Researchers at the University of Texas at Austin have found that PPP loans processed by fintech lenders are generally more likely to be accompanied by suspicious indicators than loans processed by traditional banks and credit unions. However, there are some exceptions. Researchers at the University of Texas found that PPP loans processed by three well-known fintech lenders, Capital One, Square and Intuit, had particularly low indicators of potential fraud.
The difference in fraud rates points to differences in the underwriting practices of fintechs and other lenders participating in the PPP. Some fintech lenders appear to have adopted stricter underwriting practices, including conducting due diligence on potential clients and adhering to “know your customer” rules, reducing potential fraud rates. The wide variance in practice is due to lax rules governing the PPP program, which relies on self-certification by loan applicants rather than verifying the accuracy of the documents and tax information applicants provide in support of their loan requests. As the Government Accountability Office wrote in June 2020, “To streamline the process, the SBA requires lenders to undertake minimal loan underwriting—limited to actions such as acknowledgment of receipt of borrower certification and supporting payroll documentation—to make the program easier affected by a fraudulent application.”
Earlier this month, the House Select Subcommittee on the Coronavirus Crisis released a report on the role of fintech in PPP fraud. “Congress and the SBA should carefully consider whether unregulated businesses such as fintechs, many of which are not subject to the same regulation as financial institutions, should be allowed to play a leading role in future federal lending programs,” the report said. I urge this committee and The SBA reviewed the report because it contained troubling details about the practices of some of the major fintech players involved in the PPP.
SBA’s Role in Evaluating Fintech Lenders
Given that some fintech companies are no Associated with the high potential PPP fraud rates, it seems unlikely that the fintech model has some inherent flaws that make these lenders more vulnerable to abuse. Instead, there is evidence that governments are not doing enough to ensure that nontraditional lenders participating in PPPs have adequate anti-fraud controls.
If the SBA goes ahead with its proposal to expand participation in its lending program beyond traditional lenders, it has a chance to learn from 2020. Unlike the chaotic days of March and April 2020, now is the time for Congress and the SBA to take deliberate steps to address this issue before the next catastrophe strikes.
In the spring of 2020, fintech industry groups successfully lobbied the government to allow them to participate in the Paycheck Protection Program. The SBA issued interim rules governing the PPP on April 2, 2020, the day before the program began accepting loan applications.
There’s good reason to expand participation: In the spring of 2020, when unemployment is soaring, speed is of the essence. Expanding participation to more lenders means more loans can be processed faster and funds can be distributed more equitably.