Online PPP loans at higher risk of fraud, study finds

ATLANTA — A new analysis has found more than $76 billion in Paycheck Protection Program loans may have been obtained fraudulently, with many of the loans handed out by online lenders. So far, few of these “dubious” loans appeared to have been detected by authorities or repaid, according to the study by researchers at the McCombs School of Business at the University of Texas at Austin.

Online lenders, known as fintechs, have streamlined processes that were used to issue pandemic relief loans to applicants quickly, satisfying one of the program’s top objectives by rapidly putting federal dollars into circulation.

But that may have been a boon for bad players looking to avoid the more rigorous underwriting standards used by traditional banks, which are in place to help detect fraud, the study says.

“I see very broadly that there’s a trade-off between quick and easy access to this government money and susceptibility to abuse‚” Sam Kruger, an assistant professor of finance and one of the study’s authors, told The Atlanta JournalConstitution. “And I think one of the things that our research sheds light on is a potential cost of that ready access.”

The federal Paycheck Protection Program was enacted to help small businesses stay afloat during the pandemic. The forgivable loans were expected to cover payroll, rent and utility expenses while state and local governments ordered the businesses to close or when they had to reduce operations to fend off the spread of the virus. At the time, businesses from beauty parlors to dentists and restaurants were forced to lay off employees.

To look at the potential for fraud in the program, the researchers analyzed more than 10 million PPP loans that provided more than $780 billion, using various indicators that loan information may be suspect.

One measure was whether multiple loans were granted at a residential address. Other primary indicators were whether loans went to businesses that weren’t registered or registered after the cutoff date of Feb. 15, 2020, to qualify for loans; whether reported pay to workers appeared high relative to the industry and business location; and whether businesses reported different job numbers on applications for another pandemic relief loan program.

In one example cited in the study, 14 loans totaling nearly $800,000 — all but one of them approved by Atlanta-based Kabbage — went to 14 businesses that all used the same address, a modest single-family home in the Chicago suburbs. The companies had “colorful business names” and all claimed 10 employees. Eleven of the loans were for identical amounts, $53,229. Only one of the businesses was registered by Feb. 15, 2020. The other 13 businesses registered only shortly before the loans were approved.

In another case, Kabbage approved four separate $20,833 loans, all at another “modest suburban Chicago home,” in July 2020. Two of the businesses were listed as lawn and garden equipment manufacturers, one did automotive repair and one was a nail salon.

Photos of the property showed no evidence of any such businesses, the report says, and the borrower in the salon industry didn’t appear to have a nail technician license. Particularly high percentages of flagged loans cluster near Atlanta and New Orleans and surrounding areas, the report says.

The University of Texas researchers found plenty of suspicious loans issued by traditional banks, as it analyzed the loans made in three waves. But they found fintech loans to be “highly suspicious” at almost five times the rate of traditional lenders, with FinTechs making up nine of the 10 lenders with the highest rates of questionable loans.