As law enforcement officers and prosecutors gradually move on from fake businesses that got PPP in favor of real ones that lied to get more PPP funds than they should have, non-PPP loan underwriters may be forced to grapple with a new question: Is the merchant at risk of PPP fraud prosecution?
Alarm bells have already been sounded by Experian for a different reason, one that warned commercial fintech lenders that the mere receipt of PPP funds should not be considered enough to confer legitimacy on a loan applicant.
But what if everything checks out and the business is legitimate? PPP could come back to adversely affect the performance of the loan if the applicant is later prosecuted or forced to give back all or a portion of the PPP funds. A recent roundup by the Department of Justice, for example, resulted in 22 individuals being charged for PPP related fraud. More than a dozen actual businesses were ensnared by it, with the litany of charges including things “false statements to a federally insured financial institution.”
If a business misappropriated the funds, lied to get more than they should have, lied about when the business was founded, or engaged in some other kind of misleading impropriety, that business could be a ticking time bomb for lenders.
Proactive underwriters or fintech technology could assess whether or not the PPP funds obtained by an applicant were financially realistic and that the business start date aligned with PPP requirements. A business doing $20,000 a month in sales that obtained $200,000 in PPP funds, for example, may look sustainably healthy but raise a red flag that it may not have been legitimately obtained. Underwriters should be crunching the numbers and thinking about whether or not this applicant is likely to face consequences and what that might mean for the loan if it’s approved.
This editorial is the opinion of the author.
A small business finance underwriter torn between approving or declining an applicant probably should not consider whether or not that business got PPP funding as evidence of the applicant’s legitimacy.
A new alert put forth by Experian claims that “greater than 75% of PPP loans originated by commercial fintech lenders were NOT run through a fraud screening and have a greater probability of containing bad actors.” Experian says that “lenders will need to be more vigilant as they assess these businesses for future offers of credit.”
Experian cites data from the FTC that shows fraud and identify theft have surged since the pandemic started, climbing to even higher levels in 2021 over 2020.
Fraudsters that successfully obtained PPP loans with altered documents, for fake businesses, or on behalf of real businesses using stolen identities, may now use those as leverage to obtain additional money, particularly through sources where the perceived consequences of being found out are low. Non-bank funders and fintech lenders are an attractive target.
Just because an applicant got a PPP loan, underwriters should not assume it has passed a fraud check.
Fountainhead, an Orlando-based SBA lender, funded over $4.72 billion in PPP loans to SMBs in the past 15 months. According to the SBA, the 30 member team facilitated the 12th most PPP loans in the country.
So far in 2021 alone, Fountainhead funded $3.95 billion, after a total of $760 million in 2020, preserving 430,000 American jobs, they estimated.
“We did not shy away from the latest round of PPP. Before it was introduced, we were implementing new procedures and building on what we learned from the first and second rounds in order to create a more streamlined and effective system for our customers,” said CEO and Founder Chris Hurn. “It’s no secret that the past few months have been anything but easy. While our team endured long days and nights with little time to rest, we’re extremely proud to have helped so many small businesses. Our team performed admirably. I’m so very proud of them.”
Fountainhead’s current objective is to process PPP loan forgiveness applications while also refocusing on its core business of SBA 7(a) and SBA 504 loans.
The DOJ has launched a probe into fintech firms like Kabbage for their handling of PPP loan distribution, expressing concern that firms may have miscalculated eligible loan amounts or misrepresented payroll taxes, Reuters reported.
The probe is the beginning of an investigation and does not indicate any wrongdoing. The DOJ is reacting to the concerns from multiple sources since PPP launched that the $780 billion program ran the risk of fraud and misuse of funds.
The PPP lending portion of Kabbage, since spun off and rebranded to K Servicing, made less than 300,000 PPP loans worth $7 billion from April to August alone, according to the website. Based on the original PPP lender guidelines, that could net the firm as much as $350 million in commission for sourcing the loans.
As recently as December, the SBA’s own oversight officer Hannibal Ware found that possibly “over 2 million approved PPP loan guarantees” or about $189 billion in loans were “potentially” not in compliance with the law. Those applications are a piece of the puzzle and may turn out to be not fraudulent at all, but the DOJ is taking steps to make sure.
The SBA compliance rules changed constantly, creating a challenge for many PPP lenders to adapt their automated loan processing while updates came out.
In related news, the SBA began accepting applications for the Restaurant Revitalization Fund on Monday, May 3rd. In the first two days, the organization recorded 186,200 applications from restaurants and eligible businesses from across the country.
“61,700 of the applications came from businesses with under $500,000 in annual pre-pandemic revenue,” the SBA reported. “Representing some of the smallest restaurants and bars in America.
According to a sneak peek posted by Lendio CEO Brock Blake, fraudsters are stopping at nothing to game the government’s emergency loan system.
“Wanna glimpse into what lenders are experiencing with attempted fraudulent applications?” Blake wrote in a tweet. “Here are four ‘applicants’ seeking a loan.”
Four pictures showing computer-generated “business owners” all have the same sweater, but different heads. People are using AI tech to create randomized, just barely discernible pics of borrowers holding IDs beside them to beat new compliance measures.
