DOJ Probe of Fintech PPP Lenders Highlights the Need for Compliance Risk Management Enhancements
Recently, Reuters reported that Kabbage Inc. and other fintech firms have been targeted in an investigation led by the civil division of the Department of Justice (DOJ). The probe is examining whether Kabbage and other fintech companies miscalculated how much aid borrowers were entitled to from Paycheck Protection Program (PPP) loan proceeds, which may have been caused by confusion over how to account for payroll taxes.
The investigation comes after news agency reports claiming to identify several instances of potential fraud involving PPP loans made by fintech lenders. In one such report, ProPublica claimed to have discovered at least 378 PPP loans made by Kabbage to fake businesses. The “overwhelming majority” of these were categorized as loans to “farms,” despite the borrower being in a geographic area not historically associated with farming the particular crop referenced in the loan application and, in some cases, not associated with farming of any type.
Examples provided in the report include a wheat farm and a tree nut farm located on New Jersey coastal sandbars, a potato farm in Florida, and an orange grove in Minnesota. ProPublica also claims it identified many small PPP loans made by Kabbage that potentially involved “synthetic identity theft”—where a criminal combines personally identifiable information from several sources (actual and fake) to build a credit profile for fraudulent purposes.
Fintech lenders were essential in helping many small businesses access PPP loans because traditional lending channels had prioritized lending to existing customers. Based on PPP loan data released by the Small Business Administration, fintechs made nearly $26.5 billion worth of PPP loans between April and August of last year. Kabbage was one of the most active fintechs in PPP lending, making nearly 300,000 of these loans totaling $7 billion, or 26% by dollar amount.
But to achieve this volume of lending, Kabbage and other fintech lenders had to ramp up loan processing using software that, in some cases, was plagued by glitches. When combined with an over-reliance on automated lending platforms with few manual checks, these software glitches resulted in errors that were replicated across thousands of loans, ultimately catching the DOJ’s attention.
By harnessing financial innovation and technology to enhance lending automation, fintechs have been able to reach more customers with fewer resources. For fintechs and the financial institutions looking to partner with them, this translates into lower overhead costs—providing one of the few ways to enhance lending profitability.
From the customer’s perspective, this not only expands access to credit but also smooths the loan application experience. Despite these benefits, however, placing a greater reliance on lending automation technology presents its own legal, compliance, and regulatory risks that fintechs should address with appropriate mitigating controls and other effective risk management measures.