Fintech Handled More Suspicious PPP Loans: Research



Brief description of the dive:

  • Fintech lenders were almost five times more likely to be associated with suspicious loans under the Payroll Protection Program (PPP) than traditional banks. according to research published Tuesday by researchers at the McCombs School of Business at the University of Texas at Austin.

  • The study examined over 10 million PPP loans for potential red flags such as unregistered businesses, multiple businesses at the same residential address, abnormally high implied compensation per employee, and significant workplace discrepancies reported in another government program.

  • The researchers found that nine of the 10 lenders with the highest percentage of suspicious PPP loans were fintech companies. “While FinTech lenders are likely to expand access to PPPs, this can be done by facilitating credit fraud,” they wrote.

Dive Insight:

Small Business Administration (SBA) supported 11.8 million credits totaling nearly $ 800 billion by the end of the PPP in May and faced fears of fraud from the early months of the program.

Choosing a House USA Coronavirus Crisis Subcommittee said in march that Nearly $ 84 billion in Coronavirus Crisis Lending through PPP and Economic Injury Loan could be fraudulent.

Subcommittee in May started an investigation about the role of fintech in PPP, stating that “fintech companies and banking partners were associated with a disproportionate amount of fraudulent PPP loans.” The panel “seeks to understand the fraud and compliance systems” used by fintech companies through the program.

Due to the urgency of providing quick assistance to borrowers in a pandemic, “PPP did not include strict verification requirements,” the report said. John Griffin, Samuel Kruger and Pratik Mahajan, study authors. “The lack of rigorous scrutiny appears to have resulted in significant costs for taxpayers.”

The researchers write that the ability of lenders to collect processing fees has also served as fertile ground for lax underwriting standards.

According to the study, lenders earned $ 36.2 billion in processing PPP payments. Of this, $ 7.2 billion went to fintech companies.

“Lending to PPPs could be a lucrative business for lenders,” the researchers write. “The advance payments on each loan, coupled with the absence of credit risk, has potentially created an incentive for weak underwriting standards, especially for specialized PPP lenders.”

“When you have a lot of money withdrawn quickly, there is the potential for fraud and misconduct,” Griffin said. told Bloomberg… “There are many differences between senders, indicating that creation practices are likely to play a large role in potential violations.”

The researchers found that the rates of fraud in PPP loans associated with financial technology lenders increased with each iteration of the loan forgiveness program.

According to the study, both fintech and traditional lenders started PPPs with suspicious lending rates of around 10%, with suspicious lending rates of fintech companies rising to 40% by the end of the program.

The study identified the three largest fintech lenders of the program – Cross River Bank, Capital Plus Financial, and Harvest Small Business Finance – as lenders that showed high and growing rates of both inaccurate reporting and lending, with each receiving more than $ 900 million. US for a handling fee.

Adam Siri, chief operating officer of Harvest, told Bloomberg that the company “has systems to track and detect fraud through its PPP program.”

Siri disagreed with the report’s categorization of Harvest as a financial technology company and told the CW that the company considered itself a “non-bank lender.”

A New Jersey-based Cross River spokesman said the bank’s fraud detection standards “far exceed” government requirements.

Without limiting its program to existing clients or a minimum size, the lender has served nearly half a million businesses, retaining “more than 1.4 million US jobs,” the bank said in a statement to Bloomberg.

In response to the report, Capital Plus sent a letter to the president of the University of Texas at Austin, Jay Hartsell, saying that, according to Bloomberg, the study included proposed loans that were never made.

Capital Plus CEO Eric Donnelly said in a letter that the company has turned down more than 20% of loans marked as approved or funded on the SBA’s website and is working to update the information.

The university’s report, which is likely to generate further backlash from fintech lenders participating in the program, comes as the sector is undergoing scrutiny by the DOJ regarding its handling of PPP loans.

A civil division of the US Department of Justice is investigating whether Cabbage and other fintech companies have miscalculated eligibility for PPP assistance to borrowers, citing confusion over how to account for payroll taxes. Reuters reported in May

BUT ProPublica report In May, it was revealed that 378 PPP loans totaling $ 7 million issued by Cabbage were transferred to fake commercial entities.

However, not all fintech lenders have received high rates on suspicious loans. Square and Intuit had the wrong rates, which are “well below the average rates for all lenders,” the authors of the report write.


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