PPP financial loans face high risk of potential fraud

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(TNS) – New analysis found more than $ 76 billion in payroll protection loans could have been fraudulently obtained, with many of the loans originated from online lenders, including the Atlanta-based Cabbage.

So far, some of these “dubious” loans have been discovered or repaid, according to a study by researchers at the McCombs School of Business at the University of Texas at Austin.

Online lenders known as FinTechs have streamlined the processes they used to quickly disburse pandemic relief loans to applicants, thereby meeting one of the program’s main goals by quickly issuing federal dollars. But it could be a boon for bad players looking to avoid the stricter underwriting standards used by traditional banks to help detect fraud, the study said.


“I am very broadly aware that there is a trade-off between quick and easy access to this public money and vulnerability to abuse,” said Sam Krueger, assistant professor of finance and co-author of the study. “And I think one of the things our research is shedding light on is the potential cost of that free access.”

A federal payroll protection program was put in place to help small businesses stay afloat during the pandemic. The forgiven loans were expected to cover wages, rent and utilities costs, while state and local governments ordered factories to close or when they had to cut operations to stave off the spread of the virus.

At the time, companies from beauty salons to dentists and restaurants were forced to lay off employees.

To investigate the possibility of fraud in the program, the researchers analyzed over 10 million PPP loans for more than $ 780 billion, using various indicators indicating that information about the loan could be suspicious.

One of the criteria was whether multiple loans were issued to the address of residence. Other primary indicators were: whether loans were transferred to businesses that were not registered or registered after the cut-off date of February 15, 2020, in order to qualify for loans; whether the declared wages of employees are high compared to the industry and location of the enterprise; and whether businesses applied different job numbers in applications for another pandemic loan program.

In one example cited in the study, 14 loans totaling nearly $ 800,000 – all but one approved by Cabbage – were made to 14 companies that used the same address – a modest single-family home in suburban Chicago. The companies had “colorful names” and all announced 10 employees. Eleven loans were for identical amounts, $ 53,229. By February 15, 2020, only one business was registered. The remaining 13 companies registered shortly before the loans were approved.

In another case, Cabbage approved four separate loans of $ 20,833, all in another “humble suburban Chicago home” in July 2020. Two businesses were listed as manufacturers of garden and lawn equipment, one for car repairs and one for a nail salon.

The report says there was no evidence of such a business in the photographs of the property, and the beauty salon borrower did not appear to have a license as a nail artist.

The report notes that a particularly high percentage of noted loans clustered around Atlanta and New Orleans and surrounding areas.

Researchers at the University of Texas found many suspicious loans from traditional banks when analyzing loans issued in three waves. But they found FinTech loans “very suspicious” – nearly five times more than traditional lenders, with FinTech companies accounting for nine of the 10 lenders with the highest percentage of bad loans.

Of the more than 1.8 million bad loans, FinTech companies accounted for 52%, while their market share of loans was just under 29%. Overall, researchers marked over 31% of FinTech loans as potentially suspicious, compared to 11.6% of traditional bank loans.

“Not only did FinTechs have higher rates of suspicious lending, but those rates of suspicious lending grow quite strongly over time if you look and compare rounds one, two, and three,” Kruger said.

Kabbage was acquired last year by American Express and operates as K Servicing. On Monday, an American Express spokesperson referred questions to K Servicing, which did not respond to a request for comment.

The company’s website boasts of its PPP loans and cites a report that it “served the most vulnerable companies, representing more than 92% of all loans under $ 50,000.” It also saves 945,000 jobs.

Fintech companies have some important differences from traditional banks, which may partly explain their disproportionate share of suspicious loans.

The researchers cited independent research that found that online lenders increased access to PPP loans by lending to more zip codes with fewer traditional banks, lower incomes, and a higher minority interest. Even before the PPP program, another study cited by researchers showed that FinTech was filling the gaps in small business lending left by traditional banks.

“Online lending is not a problem in itself,” the researchers write. He noted that two FinTech lenders, Square and Intuit, had the lowest suspicious loan rate of any lender.

But the two online lenders have established relationships with customers, the report said.

The researchers also noted a potential incentive for all lenders participating in the program: the profits they could get when they themselves would not bear any credit risk if the loans were bad. Lenders were expressly allowed to rely on borrowers’ information.

“While there are limits to what our data and analysis can determine, the sheer volume of tens and hundreds of thousands of suspicious loans issued by many FinTech lenders suggests that many lenders have either encouraged such loans, or turned a blind eye to them, or extremely weak oversight procedures, ”the report says.

The University of Texas report says Cabbage earned about $ 188.8 million in commissions from over 180,000 PPP loans worth $ 3.3 billion.

Cabbage has previously come under scrutiny from news organizations. One news report said the company sent at least 378 PPP loans worth $ 7 million to likely defunct farms.

Late this spring, the Congressional Oversight Committee sent letters to several lenders, including Kabbage, requesting documents and information regarding their handling of PPP loans.

© 2021 Atlanta Magazine-Constitution (Atlanta, GA). Spreads Tribune Content Agency, LLC.



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