House Subcommittee Launches Investigation into FinTech Companies’ Role in Allegedly Fraudulent PPP Loans

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Sheppard Mullin Richter & Hampton LLP

The House Select Subcommittee on the Coronavirus Crisis recently announced an investigation into the role of four Fintech companies and partner banks in issuing allegedly fraudulent Paycheck Protection Program (PPP) loans.  The Subcommittee’s press release references certain reports that the Fintech industry and its bank partners “have been linked to a disproportionate number of fraudulent PPP loans . . . raising questions about whether FinTechs and their bank partners have adequately screened PPP loan applications for fraud.”  This announcement builds on the Subcommittee’s March 25 findings that the Treasury Department and SBA failed to institute adequate safeguards to prevent waste, fraud, and abuse in pandemic relief programs, leading to nearly $84 billion in potentially fraudulent loans.

Together with this announcement, Representative Jim Clyburn, Chairman of the Subcommittee, sent letters to these companies requesting documents and information relating to, among other things, establishing or governing the process used to review and approve PPP loan applications, and all communications concerning potential fraud or other financial crime related to

PPP loans.  The letters note that criminal actors sought out FinTechs for fraudulent PPP loans because of their speed in processing such loans – in some cases as little as one hour – while implementing minimal due diligence.  Letters from the Subcommittee can be found here, here, here, and here.

Putting it Into Practice:  As yet another example of the scrutiny pandemic relief program participants face from regulators, FinTechs and their partner banks should be prepared for future government inquiries.  While the Subcommittee seeks to understand the fraud controls and compliance systems that the companies applied to their PPP loan programs, this investigation highlights the value in strict and consistent due diligence policies and procedures to detect fraudulent applications for those processing and funding business loans generally.  To help mitigate potential risk, FinTechs should ensure that their commercial lending programs include:

  • Loan origination policies and procedures that verify the accuracy of loan documents and information, and include processes for high risk borrowers and transactions, such as implementing management oversight;
  • Improved internal controls and post-closing due diligence, including audits of closed loans and red flag procedures for taking immediate corrective action;
  • Avoiding or limiting commissions and other internal inducements that provide incentives for employees to concentrate on loan volume at the expense of loan quality; and
  • A highly-trained and effective team of quality control professionals.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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