Online financial companies’ processes facilitated fraud in PPP loans, Texas university study finds

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Online companies fusing tech and financing became major players in the government’s Paycheck Protection Program in the past year. A new academic analysis suggests they also fueled billions in fraudulent loans.

The McCombs School of Business at the University of Texas, Austin released a report Tuesday analyzing the $780 billion lending program that boosted the burgeoning “fintech” market, which replaced traditional banking relationships with apps and algorithms.

Overall, the report identified more than 1.8 million loans with indications of potential fraud by borrowers, representing about $76 billion – nearly 10% of the total loaned in the COVID-19 business assistance program. About 960,000 of those, $21 billion, came through the new online lenders.

Lead researcher John Griffin said the team looked at nine indicators, including four primary and five secondary red flags that could indicate misreporting by borrowers.

“We … found widespread evidence of misreporting, and it’s not just random,” Griffin said. “There’s a very strong pattern (showing) a cluster of fintech originators.”

Although the PPP funds are technically loans, they can be forgiven if businesses prove they saved jobs and used the money correctly. Small Business Administration data shows only a fraction, about 17,000, have been repaid.

The report outlines how borrowers, including criminals, could create fake companies with fake head counts and fake salaries to capture a slice of the pandemic assistance, facilitated by the largely automated review of fintech lenders.

The research takes aim at companies that claim suspiciously high-paying jobs clustered in single residential homes. That was the case in two Chicago cases highlighted in the report.

Those two loans were originated by Kabbage, a pioneer in fintech PPP lending that is the target of probes by Congress and others. It provided millions in loans to fake farms last year, according to a review by ProPublica. Company representatives for Kabbage, now owned by American Express, and the company that still holds the loans, K Servicing, declined to comment.

Representatives from Blueacorn, a marketing partner with two of the other fintechs highlighted in the report – Capital Plus and Prestamos CDFI – also were contacted by USA TODAY for comment. They pushed back at the report’s findings, sending a letter from a company attorney to UT Austin’s president over the weekend asking him to delay its release or face “reputation damage” and “large scale repercussions.” The CEO of Capital Plus sent a letter to the university’s president Monday.

The two Blueacorn lenders stood out in the report based on volume of loans granted and the percentage flagged by the researchers as suspicious – including being first and second in the nation for writing loans to businesses created after a February 2020 cutoff for PPP loan applications or those absent from their state’s business registry.

Blueacorn argued that even though SBA regulations did not require much cross-referencing with business databases, it set a higher standard, holding up many loan applications for deeper scrutiny.

In the letter to UT Austin, Blueacorn attorney Jonathan Frutkin pointed out that the university’s research ended April 30, which left out denials of loans after that time and loans canceled and not paid out after further scrutiny.

“The failure to use all available data to reach an erroneous conclusion is problematic for the University of Texas,” Frutkin wrote.

The company cited its work to serve Black and Latino borrowers, accusing the researchers of insinuating that those small-business owners were more likely to commit fraud.

In response, the Austin researchers performed an additional analysis over the weekend using the updated June 30 data, which includes canceled and undisbursed loans. They said the percentage of misreporting in loans written by fintechs declined only slightly.

Blueacorn was created in 2020 exclusively to source PPP loans. It partnered with Capital Plus, a mortgage lender in Texas and Prestamos CDFI, a small-business lender in Phoenix aimed at Latino borrowers.

The companies make their money by capturing processing fees on the loans – $926 million in the case of Capital Plus, according to the university’s report.

The report highlighted suspicious lending patterns by fintech startups Cross River, Harvest and MBE. It pointed out that fintechs Capital One, Square and Intuit had fewer indicators of misreporting.

Industry pushes back on report’s claims

Capital Plus Chief Operating Officer Greg Jacobson on Monday called the UT study “grossly inaccurate, and filled with bad assumptions and bad data.”

The company, Jacobson told USA TODAY, has been bombarded by fraudulent activity ranging from inflated salaries and identity theft to sophisticated fraud schemes run by criminal rings.

Jacobson said his company’s pool of loans initially approved but flagged for further review – and ultimately not funded – helps explain some of the activity the UT study considered suspicious. He said the SBA’s limited guardrails, aimed at helping struggling businesses access capital, meant that the company didn’t always apply the same verification as the academic paper.

“We think the report’s loan count was inflated by more than 20%, and that includes a large portion of loans we eventually caught with our additional due diligence,” Jacobson said. “We weren’t supposed to go around checking business registrations. The only reason you’d do that is if you believe you’ve been provided something that’s inaccurate.”

Jacobson said Capital Plus switched identity verification providers months ago after it saw fraud rings posting online tutorials about how to bypass the safeguards.

Representatives from Prestamos did not respond to a request for comment. Blueacorn CEO Barry Calhoun said in a statement that the company was “incredibly proud of the work we have undertaken to dramatically reduce fraud in the PPP program.”

“As we reviewed increasing volumes of loan applications, we learned, adapted, and enhanced our fraud detection capabilities and protocols,” he said. “Along the way, we partnered with the SBA and other authorities to ensure the integrity of the PPP while providing a traditionally overlooked population with access to the funds they needed and deserved.”

The company told USA TODAY it received 4.28 million loan applications it sent to Capital Plus and Prestamos. Less than a quarter of those, 966,000, met the SBA’s requirements for approval. Within those, more than 150,000 originally approved failed greater scrutiny.

