Fintech companies have a problem with Covid aid loan scams



Fintech lenders have helped expedite bad government loans to small businesses affected by the pandemic. But these tech-savvy lenders may have also opened the door for widespread fraud and misuse of taxpayer money.

Fintech is almost five times more likely than traditional banks to issue “highly suspicious” loans worth $ 780 billion. Payroll protection program (PPP) according to research published Tuesday.

According to a study by researchers at the McCombs School of Business at the University of Texas at Austin, nine of the top ten PPP lenders with the highest rates of suspicious loans are fintech companies, and the remaining one operates as a fintech company.

Overall, the researchers found that 1.8 million PPP loans totaling $ 76.3 billion had suspicious characteristics.

The report points to regulatory gaps and due diligence failures that have led to a suspicious lending of taxpayer money to help family stores hit by the pandemic.

“These results highlight the high costs associated with low levels of supervision and the lack of sufficient negative impact on borrowers and lenders due to poor lending practices under PPPs,” the researchers concluded.

‘I closed my eyes’

Specifically, the report found that the three largest fintech issuers of PPP loans – Cross River, Capital Plus and Harvest – had “high and growing rates” of misreporting and received more than $ 900 million each in processing fees.

The authors wrote that the sheer volume of suspicious lending to fintech companies suggests that “many lenders either encouraged such loans, turned a blind eye to them, or applied weak supervision procedures.”

The fintech industry has opposed these arguments.

“Cross River has responded to a congressional mandate and in the process has deployed fraud detection standards that have far surpassed the ever-changing requirements of the SBA program,” a Cross River spokesman said in a statement, adding that they have reached nearly half a million “smallest and most needy vulnerable enterprises “.

Fort Lee, New Jersey, Cross River said it was “disappointing that some are using false criticism, crude assumptions and unsubstantiated statements to undermine the casualties and countless hours that have been devoted to recovering the American economy.”

The Fintech Association, an industry trade group, championed the role of fintech during the pandemic.

“Despite evolving government leadership and inadequate processing systems, fintech companies have met the goal of a regulatory PPP program throughout the lending process, helping save hundreds of thousands of small businesses,” said Penny Lee, CEO of the trading group, said in the message.

Lee also pointed the finger at traditional lenders.

“While small businesses have suffered, many large legacy financial institutions have refused to lend to businesses with no existing relationships,” the statement said.

Capital Plus and Harvest did not respond to requests for comment.

Red flags in PPP lending

Fintech use digital technologies to issue loans, store deposits and provide other banking services, usually without physical bank branches. This new model relies heavily on loan application validation algorithms and sometimes lacks the robust compliance procedures that traditional banks rely on. Fintech tends to be less subject to regulatory scrutiny.

“There is a trade-off between quick and easy access to government funds and the potential for abuse,” said Sam Krueger, one of the study’s authors and assistant professor of finance at the University of Texas at Austin, in an interview.

To identify potential fraud, researchers looked for red flags in PPP loan applications, including unregistered businesses, multiple businesses at home, unusually high estimated compensation per employee, and large disparities in the number of workers. reported in applications for participation in other government programs.

Of course, some fintech companies have followed this trend. The study found that Square and Intuit have some of the lowest reporting fraudulent rates of any lender.

“Online lending is not a problem in itself,” the report says. “One thing that sets Square and Intuit apart is that they have established customer relationships based on a wide range of payment, accounting, payroll and other financial support services.”

Luxury cars, jewelry and other items purchased with PPP funds

Created in March 2020 when the pandemic broke out, PPPs brought more 11 million loans worth nearly $ 800 billion that the government pledged to forgive if the recipient used a certain portion of the money to pay the workers.

The Office of the Inspector General of the Small Business Administration said that as of July 15, more than $ 611 million had been returned or withdrawn from loan recipients as a result of investigations related to PPPs or disaster loans for economic damages. The agency’s oversight body said 139 open PPP investigations had been conducted as of mid-July, and more than 10,200 PPP loans had been flagged for identity theft.

Federal prosecutors prosecuted dozens of applicants who allegedly took advantage of the emergency assistance program.

The Justice Department says that since the launch of the PPP, it has prosecuted more than 100 defendants in more than 70 criminal cases related to the program. The Justice Department confiscated more than $ 65 million in cash proceeds that it said was fraudulently derived from PPP funds. The prosecutor’s office also seized real estate and luxury items purchased with loans.

For example, 22 people were charged with a $ 11 million PPP scheme that involved for emergency funds for the purchase of luxury cars, jewelry and other personal items.

Last week, a Washington State man was sentenced to two years in prison after pleading guilty to nine bogus emergency loan applications for over $ 1.1 million. According to the prosecutor’s office, six of the nine applications were approved.

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