The Promise and Peril of Fintech Companies in Small Business Lending Programs
Researchers at the University of Texas at Austin found that PPP loans processed by fintech lenders were generally more likely to be accompanied by suspicious indicators than loans processed by traditional banks and credit unions. However, there are some exceptions. Researchers from the University of Texas found that OPS loans processed by three well-established fintech lenders – Capital One, Square and Intuit – had particularly low indicators of potential fraud.
The variation in fraud rates points to varying insurance practices from fintech and other lenders participating in OPS. Some fintech lenders appear to have engaged in stricter assurance practices, including conducting due diligence on potential customers and complying with Know Your Customer rules, resulting in lower potential fraud rates. The wide variation in practice was made possible by lax rules for the OPS program, which relied on loan applicants’ self-certification rather than verifying the accuracy of documentation and tax information that applicants provided to support their loan requests. As the Government Accountability Office wrote in June 2020, “to streamline the process, SBA required minimal loan guarantees from lenders — limited to actions such as confirming receipt of borrower certificates and supporting wage documentation — making the program more vulnerable to fraudulent applications.”
Earlier this month, the House Select Subcommittee on the Coronavirus Crisis released a report on the role of fintechs in PPP fraud. The report stated that “Congress and the SBA should carefully consider whether unregulated businesses such as fintechs, many of which are not subject to the same regulatory framework as financial institutions, should be allowed to play a leading role in future federal lending programs.” I encourage this committee and the SBA to review that report, as it contains disturbing details about the practices of some of the major fintech players that participated in the PPP.
SBA’s Role in Evaluating Fintech Lenders
Given that some fintechs are not coupled with high rates of potential PPP fraud, it seems unlikely that there are any inherent flaws in the fintech model that make these lenders more vulnerable to abuse. Rather, evidence suggests that the government did not do enough to ensure that non-traditional lenders participating in PPPs had adequate anti-fraud controls in place.
If the SBA moves forward with its proposal to expand participation in its lending programs beyond traditional lenders, it has an opportunity to learn lessons from 2020. Unlike the chaotic days of March and April 2020, now is a time when Congress and the SBA can take conscious steps to get this right before the next big disaster strikes.
In the spring of 2020, fintech industry groups successfully lobbied the government to allow their participation in the Paycheck Protection Program. The SBA issued temporary rules for OPS on April 2, 2020 – the day before the program began accepting loan applications.
There were good reasons for expanding participation: In the spring of 2020, when unemployment skyrocketed, speed was crucial. Expanding participation to more lenders meant more loans could be processed more quickly, and the funds could potentially be disbursed more fairly.
