18] The First IFR sets out maximum limits for agent fees and states that the fees (1) will be paid by the lender out of origination fees received from the SBA and (2) may not be collected from the borrower or out of the PPP loan proceeds.[19] The First IFR focuses on what an agent affirmatively may not do: it may not collect fees from the borrower, out of the PPP loan proceeds, or beyond the set amounts. In contrast, the IFR’s reference to fees “being paid” out of lender fees does not place an express obligation on lenders to pay agents as read from the plain language of the legislation. Instead it provides the listed amounts which would be “reasonable” should a lender authorize and decide to pay an agent.[20]

No cause of action created by the Act

It’s important to note that the Act does not provide a private right of action for PPP agent fees, either express or implied.[21] Profiles, the only court to issue a written ruling on this issue held the Act does not add or create any private right of action.[22] There additionally appears to be nothing in the statute reflecting an intent by Congress to create a cause of action for agents.[23] The statute only reflects an intent to prohibit agents from collecting excessive fees. Without statutory evidence of an intent to permit agents to pursue claims for fees, the First IFR also does not provide a private cause of action.[24]

Conclusion

From the initial reading of the JEK Services Inc. complaint, it appears the borrowers, not the lenders named in the suit, are the parties actually responsible for paying the agent fees as JEK was acting as a packager in preparing its client’s loan applications. However, further judicial and legislative guidance is needed to determine if reimbursement of agent fees is automatic, what party should pay the agent fee, and if a private cause of action can be read into the Act. We will continue to follow the JEK Services Inc. matter, as well as the other similar class actions across the nation, as this issue will continue to effect lenders and agents until more clarity is provided.

 

[1] JEK Services Inc., et al. v. Simmons Bank, et al., No. 4:20-cv-00836-KGB (E.D. Ark).

[2] See 15 U.S.C. § 636 (a)(36)(A),(D),(F).

[3] Id. § 636 (a)(36)(F)(iii).

[4] JEK Services Inc., et al. v. Simmons Bank, et al., No. 4:20-cv-00836-KGB *4.

[5] Id. at *6.

[6] Id. at *11.

[7] Id. at *8-10

[8] Id. 15 U.S.C. § 636 (a)(36)(P)(i).

[9] Id.

[10] Id.

[11] Id. § 636 (a)(36)(P)(iii).

[12] Id. § 636(a)(36)(P)(ii).

[13] Id. (emphasis added).

[14] See id. § 103.1(a)(2); Along with “packagers,” the regulations describe a “Lender Service Provider” that assists and is paid by a lender, and a “Loan Broker” that either assists a borrower or an agent, and is paid by the party it assists. Id. § 103.1(a)(1), (3).

[15] See id.

[16] Id. § 103.1(a)(2); see also JEK Services Inc., et al. v. Simmons Bank, et al., No. 4:20-cv-00836-KGB (E.D. Ark);

[17] See id. § 103.5(a).

[18] The First IFR states that “[t]he program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement (as defined in 13 CFR 120.10).” 85 Fed. Reg. 20,811, 20,812 (Apr. 15, 2020). The First IFR specifically provided that PPP lenders need not comply with the 7(a) program’s stringent lending criteria when reviewing PPP loans and could instead rely on borrowers’ certifications to determine eligibility. Id.

[19] 85 Fed. Reg. at 20,816.

[20] Beyond stating that lenders would pay agents that assisted borrowers—a change in the existing framework that required borrowers to pay such “packagers”—the First IFR did not set out any other provisions for agents that conflict with pre-existing requirements. In particular, the First IFR did not promulgate any provision conflicting with or eliminating the requirements that an agent be authorized and complete a written compensation agreement to receive payment.

[21] See United States v. Fidelity Capital Corp., 920 F.2d 827, 838 n.39 (11th Cir. 1991); Bulluck v. Newtek Small Bus. Fin., Inc., 808 F. App’x 698, 2020 WL 1490702, at *3 (11th Cir. Mar. 27, 2020).

[22] Profiles, Inc. v. Bank of Am. Corp., —F. Supp. 3d—, No. 20-0894, 2020 WL 1849710, at *7.

[23] See McDonald v. S. Farm Bureau Life Ins. Co., 291 F.3d 718, 723 (11th Cir. 2002) (“There must be clear evidence of Congress’s intent to create a cause of action.”); Love v. Delta Air Lines, 310 F.3d 1347, 1352 (11th Cir. 2002) (courts rarely impute an intent to create a private right of action when a statute lacks “[r]ights-creating language . . . explicitly conferring a right directly on a class of persons that includes the plaintiff in a case”).

[24]See Love, 310 F.3d at 1353 (if a statute does not confer a private right of action, “such a right may not be created or conferred by regulations promulgated to interpret and enforce it”).

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