AUSTIN, Texas–Approximately 1.8 million of the Paycheck Protection Program’s 11.8 million loans — more than 15% and totaling $76 billion–had at least one indication of potential fraud, according to a new research paper that suggests fintechs were significant players in those questionable applications.
The new academic working paper was released this week by researchers at the University of Texas, who reviewed the $800 billion in PPP loans that were made during the first 15 months of the pandemic. Many have raised concerns over what the ultimate cost of PPP-related fraud will be as a result of the haste involved in making loans and the lack of the traditional vetting that is usually in place.
“There’s been a lot of anecdotes about fraud, but the tricky thing about anecdotes is that it’s very difficult to put them together and get at the scale of what’s going on,” Samuel Kruger, an assistant professor of finance at the University of Texas at Austin’s McCombs School of Business and one of the paper’s authors, told the New York Times. “We wanted to look for patterns in the data.”
According to the study, problems with many of the questionable loans on one particular group of lenders: fintechs. Nine of the 10 lenders with the highest rate of suspicious loans fell into that group, the study found.
“Certain fintech lenders seem to specialize in dubious loans,” the authors wrote, according to the Times.
Nearly One-Third of Loans
Collectively, fintechs made around 29% of the program’s loans but accounted for more than half of its suspicious loans, the study concluded.
The Paycheck Protection Program had three different funding/application rounds between April 2020 to May 2021. To date, the Justice Department has charged more than 500 people with improperly claiming hundreds of millions of dollars in borrowing, the Times reported.
According to the Times, Kruger and two other researchers at the university, John M. Griffin and Prateek Mahajan, identified a set of four primary and five secondary indications of a suspicious relief loan.
“Among the red flags: businesses that claimed they paid workers significantly more than their industry’s norm, and corporations and other formally structured businesses that lacked a state business registration,” the Times reported. “Then they combined the loan records released by the Small Business Administration, which managed the program, with other data sources, like registration records and industry wage data, to find loans with anomalies.”
False Positives
The authors acknowledged the $76 billion contains some false positives, because not every loan that raises red flags is improper.
“One of their indicators, for example, is multiple loans going to multiple businesses located at the same residential address,” the Times stated. “That’s often a warning sign, according to the researchers and to program lenders, several of whom have said they gave extra scrutiny to such loans. But there are also legitimate reasons a household could contain more than one home-based business.
“A more restrictive calculation by the researchers, of loans with at least two suspicious characteristics, identified 1.2 million potentially fraudulent loans, totaling $38 billion,” the report added.
Two Lenders Cited
In particular, the Times reported the study cites two lenders, Capital Plus and Prestamos CDFI, as having fraud flags on roughly half their loans.
“Both of those lenders made nearly all of their loans through Blueacorn, a loan facilitator that drew in borrowers through a marketing blitz and steered them to its partners,” the Times stated. “Two other large online lenders, Cross River Bank and Harvest Small Business Finance, also had exceptionally high rates of suspicious loans, the researchers said.”
All four lenders told the Times they strongly objected to the study’s methodology, data and conclusions.
“At the same time, they emphasized that the populations they focused on — particularly solo entrepreneurs and tiny companies, including those without traditional business banking relationships — were inherently riskier,” the Times said.
Objections Raised
But the companies do not agree with the analysis. The Times reported that before the study was released, Blueacorn sent a letter Jay Hartzell, the president of the University of Texas at Austin, objecting to the researchers’ approach. Blueacorn said that by relying on interim data released by the Small Business Administration before the PPP ended, the study counted loans that its lenders initially approved but later canceled because of suspicious traits.
“Nearly 157,000 applications — about 16% of all of the loans Blueacorn’s lenders approved — were canceled by the lenders before they were paid out,” the report added.