It’s like a techno arms race between an automated scanning system that looks for fakes versus an automated fake ID and person generator that tries to make passable fakes.
After a year of PPP and EIDL success stories and fraud concerns, funders are still beating back scam artists. During a recent U.S. Senate hearing, SBA Inspector General Mike Ware said his office had secured $2.1 billion in fraudulently claimed PPP and EIDL loans.
In related news, the SBA announced the $28.6 billion Restaurant Revitalization Fund applications would open on Monday, May 3. Fraudsters start your fake restaurant owner generators.
Wanna glimpse into what lenders are experiencing with attempted fraudulent applications?
— Brock Blake (@BrockBlake) April 26, 2021
We’ve heard rumblings of funding slowdowns because of competition from Uncle Sams’s emergency stimulus programs. But a soon-to-launch grant specifically targeting restaurants, food, and alcohol services may put PPP to shame.
The $1.9 trillion American Rescue plan signed last month set aside $28.6 billion toward the Restaurant Revitalization Fund. Just like PPP, the fund will dole out refundable grants up to $10 million to the most hard-hit food-related businesses.
Since PPP funds tend to run out quickly, the SBA apportioned $500 million just for merchants with less than $50,000 gross receipts in 2019. $4 billion will be set aside for the $50k- $500k bracket and $4 billion toward the $500k- $1 million bracket.
During the first 21 days of the program, the SBA will also focus efforts on disadvantaged businesses controlled by veterans, women, or those that suffer bias due to race or ethnic prejudice.
Just as in the PPP program, eligible businesses will have to devote the grant toward business expenses. That means payroll, loan financing, utilities, supplier, and equipment costs. Only companies that have survived the pandemic thus far with a physical location are eligible. The stipulations forbid a recipient to use funds to open a new venue.
Recipients will have to spend the money before the SBA end date, possibly December 2021 or later, or they will have to return the funds. The program is not live yet, but rumor has it will be opening in late April.
President Biden signed a law extending PPP lending until May 31st. The PPP Extension Act passed through Congress on March 25th and will allow businesses to access emergency loans past the original March 31st deadline.
According to the PPP loans tracker, as of 3/21 the SBA has disbursed $718 billion of the $806 billion available, leaving $88 Billion left for funding. Businesses will be able to apply until the new deadline, and the SBA will be able to process applications until the end of June. The new filing deadline gives the SBA some breathing room to review the 234,000 applications currently in the queue.
Biden signed it a day after unavailing a $2 trillion American jobs and infrastructure plan, aimed at revitalizing roads, bridges, and protecting the environment. The money is split into a cross-section of infrastructure, subsidies, like $100 billion toward bringing broadband internet to 30 million Americans, $50 billion toward semiconductor research, and $174 billion toward electric car manufacturing.
Not every spending point is for future tech. There are lump sums for healthcare, like $400 billion for long-term elderly care, and $30 billion for pandemic preparedness.
Biden has said he plans to pay for the expenses through the Made In America corporate tax plan raising the corporate tax rate from 21% to 28% after President Trump leveled the tax from 35%.
Fintech lenders doling out PPP not only reached smaller businesses on average but played an essential role in extending PPP loans to Black-and Hispanic-owned businesses, according to a study conducted by professors at the NYU Stern School of Business.
“Fintech lenders originated much smaller loans than other lenders, suggesting they served smaller firms on average,” researchers found. “Overall, we find that, relative to other lenders, [Minority Development Institutions] nonprofits, and fintech lenders make a substantially larger share of their loans to minority borrowers, particularly Black- and Hispanic-owned businesses.”
The team of economists looked over 3.4 million PPP transactions to determine what category of lenders had the highest minority share among their loans. Ryan Metcalf, Head of Public Policy for Funding Circle, member of the Innovative Lending Platform Association (ILPA), shared the full study on LinkedIn, pointing out that six ILPA members had contributed to saving jobs.
“(Funding Circle US, BlueVine, Kabbage, Inc, OnDeck, Fundbox, Lendio) provided more than 476,000 #PPP loans totaling $16.5 billion with an average loan size of ~$30,000, median loan size of $15,000, and helped save more than 2 million jobs,” Metcalf wrote. “And that was just in 2020.”
The study found that fintech lenders did a better job meeting the intention of the CARES act. While most lenders were giving out larger loans to large firms, fintech better reached actual small businesses with smaller loans on average.
“Section 1102 of the CARES Act explicitly specified that the program should prioritize ‘small business concerns owned and controlled by socially and economically disadvantaged individuals,'” they wrote. “However, the SBA did not issue specific guidance for distributing the loans, leaving private financial institutions administering the loans to independently determine which businesses to serve first or at all.”
Instead, as has become clear, many funds went to larger firms and seemed to miss minority communities. The team compared the mean and median loan amounts for different Lenders, finding the smallest in both types were fintech loans.
Researchers put first and last names through a mathematical model to predict race because that data was not available from the majority. Then predictions were compared to the sample borrowers that self-reported race. The algorithm was 78% accurate in guessing black names, 84% in guessing Hispanic, 95% for Asian, and 99% accurate for white names.