Research shows that PPP loans from fintech companies are at higher risk of fraud

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ATLANTA – New analysis found that more than 15% of nearly $ 76 billion in payroll protection loans could have been obtained fraudulently, with many of the loans originating from online lenders.

So far, some of these “dubious” loans appear to have been discovered by the authorities 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 fintech companies, have streamlined the processes they used to quickly disburse pandemic relief loans to applicants, thereby meeting one of the program’s main goals by rapidly 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 see very broadly that there is a trade-off between quick and easy access to this public money and susceptibility 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 are expected to cover wages, rent and utilities costs, while state and local governments have ordered businesses to close or when they had to cut operations to prevent the spread of COVID-19.

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 at a residential address. Other primary indicators were: whether loans were issued to businesses that were not registered or registered after the cut-off date of February 15, 2020 in order to qualify for the loans; whether the declared wages of employees are high compared to the industry and location of the enterprise; and whether companies have listed different job numbers in their applications for another pandemic loan program.

In one example cited in the study, 14 loans totaling nearly $ 800,000 – all but one approved by Atlanta-based Cabbage – were made to 14 companies using 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 had been registered. The remaining 13 businesses registered shortly before the loans were approved.

In another case, Cabbage approved four separate loans of $ 20,833, all in another “humble home in suburban Chicago” 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 apparently did not have a license as a nail artist.

A particularly high percentage of tagged loans were concentrated near Atlanta and New Orleans and surrounding areas, the report said.

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 loans accounting for nine of the 10 lenders with the highest percentage of bad loans.

Of the more than 1.8 million doubtful loans, 52% were provided by fintech companies, while their market share of loans was just under 29%. Overall, researchers rated more than 31% of fintech loans as potentially suspicious, compared with 11.6% of traditional bank loans.

“Not only did fintech companies have higher rates of suspicious lending, but those rates of suspicious lending grow quite strongly over time if you look and compare the first round, second round and third round,” said Kruger.

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 start of the PPP program, researchers found that financial technology 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, have 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.

A report from the University of Texas said 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.

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