As bankers process thousands of applications for Small Business Administration loans as part of the coronavirus relief law, lawyers say legal pitfalls remain and a certain level of fraud seems inevitable.

At the same time, the limited pool of funds — Congress authorized $349 billion of loans, for now — have bankers rushing to process applications as quickly as possible. Many in the industry are eager to shore up small businesses, and also avoid a repeat of the 2008 financial crisis when bankers were widely painted as the enemies of Main Street America. But a rocky rollout to the Paycheck Protection Program and inevitable incidences of fraud could scuttle those hopes.

"A year or two from now, there will be some sort of audit or investigation of this program, and there will be a lot of questions asked about individual borrowers," said Damien Specht, a partner with law firm Morrison & Foerster. "Folks won't remember that the banks were given streamlined instructions and were told to only look for these certain things and move the applications through."

The SBA Inspector General issued two white papers on April 3 highlighting risk awareness and lessons learned from previous SBA 7(a) audits. One recommended clearly written program requirements issued in a timely manner and noted that "delays in promulgating regulations caused confusion." The other white paper found that previous disaster loan programs were marked by loans to borrowers or businesses that did not suffer economic loss. That included a program that issued $527 million of loans following Hurricane Sandy. The coronavirus relief law authorized $10 billion of Economic Injury Disaster loans.

The urgency of the coronavirus pandemic and the shutdown of large parts of the U.S. economy have pressed policymakers to act quickly. That has led to uncertainty as regulators made substantive changes to the application form late on April 2, the day before the program's launch, said Rick Giovannelli, a partner at law firm K&L Gates.

"What the banks have been asked to do is essentially launch a new product for hundreds of thousands of their customers in less than seven days," Giovannelli said in an interview. "What they've been asked to do is an unprecedented, herculean task in an incredibly short amount of time."

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Banks have already attracted some criticism on social media platforms for their handling of the program. Bank of America Corp. was one of the first banks to accept applications under the program, but the lender limited it to existing small business customers with a lending relationship. That decision attracted criticism online from small businesses desperate for funding and was highlighted in the mainstream media, including The Wall Street Journal.

Lawyers said banks have good reason to focus on their own customers first. The law does state that lenders will be "held harmless" for borrowers who fail to comply with the program's requirements. But lenders still must adhere to Bank Secrecy Act and Know Your Customer requirements.

"We're helping people in our community, but if you're not a customer, we don't know you as well," said Christopher Maher, CEO of OceanFirst Financial Corp., a community bank based in New Jersey. "Is this really going to be payroll money, or are we going to have a problem in 90 days?"

Maher said his bank is accepting applications from non-customers but that the process will be lengthier. He said well-organized, existing customers can get funding the same day as applying, but new applicants will have to provide identifying documents in addition to the SBA application.

While the law appears to be clear that the loans will turn into grants as long as borrowers use funds appropriately, the SBA still needs to issue finalized guidance on forgiveness conditions, Specht said in an interview.

And there are pitfalls beyond forgiveness. Lawyers said a certain amount of fraud will be inevitable in any massive disaster relief program.

"Anytime there's money being given away for free to a restricted group of businesses or people, there will be an opportunity for fraud," Giovannelli said.

One of the trickiest areas is the definition of affiliated companies. The law stipulates that only small businesses with fewer than 500 employees are eligible for the potentially forgivable loans fully backed by the government. However, the law calls for any affiliated companies to be included in the employee count. If the company, or a third party, owns more than 50% of the voting equity in another company, it should be included in the total employee count. That could become an issue for small businesses owned by private equity firms.

However, the application asks employers to list their number of employees without clearly instructing applicants to consolidate employees from affiliated companies.

"I could be a borrower submitting 100% in good faith, but unless I talked with a lawyer, I missed 80% of the nuance," Specht said. "Because of that, the likelihood that we will see mistakes that could be characterized as fraud is high."