Federal courts across the country are being asked to step in as small businesses hit roadblocks applying for billions of dollars in COVID-19 relief funds.

Pointing out a “significant flaw” in the government’s emergency coronavirus response bill, a federal judge nevertheless declined to block Bank of America from prioritizing its own customers over small businesses who don’t have a preexisting relationship with the bank.

The problem is banks requiring previous relationships with borrowers before new lending contracts can be created. While one federal judge sided Monday with Bank of America in a case out of Maryland, she noted the existence of a “significant flaw” with the government program.

Signed into law at the end of March, the CARES Act – short for the Coronavirus Aid, Relief, and Economic Security Act – includes several financial support systems for people and businesses across the country struggling in the face of the COVID-19 pandemic.

Among other measures, the law created the Paycheck Protection Program, or PPP, which set aside nearly $350 billion for businesses to maintain their payrolls during the virus outbreak that has forced millions of businesses to close in hopes of slowing the spread of the respiratory disease.

The bipartisan agreement was hailed by leaders in both parties, but when banks created online portals for small businesses to apply for PPP over the first weekend in April, issues began to surface.

Senator Ben Cardin, a Maryland Democrat and ranking member of the Senate Committee on Small Business and Entrepreneurship, was among those who said he was “deeply troubled” by the preexisting relationship requirements being enforced by banks.

“Creating artificial barriers that block businesses from much-needed capital is redlining by another name,” Cardin said in a statement.

Senator Marco Rubio, R-Fla., was similarly displeased with the initial rollout.

“The requirement that a #SmallBusiness not just have a business account but also a loan or credit card is NOT in the law we wrote & passed or in the regulations,” Rubio tweeted April 3, noting the requirement at issue was from Bank of America, not the government. “They should drop it.”

But new criticism was lobbed this week by U.S. District Judge Stephanie Gallagher, despite her ruling Monday denying an injunction request to block Bank of America’s lending requirement.

The underlying class action, filed by Baltimore-based manufacturer Profiles Inc., accuses Bank of America of putting “discriminatory policies of corporate greed over the needs of America’s small businesses.”

“Nothing in the CARES Act authorizes or permits defendants to pick and choose who would gain access to or benefit from the federally backed lending program,” the 16-page complaint states. “There is no justification for requiring depository clients and other small businesses to go to the end of the line.”

But Gallagher, an appointee of President Donald Trump, found the stimulus law did not expressly create a private right of action allowing small businesses to sue lenders over provisions of the law, effectively tying the court’s hands.

“Plaintiffs’ experiences demonstrate a significant flaw, from their perspective and that of many other small businesses, in the implementation of the massive and complex PPP program,” the judge wrote in her 23-page opinion. “However, given the competing policy interests, the need to balance the desire to assist the widest swath of small businesses with the need to incentivize lender participation, and the overall fluidity of this epidemic, Congress is better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis.”

Alan M. Rifkin — managing partner of the Bethesda-based firm Rifkin Weiner Livingston, which represents Profiles Inc. in its case against Bank of America — pointed to Gallagher’s criticism in a statement following the opinion’s release.

“The class action highlights serious shortcomings in Bank of America’s administering of the program,” Rifkin said. He promised to appeal the decision, but in the meantime asked Congress to “do what is right and open the PPP process to any small business that otherwise qualifies for federal funds under the PPP program.”

While Gallagher highlighted the program’s main flaw, she noted banks typically put their own customers first and declined to issue an order that could “undermine Congress’s goal to maximize relief for American small businesses.”

“If fewer lenders are incentivized to participate in PPP, because they are prohibited from prioritizing their own customers or other entities they believe worthy of expedited consideration, then fewer American small businesses will have access to the pool of readily available PPP funds, and Congress’s statutory scheme would be further frustrated,” she wrote.

In its response to Profiles Inc.’s injunction request, Bank of America pointed to the importance of prioritizing current lenders for that exact reason.

“BofA’s decision to prioritize lending to clients who do not have lending relationships with other banks is simply an effort to direct its resources quickly and efficiently,” wrote Kenneth Smurzynski with the DC-based Williams & Connolly LLP, who represents the bank in the dispute. “Because lenders already have information about their existing clients, prioritizing those clients streamlines the application process, meaning more loans are processed faster.”

Federal judges in Houston are also handling lawsuits from small businesses making similar complaints against Wells Fargo and a local financial institution, Frost Bank.

The complaints, filed over the weekend by Houston lawyer Salar Ali Ahmed, claim the preexisting relationship requirements at both banks violate the CARES Act.

“Defendant implemented a loan process that unlawfully prioritized its existing business clients at the expense of not only its own clients without business checking accounts, but also other small businesses from applying for funds from the governmental loan program,” according to the lawsuit against San Antonio-based Frost Bank.

But as these lawsuits roll in, some criticism of the program has been dialed back.

“Despite some challenges, the program has now had over 1 million small businesses approved for small business loans,” Senator Rubio said in a Twitter video posted Tuesday morning

The Florida Republican stressed early issues were the result of the all-new nature of the emergency lending program. He reversed course on earlier complaints, calling the program a success and claiming over $240 billion has been committed to small businesses with disbursements already underway.

“But there’s more work to be done,” Rubio added. He called on his fellow lawmakers to approve more funding for the program, after a dispute in the Senate last week that saw an additional $250 billion in PPP funding die on the floor.

In an emailed statement, Bank of America spokesperson William Halldin said the bank “remained focused” on the more than 300,000 applications it has received, totaling more than $45 billion since it opened the program.

— By Brad Kutner, CNS