Online lender under investigation for PPP lending practices

Ben Wieder, McClatchy’s office in Washington (via TNS).

The Paycheck Protection Program was awash with fraud. Now a lender can finally face a legal settlement.

The PPP was one of the main federal economic relief measures at the start of the COVID-19 pandemic, providing small businesses with loans of up to $10 million that were forgivable if used for payroll and other approved expenses.

But the program, which tasked banks and other private lenders with processing applications, was plagued by fraud from its start in the spring of 2020, with some recent estimates suggesting that more than $117 billion of the $780 billion in federal loans went to ineligible companies. .

Hundreds of borrowers have been prosecuted for submitting fraudulent PPP applications, but few lenders have been held accountable for their role in approving these fraudulent loans.

Now, thanks to a murky dossier in one of South Florida’s many PPP fraud cases, it’s been revealed that one of the program’s biggest first-year lenders could soon face consequences.

Online lender Kabbage revealed in the Florida case that it was under investigation by US attorneys in Massachusetts and the Eastern District of Texas for its PPP lending practices. These investigations are being coordinated by the Civil Division of the US Department of Justice, according to the filing. Neither the district nor the DOJ responded to requests for comment.

“Anytime you have two US law firms that have separately come to the same conclusions based on evidence that comes to them from independent sources, that’s not really a good sign,” said Ben Curtis, the former Deputy Chief of the DOJ Criminal Division Fraud Section and a partner in the Miami office of McDermott Will & Emery.

The disclosure itself was unusual, Curtis said, because civil investigations are usually not public.

“If I’m a customer, I don’t want this in the public domain,” he said.

The filing came amid an effort by Kabbage to fend off a subpoena from federal prosecutors in the Southern District of Florida to testify in a PPP fraud case set to be heard next month at a Fort Lauderdale courthouse. . Kabbage is not the target of the case, but he argued that his testimony in the case could be used against him in the other federal investigations, which he described as “financially… an existential threat to Kabbage”. But that argument did not sway US District Judge William P. Dimitrouleas, who denied Kabbage’s request, and the online lender could be called to testify in the criminal trial against Luke Joselin, which is currently due to begin in August. . 15.

Kabbage is also one of several financial technology companies, or FinTechs, that are being investigated by the House Oversight Committee’s select subcommittee on the coronavirus crisis for their role in the PPP fraud.

The PPP program bailed out the Georgia-based online lender, which went from furloughed employees in March 2020 to an attractive takeover target within months, thanks in part to the $7 billion in PPP loans the company said treated that year.

Those $7 billion in loans netted the lender, which was heavily backed by Japanese investment firm SoftBank, hundreds of millions of dollars in fees and helped attract the attention of American Express, which acquired the company in October 2020 for an alleged $850 million.

But the company’s trademark speed – it relied more on algorithms than people to approve loans – raised questions about how it vetted applicants.

When American Express acquired Kabbage, it did not take over its loan portfolio, which included PPP loans, leaving them in a KServicing-branded holding company. The credit card giant has tried to distance itself from Kabbage’s performance in the PPP program, but those multiple inquiries could make it impossible to continue avoiding tough questions.

“What, if anything, did AMEX know, and when?” said Jim Richards, a former senior financial risk officer at Wells Fargo and Bank of America and a former prosecutor.

KServicing CEO Laquisha Milner did not respond to multiple requests for comment, and messages to company media bounced back.

American Express also did not respond to multiple requests for comment. He previously made a point of pointing out that American Express and KServicing are separate entities.

“Obviously Fraudulent”

The COVID-19 Small Business Relief Program, approved under the CARES Act in March 2020, tasked lenders with vetting and approving applicants for the program, with the money ultimately being repaid by the federal government.

The program, which was approved under the CARES Act in March 2020, administered by the US Small Business Administration, has undoubtedly saved many businesses struggling with mandatory closures and uncertainties during the first months of the pandemic. COVID-19 pandemic, but has also been plagued by fraud. . The SBA’s Office of Inspector General estimated that up to $4.6 billion in fraudulent loans were approved in the first year of the program alone. A paper by researchers at the University of Texas at Austin estimated fraud in the program to be just over $64 billion by one measure and over $117 billion by different measures, including including cases where the number of industry recipients in some counties exceeded the number of such companies in those counties. $64 billion and $117 billion are conservative estimates, the paper’s authors write.

The loan money would eventually be repaid by the federal government, and the rules of the program effectively allowed lenders to take borrowers at their word about their business’ eligibility. Herald reports previously found businesses that were approved despite failing to follow program rules, which required businesses to have been in existence since at least Feb. 15, 2020, and barred business owners from facing charges. criminals or who had recently been convicted of financial fraud. . Kabbage approved a disproportionate share of dodgy PPP loans reported by the Herald.

Although it was previously reported that Kabbage and other FinTechs were under investigation by the DOJ, the Florida filing provides much more detail about the investigations the online lender is facing. Kabbage revealed that he had been under investigation for more than a year by the Massachusetts U.S. Attorney’s Office under the Misrepresentation Act, which prevents government fraud, “on the theory that Kabbage improperly approved PPP loans that were either obviously fraudulent or not Small Business Administration (“SBA”) parameters. The company also disclosed that the U.S. Attorney’s Office in East Texas was investigating “the adequacy of of Kabbage against fraud and money laundering in the same time frame.” Kabbage said the DOJ Civil Division is coordinating the two investigations. responded to requests for comments.

The Texas probe is important, Richards said, because the PPP program required lenders, even those like Kabbage who weren’t banks, to establish strong anti-money laundering and due diligence programs. reasonable to customers.

“That’s where I think Kabbage probably has his greatest exposure,” he said.

RIchards, who now runs financial risk consultancy Regtech Consulting, tracked PPP fraud cases and found that Kabbage was linked to nearly one in five federal PPP fraud prosecutions to date.

Banks received fees on a sliding scale based on the size of the loan, earning Kabbage hundreds of millions of dollars in fees on loans he approved directly and those he approved through lenders. through its partner banks Cross River Bank and Customers Bank. Kabbage recently filed a lawsuit against Customers Bank, alleging the Pennsylvania-based bank owed Kabbage “tens of millions” in PPP fees that the bank and Kabbage agreed to share. Customers Bank declined to comment, citing ongoing legal action.

Loans not forgiven

Potential fraud isn’t the only problem with Kabbage’s PPP performance.

The Herald previously reported on the difficulties faced by many small business owners in obtaining forgiveness who obtained their PPP loans through Kabbage. According to the rules of the program, the loans would be canceled if they were used for payroll and other approved expenses. While the vast majority of loans approved in the program’s first year have now been canceled, Kabbage, known as KServicing since the American Express merger, had the lowest cancellation rate of any major lenders in the first year of the program.

She is currently facing a class action lawsuit brought by several borrowers who allege that KServicing’s loan cancellation process has been an “abject and continuing failure” and describes the company as “one of the most opportunistic profiteers to come out. of the global COVID-19 pandemic”. KServicing argued that the lawsuit should be dismissed because the loans were approved through the CARES Act, which it said “does not provide a private right of action” that would allow individuals to sue lawsuits.

Kabbage first touted its success in approving PPP loans for small businesses and women- and minority-owned businesses that historically struggled to obtain credit from traditional banks. This means that these same companies are now finding it harder to get their PPP loans forgiven.

“It was ridiculous,” Vicki LeMaster, a Miami hairstylist who struggled for months to have her loan of just over $3,000 forgiven, told the Herald in March. “Because we don’t have a banker on our side, we have to take care of all the garbage.”

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