CARES Act PPP lending got off to a slow start last week as many banks – large and small – were unable or unwilling to accept and process applications.  The slow start is not unexpected.  Bank and non-bank experiences with the government programs from 2008 to today show that lenders and industry participants can face unique legal risks from participating in such programs.  Among those risks is that of being subject to claims under the False Claims Act relating to businesses that provide goods to the U.S. government. 

The False Claims Act originated during the Civil War in order to fight fraud with respect to goods ordered by the Union forces.  Currently, the Act “provides for liability for triple damages and a penalty of from $11,181 to $22,363 per claim.”¹  False Claims Act cases may be brought “qui tam” by private persons or “relators” acting as whistleblowers.  Relators generally receive 15% to 30% of any funds recovered on behalf of the government.²   

A case triggers a duty of investigation by the U.S. Attorney General and/or the Department of Justice, involving the Office of Inspector General with regard to the alleged “victim” agency and potentially the Postal Inspection Service and the Federal Bureau of Investigation.  If the government refuses to go forward after investigation, the relator can proceed on their own. 

Cases are brought under seal, so relatively little is known about their duration and cost.  According to the Department of Justice, “There are no statistics reported on the length of time the average qui tam case remains under seal…, [although] most intervened or settled cases are under seal for at least two years…”³ 

An illustrative example of lenders exposed as a result of federal government programs in the last crisis is United States of America ex rel. v. Ocwen Loan Servicing LLC, which was brought under the False Claims Act.⁴  The suit was settled just before trial, even as other, similar suits are still pending.  

These HAMP False Claims Act cases have little or nothing to do with whether the modifications helped borrowers.  Rather, they relate to early Home Affordable Modification Program (“HAMP”) forms supplied by the U.S. Treasury, on which corporate officers attested that their firms were “in compliance” with all state and federal laws and regulations.  The forms were subsequently revised by Treasury to attest to being “materially” in compliance with state and federal laws and regulations.  Nonetheless, among other claims relators sought to have each HAMP modification considered an individual violation initially resulting from the allegedly false attestation.  The change to the attestation language was only one alteration.  The Treasury ended up issuing new rules for HAMP roughly monthly over the next five years.  

The allegations in these HAMP cases, therefore, center on the Treasury’s forms and procedures used in the policy response to rapidly deteriorating conditions in the housing market.  Like PPP, HAMP was developed by the Department of Treasury in a time of crisis to help U.S. citizens.  Like PPP, the program was built as a collaboration between lenders and the government. Also like PPP, financial services firms received a fee for each HAMP modification so that they might be said to provide a service to the government in exchange for money, possibly exposing them to False Claims Act claims. 

Whether the Treasury considered firms’ initial HAMP disclosures problematic is unknown.  Indeed, the government’s intention in the arrangement may be of little relevance in any subsequent False Claims Act lawsuit.  So while it is relatively easy to imagine banks acting quickly on behalf of government agencies seeking to provide bailout infusions of cash, banks could still be on the hook for loan program, form, and procedural deficiencies.