Fintech companies fail to prevent PPP fraud

On December 1, 2022, the House Select Subcommittee on the Coronavirus Crisis released a staff report detailing the poor performance of the financial technology companies that took a prominent role in the administration of the Paycheck Protection Program (PPP). Previously, the SBA Inspector General reported unprecedented levels of fraud in the program, due in part to a lack of sufficient specific guidance for lenders to effectively identify, track, address, or resolve potentially fraudulent PPP loans. The committee, charged with investigating reports of fraud related to the coronavirus crisis, launched an investigation to determine the role of financial technology (fintech) companies that made “massive profits” by referring small businesses to lenders providing loans under the federal program. The report found that the fintech companies failed to meet their responsibilities to prevent fraudulent activity and caused significant damage and the loss of large amounts of program funds.

The OPS program was launched with the 2020 CARES Act in response to the COVID-19 crisis to provide unprecedented levels of emergency financing in the form of SBA-backed loans designed to help businesses keep their workforces employed. Initially, the banks switched to larger loans and more established applicants because these applications were easy to process and resulted in higher fees per loan. The result was that loans did not reach the smaller borrowers who were potentially most at risk. In response, Congress amended the program rules to expand eligibility and increase fees for smaller businesses by up to tenfold. In this context, technology-driven companies claimed that technology and innovation would enable them to better process loans to established financial institutions. Fintech companies, which operate largely outside the regulatory structure governing traditional financial institutions and with little or no oversight from lenders, were given a significant level of responsibility for managing PPP loans. Chairman James E. Clyburn issued a statement along with the report, claiming that these companies “refused to take adequate steps to detect and prevent fraud despite their clear responsibility to protect taxpayer funds . . . [and] accrued massive profits from program management fees.”

Two of the fintech companies investigated by the committee, Blueacorn and Womply, were created during or after the start of the COVID-19 pandemic solely to act as a lending service provider for small businesses. Since these companies are not banks, they could not directly lend money to applicants and instead acted as an intermediary directing applicants to lenders and taking a cut of the fees lenders made on each loan. However, according to the report, Blueacorn had only one employee to help process PPP loan applications and therefore relied almost exclusively on third-party providers to process loan applications. The reviewers worked as loan underwriters but reported receiving poor training and being pressured to “push through” OPS loans, according to the report, even though there were questions about the authenticity of the loan documents. Likewise, the report accuses Womply of stringing its systems together with “duct tape and chewing gum” and creating a high likelihood of fraud within the loans the company refers to lenders. Blueacorn and Womply partnered with the six most active PPP lenders, facilitating almost one in three PPP loans in 2021, according to the committee’s investigation. The Select Subcommittee also found that due to the efforts of Blueacorn and Womply, loans under $50,000 increased to $5.8 million in 2021, up from $3.6 million in 2020, and the program’s average loan size fell from over $100,000 to $41,560 in 2021.

The committee also investigated established fintech firms involved in the PPP loan program, Kabbage and Bluevine, which also struggled to manage the loans and prevent fraud. Internal Kabbage documents allegedly revealed that the company missed clear signs of fraud in a number of PPP applications, such as loans made to farms that were dubious on their face, including an orange grove in Minnesota and a cattle ranch based on a sandbar in New Jersey. According to the report, Bluevine initially experienced similarly high rates of fraud, but through ongoing oversight and partnerships with traditional financial institutions, improved anti-fraud controls with new software and the incorporation of manual review, which likely reduces fraud. But even with enhanced controls, Bluevine and its banking partner failed to file suspicious activity reports in a timely manner, according to the committee report, in violation of current banking regulations.

Overall, more than 70,000 potentially fraudulent loans totaling more than $4.6 billion have been identified. Chairman Clyburn referred the Select Subcommittee findings to the SBA, OIG, and Department of Justice, including evidence that some owners of financial technology companies whose companies accepted billions in management fees may have directly committed PPP fraud.