Fintech Firms' Questionable Loans in PPP Program Raise Concerns
A recent study published on Tuesday revealed that Fintech companies were more likely to issue "dubious" loans through the Paycheck Protection Program (PPP) worth $780 billion US dollars, than traditional banks.
Researchers from the McCombs School of Business at the University of Texas in Austin found that 9 out of 10 of the top PPP loan providers with the highest fraud rates were Fintech companies, with the remaining ones behaving similar to a Fintech firm.
Overall, researchers detected suspicious features in 1.8 million PPP loans worth $76.3 billion.
The report points to regulatory gaps and oversights leading to fraudulently allocated funds to help pandemic-affected Tante-Emma shops.
"These results highlight the significant costs of poor oversight in PPPs and the lack of sufficient negative consequences for borrowers and lenders due to NPL behavior in PPPs," concluded the researchers.
High Fraud Rates in Fintech-Led PPP Loans
The report specifically noted that the top three Fintech providers of PPP loans — Cross River, Capital Plus, and Harvest — all showed "high and increasing false-positive rates." They also separately claimed over $900 million in processing fees.
The massive scale of fraudulent loans from Fintech firms suggests that "many lenders are either actively promoting such loans, ignoring red flags, or implementing lax regulatory procedures," write the authors.
The Fintech sector denies these allegations.
"Cross River has proactively adhered to Congressional guidelines and introduced standards for fraud detection that far exceed the developing requirements of the SBA program," said a spokesperson from Cross River in a statement, adding that these standards were followed for nearly half a million loans. "Smallest and most vulnerable businesses need help."
"It's disappointing to see some misleading criticism, broad assumptions, and unfounded claims being used to undermine the efforts that helped revive the US economy," said Cross River, with headquarters in Fort Lee, N.J. and thousands of hours of work.
The Financial Technology Association, a trade group, defended Fintech during the pandemic.
Penny Lee, CEO of the Trade Group, said: "Despite changing regulatory guidelines and inefficient processing systems, Fintech firms have met the goals of the PPP program and contributed to saving countless loans while maintaining adherence to legal requirements throughout the loan process." Thousands of small businesses.
Lee also took aim at traditional banks.
"While small businesses suffer, many large traditional financial institutions refuse to provide loans to businesses without established relationships," Lee said in a statement.
When contacted, Capital Plus and Harvest did not respond to requests for comment.
Red Flags in PPP Loans
Fintech harnesses digital technology to issue loans, manage deposits, and offer various banking services, often without physical bank branches. This new business model is heavily reliant on algorithms for loan approval and may not necessarily have robust Compliance procedures akin to traditional banks. Fintech firms also tend to have less scrutiny from regulatory bodies.
"There's a balance between swift and easy access to government aid and the possibility of misuse," said Sam Kruger, Assistant Professor of Finance at the University of Texas in Austin and one of the authors of the study, in an interview.
To detect potential fraud, researchers looked for warning signs in PPP loan applications, such as unregistered businesses, multiple businesses at a single address, unusually high implied compensation per employee, and a large number of employees reported in inconsistent statements. Reports of other government programs.
The Justice Department has filed more than 70 cases related to PPP fraud.
Naturally, some Fintech firms oppose this trend. Research has found that SQ and Intuit had the lowest false-positive rates among all lenders.
"Online loan origination itself doesn't seem to be the issue," the report states. "Square and Intuit are unique in that they have built relationships with customers based on a broad range of payment, accounting, payroll, and other financial support services."
Luxury Cars, Jewelry, and Other Purchases with PPP Funds
PPP, launched in March 2020 at the start of the pandemic, provided more than 11 million loans worth nearly $800 billion US dollars, with the government promising to forgive any part of the loans used for paying employee salaries.
The Office of Inspector General of the Small Business Administration reported that more than $611 million was withdrawn or held back as a result of investigations related to PPP (Economic Injury Disaster Loans) by the 15th of July. According to the regulatory body, there were 139 ongoing PPP investigations as of mid-2019, while by July, investigators identified over 10,200 PPP loans involving identity theft.
The Department of Justice has pursued dozens of applicants accused of exploiting the program.
Since the inception of PPP, the Department of Justice has reportedly charged more than 100 individuals in more than 70 cases related to the program, seizing more than $65 million in ill-gotten funds, claiming that the money was derived from fraudulent PPP loans. The department also seized properties and luxury goods purchased with PPP funds.
For instance, 22 individuals were charged for a PPP program worth $11 million, which involved using relief funds to buy luxury cars, jewelry, and other personal items.
A man from the US state of Washington was sentenced to two years in prison last week for submitting nine fraudulent PPP loan applications totaling more than $1.1 million. Six of the nine applications were approved, according to the prosecutors.
Correction: In an earlier version of this article, the Paycheck Protection Program was mistakenly identified.
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Similar to Cross River, Capital Plus, and Harvest, which served as the largest PPP loan providers with high rates of questionable loans, many Fintech firms disagreed with this trend as it would not hinder their business model from regulatory oversight and scrutiny.
A possible explanation for the higher false-positive rates in Fintech firms could lie in the fact that these companies often rely heavily on algorithms for approving loans and may not have robust fraud detection protocols. The lack of such measures creates uncertainties in monitoring loan applications adequately.
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