At least two class actions filed in the wake of the COVID-19 pandemic by disgruntled accounting firms allege some of the nation’s largest banks never paid “agent fees” to entities assisting small businesses apply for Paycheck Protection Program (“PPP”) loans under the federal Coronavirus Aid, Relief, and Economic Security (“CARES”) Act – and never intended to.
These lawsuits allege plaintiffs represent a class of financial services and accounting firms that prepared PPP applications on behalf of eligible small business clients. Plaintiffs contend the CARES Act and implementing regulations require lenders to pay them “agent fees” for preparing loan applications. Fees are calculated by tiers according to the amount of the loan – a one percent fee for loans of $350,000 or less, a .50 percent fee for loans of more than $350,000 and up to $2 million, and a .25 percent fee on loans over $2 million.
Generally, the plaintiffs contend banks receiving PPP loan applications told the plaintiff or the applicant that the bank would not pay agent fees
Generally, the plaintiffs contend banks receiving PPP loan applications told the plaintiff or the applicant that the bank would not pay agent fees and that the banks made the loans but never paid the agents. These suits claim the banks unjustly retained fees owed to plaintiffs, seek a court order requiring banks pay agent fees, and request an award of attorneys’ fees.
It is unclear whether these claims will succeed. The first issue is whether the plaintiffs are “agents” given that they do not appear to have executed an SBA agent agreement. The SBA has issued a “Fact Sheet” when briefly deals with the agent issue. Under state law, for example, an agent is generally a person authorized by another (principal) to act for or in place of him; one instructed with another’s business.” The Fact Sheet’s definition might envision an “agent” as something different from this state law definition, perhaps even designating a person as an agent if they simply assisted the applicant in some way. The Fact Sheet’s definition of “agent” includes, for example:
- Someone who prepares an applicant’s application for financial assistance and is employed and compensated by the applicant;
- Someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
- A loan broker; or
- Any other individual or entity representing an applicant by conducting business with the SBA.
The Fact Sheet’s definition of “agent” is made even more confusing by its implication that even though an agent may be “employed and compensated by the applicant,” the “[a]gent fees will be paid out of lender fees.” This appears to be a direct contradiction. How could someone be “compensated by the applicant” and “be paid out of lender fees?”
These seemingly-contradictory phrases could be harmonized if “agent fees” must exist independently of the SBA rules. In other words, if the fees have not materialized – that is, if they have not been agreed upon – then there is no need for the bank to pay them. Put differently, the fees must have an independent basis: It is not enough just to be an “agent”; one must have a separate agreement to be entitled to an “agent fee.” It is only the “agent fees,” then, that must be paid by the lender. The lender certainly does not need to pay the employees of the applicant.
The SBA rules as they existed prior to the implementation of the PPP would also seem to require that there be an agreement in place for a person to be entitled to agent fees. In fact, the SBA has an existing compensation agreement form for Section 7(a) and 504 loan programs. The Code of Federal Regulations provides:
103.5 How does SBA regulate an Agent’s fees and provision of service?
(a) Any Applicant, Agent, or Packager must execute and provide to SBA a compensation agreement, and any Lender Service Provider must execute and provide to SBA a Lender Service Provider agreement. Each agreement governs the compensation charged for services rendered or to be rendered to the applicant or lender in any matter involving SBA assistance. SBA provides the form of compensation agreement and a suggested form of Lender Service Provider agreement to be used by Agents.
See 13 C.F.R. § 103.5(a) (emphasis added).
Beyond the legal issue of whether the named plaintiff is entitled to “agent fee”, class certification would be another hurdle, especially if all of the class members have not executed such SBA form agreements. Even if class members could legally qualify for agent fees without having executed such form agreements, determining whether they have some agreement for agent fees and/or qualify as agents would be fact intensive inquiries.