A class-action lawsuit filed against Bank of America last month claims the bank misrepresented the amount of pandemic aid small business owners were eligible for, leaving firms saddled with unforgivable debt.
Three California-based small businesses — Happy Puppy LA, Brandamize and Aurora Environmental Services — allege the bank marketed and approved Paycheck Protection Program loans to businesses that used their payrolls to employ independent contractors, or 1099 workers.
The bank, however, failed to tell them that independent contractors had a separate means of applying for PPP support, the businesses allege.
"Bank of America knew, or should have known, that the [Small Business Administration] would only approve forgiveness of loans to business owners that used PPP loans to pay retained employees, not 1099 employees," the businesses said in the complaint, which was filed in a California federal court. “Despite the duty to act in good faith in originating the loans, the bank turned a blind eye to payroll requirements and uniformly misled applicants regarding the applicability of payments to 1099 workers.”
The businesses also claim the Charlotte, North Carolina-based bank instructed them to apply for higher loan amounts than the SBA would forgive. The plaintiffs claim the bank told them the extra funding would be subject to forgiveness as long as the funds were used according to specified terms.
In a response to the lawsuit, Bank of America said it is the borrowers’ responsibility to follow SBA rules regarding loan amount eligibility.
“We processed Paycheck Protection Program loans based on loan amount requests and representations made by businesses,” Bank of America spokesperson Bill Halldin said. “In the forgiveness process, we are required to follow SBA rules about what expenses qualify to be forgiven. Certain expenses, such as payments made to contractors, do not meet the requirements for loan forgiveness.”
During the height of the COVID-19 pandemic, the federal government used banks to funnel aid to small businesses negatively affected by widespread shutdowns.
As part of the $2.2 trillion CARES Act, banks were encouraged to process PPP loans as quickly as possible in an attempt to keep businesses afloat and minimize the economic impact of the pandemic.
Bank of America was the program’s second-largest PPP loan originator, processing $35.4 billion in loans since the program’s launch in April 2020, according to the $3.05 trillion-asset bank.
The plaintiffs claim Bank of America promised them forgivable loans in amounts determined by a formula calculated by the bank in an effort to increase the fees generated by originating the loans.
An attorney representing the businesses said the lender must be held accountable for the PPP loans the SBA has refused to forgive.
"Now these businesses are finding out that the loans they took out to save their businesses are unforgivable and must be repaid even though Bank of America promised them otherwise,” said Emily Kirk, an attorney for McCune Law Group. “This is not right and Bank of America must be held accountable."
Bank of America has faced criticism over its handling of pandemic relief in the past.
The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau fined the bank $225 million in July over its handling of unemployment insurance and benefits payments during the pandemic, claiming the firm unlawfully froze consumers’ accounts with a faulty fraud detection program.