How researchers reached their conclusions

The Austin business school researchers considered loans to nonregistered businesses, multiple loans to a single residential address, abnormally high job compensation and inconsistencies in borrowers’ claims about the number of jobs saved vs. claims they made to other COVID-19 assistance programs.

They wrote that “the sheer scope of the tens and hundreds of thousands of suspicious loans originated by many fintech lenders suggest that many lenders either encouraged such loans, turned a blind eye to them, or had extremely lax oversight procedures.”

The research team performed the analysis on more than 10 million loans from the SBA. Griffin, the team lead, is a specialist in “forensic finance” tracing illegal, illicit and immoral actions in the financial markets. He’s served on the faculty at Arizona State University, Yale University and Harvard Business School.

Because of the way the SBA configured the loan program, the lenders bore no credit risk for misreported loans. Though they must collect documents from loan applicants and follow Banking Secrecy Act requirements about identity, “they were explicitly allowed to rely on borrower certifications and representations and do not face liability for borrower misstatements,” the report says.

Rep. James Clyburn, D-S.C., chairman of the Select Subcommittee on the Coronavirus Crisis, sent letters in a probe of fintech lending to Kabbage, BlueVine, Cross River Bank and Celtic Bank.

Rep. James Clyburn, D-S.C., chairman of the Select Subcommittee on the Coronavirus Crisis, sent letters in a probe of fintech lending to Kabbage, BlueVine, Cross River Bank and Celtic Bank.

Despite that shield, fintechs have raised concerns among regulators at the SBA, Department of Justice and Congress. In February, Rep. James Clyburn, D-S.C., chairman of the Select Subcommittee on the Coronavirus Crisis, sent letters in a probe of fintech lending to Kabbage, BlueVine, Cross River Bank and Celtic Bank.

Reuters reported in May that federal prosecutors investigated Kabbage over miscalculated loans.

Federal prosecutors have charged more than 160 borrowers over more than 350 fraudulent loans and arrested a string of alleged offenders accused of making high-end luxury purchases such as sports cars with their illegal proceeds.

The SBA did not respond to requests for comment for this story, but the SBA’s Office of Investigator General said in March that it found $78 billion in potential fraud in the Economic Injury Disaster Loan program and $3.6 billion in the PPP program.

This photo provided by U.S. Immigration and Customs Enforcement shows special agents with HSI Los Angeles's El Camino Real Financial Crimes Task Force seize a Lamborghini from an Orange County businessman on Thursday, April 6, 2021, in Irvine, Calif. Mustafa Qadiri, 38, of Irvine, was named in a federal grand jury indictment and has pleaded not guilty to charges he obtained $5 million in federal coronavirus-relief loans for phony businesses and then used the money for lavish vacations and to buy a Ferrari, Bentley and Lamborghini, prosecutors said Monday, May 10.

This photo provided by U.S. Immigration and Customs Enforcement shows special agents with HSI Los Angeles’s El Camino Real Financial Crimes Task Force seize a Lamborghini from an Orange County businessman on Thursday, April 6, 2021, in Irvine, Calif. Mustafa Qadiri, 38, of Irvine, was named in a federal grand jury indictment and has pleaded not guilty to charges he obtained $5 million in federal coronavirus-relief loans for phony businesses and then used the money for lavish vacations and to buy a Ferrari, Bentley and Lamborghini, prosecutors said Monday, May 10.

Chicago lending pattern shows indicators of fraud

Researchers pointed to two examples from the Chicago area with flags that suggest misreporting.

In one case, 14 loans were written to entities registered to a single residential address in the suburb Park Forest. Many of those LLCs with similar-sounding names such as “Save the World LLC” and “Keep Your Head Up LLC” were formed in July and August 2020, well after the statutory cutoff of Feb. 20, 2020, to qualify for the lending.

The 14 LLCs registered to the same man claiming 10 employees at each company received PPP loans for more than $50,000 each, totaling $792,497, according to SBA records.

USA TODAY identified the 38-year-old man as Marvin A. Reed through business and other public records.

In a phone interview, he repeatedly denied creating the businesses or taking the loans and claimed his identity had been stolen. He acknowledged his mother lives at the address registered to the businesses and confirmed his birth date.

Shown social media accounts registered to Marvin Reed of Park Forest, Illinois, depicting a man wearing a red sweatshirt with one of the company’s names, “Divine Revelation Entertainment,” Reed claimed it was not him.

“I didn’t do it,” Reed said. “I don’t know how it happened.”

The Facebook and Instagram accounts associated with Reed were deactivated over the weekend.

Fintech lender Kabbage processed Reed’s loans.

In another Kabbage case flagged by the Texas team as suspicious, loans were given to four individuals from the same family – ages 20, 21, 46 and 49 – living in the same home in suburban Chicago. The borrowers in July 2020 claimed to be lawn equipment manufacturers, auto repair workers and nail salon technicians, and all said they were making $100,000 a year.

Each received loans for $20,833, the maximum they could qualify to receive through PPP compensation rules.

Nick Penzenstadler is a reporter on the USA TODAY investigations team. Contact him at npenz@usatoday.com or @npenzenstadler, or on Signal at (720) 507-5273.

This article originally appeared on USA TODAY: COVID-19 PPP loan borrower fraud fueled by fintechs, report finds

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