A legal battle has broken out over when lenders must pay accounting firms and other "agents" fees for preparing borrowers' loan applications under the Paycheck Protection Program.
Banks across the country are facing lawsuits from agents, such as accountants, attorneys and loan brokers, who are seeking payment for services rendered, sometimes in cases in which a lender did not even know that an agent was providing PPP loan application services.
The controversy stems from early PPP guidance from the Treasury Department and the Small Business Administration, which states that lenders would pay fees to agents out of their own fees for processing the loans.
Some agents are arguing in court that lenders must pay these fees regardless of whether there was a previous agreement. But banks are saying there should be a contractual relationship between the two parties before they are required to pay.
"We just don't agree that they should be obtaining a fee when there has been no express agreement," Independent Community Bankers of America Executive Vice President Chris Cole told S&P Global Market Intelligence.
A federal district court in Florida appeared to agree with this viewpoint Aug. 17. The U.S. District Court in the Northern District of Florida, Pensacola Division, ruled that accounting firm Sport & Wheat was not entitled to fees from ServisFirst Bancshares Inc. "in the absence of an agreement."
It is an important decision that provides further insight into how courts will interpret the PPP legislation and regulations, Jones Walker LLP partner Graham Ryan told S&P Global Market Intelligence. He said the case will not determine the outcome of other court cases, however.
And it may not be the final legal word on this issue. Ryan said the court left the door open by allowing Sport & Wheat to seek leave for another amended complaint. The case also could go to the 11th Circuit Court of Appeals. Appeals court decisions "assuredly" will occur in PPP fee cases, Ryan said in a note.
Before the ruling was handed down, Cole, also ICBA's senior counsel, said early class action lawsuits against some of the larger banks have had an impact on smaller institutions.
"Accountants are using the big names and filing all the lawsuits they can" to try to intimidate banks into settling their lawsuits, Cole said. "Class action lawsuits put a lot of pressure on the [smaller] banks."
One such class action is a case filed in May against a number of banks, including Wells Fargo and Bank of America. That case has not yet been decided.
From the agents' perspective, Erik Asgeirsson, the president and CEO of CPA.com, a subsidiary of the American Institute of Certified Public Accountants, said there was a "flurry of activity" at the outset of the PPP due to fears that the program would run out of money. As a result, borrowers tapped their advisers to submit applications with banks, but they may have done so without any written agreement in place.
He said there have been some instances in which banks have refused to pay any agent fees at all.
"Banks should operate in a good-faith manner and not have a policy that they will not support any agent fees," he said.
The AICPA is now recommending on its website that agents secure written agreements with banks before providing services to ensure they get paid. The group also advised accounting firms to contact the lender prior to providing any PPP services to its clients and to disclose to its clients if the lender agrees to compensate the firm for its services.
In separate letters, the ICBA and the American Banking Association asked Treasury and the SBA for guidance on the issue of agent fees.
In its July 31 letter, the ABA said its members were concerned "about the line being blurred between an agent providing a legitimate service to the borrower and helping get the loan processed and agents initiating this relationship without lender consent and then seeking payment on the back end."
Likewise, the ICBA, in its Aug. 7 letter, said an interim final rule is needed that requires that a formal agreement between the agent and the lender be in place that specifies "who each party represents, what their respective duties are, and the amount of the agent's fee."
The letters came weeks after Treasury Secretary Steven Mnuchin's June 30 congressional testimony in which he said that banks could pay agents, not that they have to.
"What our guidance did say is that banks could pay agent fees out of the fees that they received," he told the House Financial Services Committee. "That was intended to be based upon a contractual relationship between the agent and the bank.
"And to the extent there is any confusion on that, we will look into clarifying that," Mnuchin said.
So far, that guidance has not materialized.
If issued, the guidance may not completely solve the legal controversy, but it may put a damper on it, according to Ryan and a fellow partner at Jones Walker.
"As these lawsuits progress, the Treasury's position may not foreclose agent-fee disputes, particularly where lawsuits have asserted state law claims,” partners Robert Carothers Jr. and Ryan said in a recent newsletter. "But an interpretation of the PPP regulations that requires a contractual relationship for the payment of agent fees may curb the viability of many agent-fee claims."