FinTech Paycheck Protection Program Loans at Higher Risk of Fraud, Study Finds

ATLANTA – A new analysis has found that more than $ 76 billion in Paycheck Protection Program loans may have been obtained fraudulently, with many loans granted by online lenders.

So far, few of these “bad” loans appear to have been detected by authorities or paid off, according to a study conducted by researchers at the McCombs School of Business at the University of Texas at Austin.

Online lenders, known as fintechs, have streamlined the processes used to quickly issue pandemic relief loans to applicants, meeting one of the program’s primary goals of quickly putting federal dollars into circulation. . But it may have been a boon for bad players looking to avoid the more stringent underwriting standards used by traditional banks, which are in place to help detect fraud, the study found.

“I see very broadly that there is a trade-off between quick and easy access to this government money and susceptibility to abuse,” said Sam Kruger, assistant professor of finance and one of the study’s authors. , at the Atlanta Journal-Constitution. “And I think one of the things our research highlights is the potential cost of that easy access.”

The federal paycheck protection program was enacted to help small businesses stay afloat during the pandemic. The forgivable loans were to cover payroll, rent and utilities expenses as state and local governments ordered businesses shut down or when they had to scale back operations to fight the spread of the virus.

Back then, businesses, from beauty salons to dentists and restaurants, were forced to lay off employees.

To examine the potential for fraud in the program, the researchers analyzed more than 10 million PPP loans that provided more than $ 780 billion, using various indicators indicating that the loan information may be suspicious.

One measure was whether more than one loan had been granted to a residential address. Other main indicators were whether the loans went to companies that were not registered or registered after the deadline of February 15, 2020, to be eligible for the loans; whether the wages declared to workers appeared high relative to the industry and location of the business; and whether companies have reported different job numbers on applications for another pandemic relief loan program.

In one example cited in the study, 14 loans totaling nearly $ 800,000 – all but one approved by Atlanta-based Kabbage – were made to 14 businesses that all used the same address, a modest single-family home in the suburb of Atlanta. Chicago. The companies had “colorful business names” and all claimed 10 employees. Eleven of the loans were for identical amounts, $ 53,229. Only one of the companies was registered as of February 15, 2020. The remaining 13 companies did not register until shortly before the loans were approved.

In another case, Kabbage approved four separate loans of $ 20,833, all in another “modest suburban Chicago home,” in July 2020. Two of the companies were listed as manufacturers of lawn and garden equipment, l one was doing auto repairs and the other was a nail salon.

Photos of the property showed no evidence of such businesses, the report said, and the borrower in the hair salon business did not appear to have a nail technician license.

Particularly high percentages of reported loans are concentrated near Atlanta and New Orleans and surrounding areas, according to the report.

Researchers at the University of Texas have uncovered numerous suspicious loans issued by traditional banks, analyzing the loans granted in three waves. But they found fintech loans to be “very suspect” at nearly five times the rate of traditional lenders, with FinTechs making up nine of the 10 lenders with the highest bad loan rates.

Of more than 1.8 million bad loans, fintechs generated 52%, while their loan market share was just under 29%. Overall, researchers reported over 31% of fintech loans as potentially suspect, compared to 11.6% of loans from traditional banks.

“Not only do fintechs have higher bad loan rates, but those bad loan rates increase dramatically over time, when you look and compare round one to round two to round three,” Kruger said.

Kabbage was purchased last year by American Express and operates under the name K Servicing. On Monday, an American Express spokesperson asked questions of K Servicing, who did not respond to a request for comment.

The company’s website brags about the PPP loans it has made and references a report saying it “served the most vulnerable businesses as more than 92% of all loans were under $ 50,000. “. He also takes credit for saving 945,000 jobs.

Fintechs present important distinctions with traditional banks which may partly explain their disproportionate share of suspicious loans.

The researchers cited an independent study which found that online lenders improved access to PPP loans by lending in more zip codes with fewer traditional banks, lower incomes, and higher minority percentages. Ahead of the PPP program, another study cited by the researchers found that FinTech is filling the small business lending gap left by traditional banks.

“Online lending does not appear to be the problem per se,” the researchers wrote. He noted that two fintech lenders, Square and Intuit, had the lowest suspect loan rate among all lenders.

But both of these online lenders have established relationships with clients, the report says.

The researchers also noted a potential incentive for all lenders under the program: the profits they could make, when they themselves did not bear any credit risk if the loans were bad. Lenders were explicitly allowed to rely on borrower information.

“While there are limits to what our data and analysis can discern, the extent of the tens and hundreds of thousands of suspicious loans issued by many FinTech lenders suggests that many lenders have encouraged these loans, have closed their eyes or have extremely lax control procedures, ”the report concludes.

The University of Texas report says Kabbage earned about $ 188.8 million in fees for issuing more than 180,000 PPP loans worth $ 3.3 billion.

Kabbage has already come under scrutiny by news outlets. A news report said the company sent at least 378 PPP loans worth $ 7 million to likely non-existent farms.

In late spring, a congressional oversight committee sent letters to several lenders, including Kabbage, requesting documents and information regarding their handling of PPP loans.