Paper Example on Wells Fargo Facing Lawsuit for Breaking PPP Rules

Wells Fargo is facing a lawsuit for allegedly breaking the Paycheck Protection Program (PPP) rules as the initial agreement was a first-come, first-served basis. The lawsuit is by a small company from California, and it is not the first time that Wells Fargo is getting accusations for professional misconduct. The last time the case was about the creation of fake bank accounts so that the company could gain overdraft fees by posting debit card charges (Rizzi, 2020). The lawsuit accuses Wells Fargo of misappropriation of PPP loans in favor of big businesses. Nevertheless, it was meant for smaller business to gain more commission, meaning more profit.

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The grounds of the lawsuit stemming from the allegations that many companies receiving the PPP loans were given based on pretenses and mistakes. PPP is a part of the CARES act exclusively by the federal government. In the beginning, Wells Fargo was not eligible for the project because of the previous scandal above (Rizzi, 2020). However, because of the high demand for the loan, Wells Fargo was later listed temporarily and under strict restrictions so that the loans could reach small businesses fast. Wells Fargo was then allowed to disburse up to 10 billion dollars. Wells Fargo then committed to focusing on small businesses and non-profit ones.

However, Wells Fargo intentionally rigged the rules for disbursement of the loan, which was to be on a first-come-first-served basis according to the lawsuits. Allegedly, Wells Fargo focused on companies applying for bigger loans so that they could gain more profits on processing fees. The PPP loans are fully guaranteed by the federal government and the Small Business Administration, and it presents a massive opportunity for the defendant to develop.

The lawsuit states that Wells Fargo broke its promise of prioritizing small businesses with less than 50 employees when applying for the disbursement program. Wells Fargo, however, served businesses with previous lending relationships instead of small businesses vouching for the loans as part of the Covid-19 pandemic cushion (Rizzi, 2020). The lawsuit states that Wells Fargo gave out bigger loans to favored entities to do minimum work and to gain the most profits in commissions. Wells Fargo is not the first company to be served with the same type of lawsuit, and it does not help the company's reputation.

PPP Background

The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) is a COVID-19 financial program aiming at giving support to small businesses to keep people on the payroll during the pandemic as it disrupts normal activities. In the CARES acts, section 1102, businesses adversely affected by the pandemic are eligible to apply for the loan, and it is accessible via banks that act as the third party as the federal government and the Small Business Administration are guarantors (Granja et al., 2020). The first consignment of the fund was $349 billion, but it was not enough, and the federal government sanctioned a further $310 billion. However, the maximum amount that a business can receive from the loan is $10 million to ensure that it reaches as many businesses as possible (Granja et al., 2020). Disbursement of the loan is on a first-come-first-served basis as spelt out to the responsible lenders. The lenders take up 5% of the total loan as the commission up to $0.35 million and 3% for loans ranging from $0.35 million to $2 million and 2% on any exceeding amount up to $10 million (Granja et al., 2020).

Requirements for Eligibility

PPP loans are not as strict as normal ones. A business has to have less than 500 employees to be considered for the loan, as in section 632 of the Small Business Act. The business should be running since 15th February or before, and the employees are on payroll (Granja et al., 2020). The business must justify that they need the loan as their normal operations are affected by the COVID-19 pandemic. The business should show that the funds are useful to support the people on payroll and other necessary expenses like a utility, lease, and mortgage payments.

How Class Action Relates to Business and Management

Wells Fargo Company is facing a class action as multiple companies are suing the company for discrimination in awarding federal government loans. The court of law puts together all the similar lawsuits to one rather than making them independent cases. Plaintiffs can decide to unite if they wish, but it is entirely up to them, as the court will deal with it as one big case. Companies are suing Wells Fargo as they believe the company did not adhere to the set laws when awarding the loans of the federal government under the CARES Act (Thuronyi, 2020).

Class Action against a company is detrimental to the operations as it can suffer huge losses. It is because the plaintiffs are set for compensation if the company loses the case and expenses incurred during the process. Defending a class action is a difficult task, and the company is at a considerable risk of losing a case, and the compensation to the plaintiffs is ordinarily huge. Even if the fine is not huge, accumulated cost as a result of many plaintiffs involves drives up the costs.

A company can decide to include class action clauses to avoid lawsuits of class actions. However, it is not entirely efficient, as in the case of Wells Fargo, as they do not own the funds, they are disbursing. Therefore, they are not immune to class action lawsuits as the company a third party because the Federal Government of the United States and the Small Business Administration are the main guarantors of the loans they were disbursing. If Wells Fargo were the owners of the funds, they could work their way around the class action lawsuit. It is because plaintiffs would not see the need to invest money and time in filing a class-action lawsuit (Thuronyi, 2020). However, at the moment, they are in a difficult situation as they broke the rules of disbursement of the federal government loans in favor of their interests. It shows that they are at a considerable risk of losing the class action lawsuit, and it comes at a high cost, financially and reputation-wise. Wells Fargo already has past scandals, and losing the current lawsuit would do more damage.

Including anti-class action lawsuits in contracts is no longer possible, thanks to The Consumer Financial Protection Bureau. The bureau gives companies the right to file class-action lawsuits regardless of their contract situation (Thuronyi, 2020). However, it is facing massive criticism from the United States House of Representatives, and it is most likely that they will overturn the regulation. It will enable companies to shield themselves once more from class-action lawsuits. Wells Fargo should seek to correct their actions and maintain professionalism in their business.

References

Granja, J., Makridis, C., Yannelis, C., & Zwick, E. (2020). Did the paycheck protection program hit the target? https://doi.org/10.3386/w27095

Rizzi, C. (2020). Wells Fargo facing another class action over alleged manipulation of fed. Paycheck protection program. ClassAction.org | Join Class Action Lawsuits | Know Your Rights. https://www.classaction.org/news/wells-fargo-facing-another-class-action-over-alleged-manipulation-of-fed.-paycheck-protection-program

Thuronyi, V. (2020). COVID-19 and Fiscal Policies: The Paycheck Protection Programme: A Tax Expenditure in Reverse? Intertax, 48(8), 787-789. https://kluwerlawonline.com/JournalArticle/Intertax/48.8/TAXI2020076