Banking and Business Monthly – April 2021

A.       Potential EIDL Fraud and the Need for Lender Due Diligence

There have been reports of companies experiencing fraudulent loan activities involving Economic Injury Disaster Loans (EIDLs) from the U.S. Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In some cases, the SBA has filed all-asset UCC Financing Statements on unsuspecting borrowers even if the borrowers had not applied for an EIDL. Often in these cases, third parties, not the borrowers, had either actually obtained EIDL funds or, if the SBA was not able to confirm a bank account number for the third party, the SBA created an active EIDL account and charged a $100 processing fee even if the EIDL was never funded.

Lenders and borrowers contemplating a loan are encouraged to conduct due diligence and order UCC lien searches early in the underwriting process to learn whether a borrower is a victim of such fraudulent activity and to take steps to remediate it. Borrowers who received a PPP loan seem to be more at risk. The UCC lien searches should reveal whether the SBA placed a lien on a borrower’s assets. Note that any such lien would relate only to an EIDL because PPP loans are unsecured and are not funded by the SBA.

If the SBA has placed a UCC lien on a borrower and the borrower has not applied for and received an EIDL, the following actions should be taken:

1. Check a public database to see if the SBA has reported the company to have been approved for an EIDL.  COVID Bailout Tracker is an example of one such database.
2.  Contact the SBA’s EIDL office at (800) 659-2955 to advise the SBA that it was a fraudulent loan and work with the SBA to have it classify the EIDL as fraudulent and initiate an investigation.

The SBA’s fraud investigation could take 60 days or longer, and note that the SBA will not file a UCC Termination Statement terminating the previously filed UCC Financing Statement until the SBA completes its investigation.

Once the SBA notifies the borrower that the SBA has deemed the loan fraudulent, we can assist lenders or borrowers with the termination of the fraudulent UCC Financing Statement. If the parties desire to close the loan before the SBA completes its fraud investigation and files a UCC Termination Statement, we can assist with the negotiation and documentation of the loan on behalf of borrowers or lenders to ensure the fraudulent UCC Financing Statement is appropriately handled in the loan documents. Please contact me at smigala@lavellelaw.com or at (847) 705-7555 for assistance.

B.       Illinois Caps Consumer Loan Interest Rates at 36%

On March 23, Illinois Governor Pritzker signed into immediate effect SB 1792, containing the Predatory Loan Prevention Act (Act). The Act extends the 36% “all-in” Military Annual Percentage Rate (MAPR) finance charge cap of the federal Military Lending Act (MLA) to “any person or entity that offers or makes a loan to a consumer in Illinois” unless made by a statutorily exempt entity. The Act applies to consumer loans under $40,000, and covers payday loans, auto title loans and installment loans, including open-end lines of credit and closed-end loans. The Act separately amends the Illinois Consumer Installment Loan Act and the Payday Loan Reform Act to apply this same 36% MAPR cap.

Like the MLA, the Act takes an “all in” approach to calculating APR. Thus, the calculation includes periodic interest, finance charges, credit insurance premiums, fees for participating in any credit plan, fees for ancillary products sold in connection with the loan, fees for debt cancellation or suspension, and, under some circumstances, application fees.

The Act contains an exemption for financial institutions such as banks and credit unions. However, it also includes an anti-evasion provision likely designed to curb partnerships and service provider relationships between banks and non-exempt entities such as fintech companies, marketplace lenders, and loan servicers, in which the latter operates loan programs using loans generated by banks with interest rates in excess of the 36% cap. Under the anti-evasion provision, a person or entity that “purports to act as an agent, service provider, or in another capacity” for a bank or other exempt entity is subject to the Act if, among other things, the person or entity “holds, acquires, or maintains . . . the predominant economic interest” in the loan generated by the exempt entity. However, it remains to be seen how the anti-evasion provision—which appears to cover loans originated by a bank and sold to a non-exempt third party—will be applied in light of its potential conflict with “Valid When Made” rules issued in 2020 by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Under those rules, the permissibility of a loan’s interest rate is determined at the time the loan is made by a bank and is not affected by the bank’s subsequent transfer of the loan to a third party. Illinois is one of several states that have filed suit against the FDIC and the OCC to challenge the Valid When Made rules.

These and other interpretation issues surrounding the Act should be addressed by the Illinois Department of Financial and Professional Regulation (IDFPR) in rules implementing the Act. Lenders affected by the Act should monitor the IDFPR for its issuance of regulatory guidance.

If you have any questions about this article, please contact Steve Migala at smigala@lavellelaw.com or 847-705-7555.