Fintechs Face DOJ, House Scrutiny of PPP Lending | Bilzin Sumberg

In a court filing on June 3, 2022, Kabbage, Inc. (doing business as KServicing), a fintech lender, disclosed that it is under investigation by the United States 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 bank fraud, wire 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 PPPs. 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 end of the program in May 2021.

Recent reports suggest that the DOJ’s focus is not just on the lenders cited above. Meanwhile, the House Select Subcommittee on the Coronavirus Crisis has announced investigations into at least six fintech lenders: Kabbage, BlueVine, Cross River Bank, Celtic Bank, Blue Acorn PPP and Womply. Moreover, certain investigative media reports and academic articles have highlighted concerns both about abuse and fraud related to PPP loans and about the significant role of the fintech industry in managing such loans. Examples of such findings/claims 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 in loan processing fees, of which nearly $9 billion went to fintech lenders.
• Fintech loans are rated as “highly suspicious” with a rate over six times higher than traditional lenders.
• Fintechs processed approximately 15% of OPS loans overall, but were lenders in 75% of a sample of individual prosecutions in which the DOJ alleges OPS fraud.
• The top 12 lenders with the highest rate of loans deemed “suspicious” are all fintech lenders.

Most or all of these claims can, and likely will, be strongly contested and questioned by fintechs. What is less exposed to challenges, however, is that fintechs are currently being targeted for scrutiny by state authorities with a focus on PPP loans. As the probes continue, key areas of focus are likely to include addressing loans that were fraudulent and/or outside SBA parameters, fair lending issues, and compliance with the Bank Secrecy Act and anti-money laundering requirements.