In a June 3, 2022 court filing, Kabbage, Inc. (doing business as KServicing), a fintech lender, disclosed that it is under investigation by the U.S. Department of Justice (“DOJ”) under the False Claims Act. The investigation, Kabbage further disclosed, relates to its Paycheck Protection Program (“PPP”) loan approval practices. Three months earlier, the DOJ charged a former CEO of a fintech lender (MBE Capital Partners) with wire fraud, bank fraud and making false statements to the Small Business Administration (“SBA”), in what we believe is the first criminal prosecution involving the activities of a PPP lender.
These and other recent developments are part of what appears to be a significant new DOJ initiative: enforcement activity targeting fintech firms and other financial institutions that processed loans under the PPP. The PPP was enacted as part of the CARES Act on March 27, 2020, in response to Covid-19 and was launched by the Small Business Administration (“SBA”) on April 3, 2020. Nearly $800 billion was disbursed under the PPP through the close of the program in May 2021.
Recent reports suggest that the DOJ’s focus is not solely on the lenders cited above. Meanwhile, the House Select Subcommittee on the Coronavirus Crisis has announced investigations of at least six fintech lenders: Kabbage, BlueVine, Cross River Bank, Celtic Bank, Blue Acorn PPP, and Womply. Moreover, certain investigative media reports and academic papers have underscored concerns both about abuse and fraud related to PPP loans and about the fintech industry’s significant role in administering such loans. Examples of such findings/assertions include:
• Of the nearly $800 billion disbursed in PPP loans, one study categorizes at least $64 billion in such loans as “suspicious.”
• PPP lending generated $38 billion of lender processing fees, of which nearly $9 billion went to fintech lenders.
• Fintech loans rate as “highly suspicious” at a rate of over six times that of traditional lenders.
• Fintechs processed approximately 15% of PPP loans overall, but were the lender in 75% of a sample of individual prosecutions in which the DOJ is alleging PPP fraud.
• The top 12 lenders with the highest rate of loans deemed “suspicious” are all fintech lenders.
Most or all of these assertions can, and likely will, be heavily contested and questioned by fintechs. What is less subject to challenge, however, is that fintechs are currently being targeted for scrutiny by governmental authorities focused on PPP lending. As the probes continue, key areas of attention will likely include processing of loans that were fraudulent and/or outside SBA parameters, fair lending issues, and compliance with the Bank Secrecy Act and Anti-Money Laundering requirements.
