Report: Fraud rampant in PPP loans by fintech
The research takes aim at companies claiming suspiciously high-paying jobs clustered in single residential homes.
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 at 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, for $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 borrowerscould 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. 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 chief executive officer 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 many 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
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.
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.”
Blueacorn 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.