It Was Only a Matter of Time: DOJ Settles First FCA Case with PPP Lender

On September 13, 2022, the United States Department of Justice (DOJ) announced a settlement with Prosperity Bank, a community bank with branches in Texas and Oklahoma, for processing a Paycheck Protection Program (PPP) loan on behalf of an ineligible borrower. Although the settlement was for less than $20,000, it is nonetheless noteworthy because it is the first time DOJ has publicly settled with a PPP lender for alleged violations of the False Claims Act (FCA) (though DOJ has been actively pursuing fraud cases against PPP borrowers for some time). Importantly, this settlement announcement comes on the heels of recent legislation that created a 10-year statute of limitations period for PPP-related fraud (equivalent to the longest statute of limitations available under the FCA). The takeaway is that PPP lenders, as well as other institutions that made loans under other pandemic-related programs such as the Main Street Lending Program, should be prepared for many years of government investigation and enforcement actions targeting PPP and other pandemic-related programs fraud.

The original PPP program, a creation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was designed to help small businesses meet their payroll (and certain other qualifying expenses) during the unprecedented shutdowns of the early COVID-19 pandemic. The PPP program depended on private lenders making loans to small businesses on behalf of the US government. And, despite significant hurdles, lenders rose to the challenge and began processing PPP applications on April 3, 2020—seven days after the CARES Act was signed into law. The single loan at issue in the Prosperity settlement was made in May 2020, during the second phase of the program. And, although the DOJ settlement announcement states that Prosperity employees “knew” that the borrower to whom they were making a loan was ineligible for a PPP loan at the time that they processed his application, few additional details were provided regarding the alleged wrongdoing by Prosperity and its employees.

We do not know all of the facts in the Prosperity settlement (including whether there were any aggravating factors that were not made public), but based on the publicly available information, the Prosperity settlement should be concerning to any lenders that were making PPP loans in the early days of the program. Early PPP lenders (and their lawyers) will recall that the PPP loan rollout was a chaotic period where time was of the essence and the rules governing the brand-new PPP program were being interpreted, clarified, and updated in real-time. Notwithstanding, the important role that private lenders paid in the PPP program and the challenges that those lenders faced to make the PPP program work, we anticipate that the DOJ’s settlement with Prosperity is the tip of the iceberg for PPP-related investigations and enforcement actions against PPP lenders, including under the FCA.

For a complete list of government enforcement actions related to CARES Act fraud, please see the Arnold & Porter CARES Act Fraud Tracker.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.