The COVID-19 pandemic caused economic turmoil and created the need for a relief effort, prompting the federal government to introduce the Paycheck Protection Program (PPP). This program allowed small businesses to apply for loans of up to $10 million with the condition that the funds be used for payroll and approved expenses. However, it has been estimated that around $117 billion of PPP loans have gone to ineligible businesses, leading to an investigation concerning Kabbage’s practices when it came to loan approval. It is essential for Kabbage customers to scrutinize their loans thoroughly to make sure they are valid under the program’s requirements. Going forward, lenders must take extra care in reviewing and granting PPP loans in order to prevent any further misuse of federal money.
In light of the Severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) and the COVID-19 pandemic, the Paycheck Protection Program (PPP) was instituted by the federal government to offer much needed financial assistance to small businesses. Unfortunately, various FinTech enterprises have been charged with exploiting fraudulent measures for their own advantage with regards to accessing PPP funds. Consequently, Kabbage is now the subject of inquiry from both the House Oversight Committee’s Select Subcommittee on the Coronavirus Crisis and U.S. attorneys in Massachusetts and the Eastern District of Texas for its PPP lending activities. The U.S. Department of Justice’s Civil Division is also lending its support to this investigation. To avoid similar fraudulence in the future, it is essential to enhance existing regulations concerning PPP loans. It is pivotal that all companies–including FinTech entities– are held accountable for their behavior, no matter where they are based.
Paycheck Protection Program Loans: Fraudulent approvals
The CARES Act, passed in March 2020, provided financial aid to small businesses via the Paycheck Protection Program (PPP), allowing companies like Kabbage to access $7 billion in loans. This relief enabled a remarkable turnaround for Kabbage, who, only a few months prior, had been forced to furlough employees. The PPP has been an invaluable tool in combating the economic repercussions of COVID-19, providing much-needed support to numerous small businesses that have been threatened by difficult times and helped them seize opportunities for growth. In this way, the PPP made Kabbage an attractive takeover target, and may be of immense benefit to other small businesses across sectors.
Kabbage, a prominent financial technology company renowned for its role in providing $7 billion Paycheck Protection Program (PPP) loans to over 300,000 borrowers, was recently acquired by American Express for an estimated sum of $850 million. Following the acquisition, KServicing – the holding company responsible for managing these PPP loans – became America’s second-largest PPP lender based on application volume.
Fintechs like Kabbage were widely praised during the pandemic for their quick responsiveness and assistance to small businesses unable to secure traditional loans. Although there have been questions raised concerning the loan approval process of these firms – which depend heavily on algorithms rather than human interaction – Kabbage balances timely loan disbursement with accuracy and credibility through advanced technology. In this way, it has enabled many small businesses to access crucial capital during the pandemic, thus empowering them towards success and helping creditors fulfill their fiscal obligations.
In May 2021, ProPublica published a report uncovering potential fraudulent activity in the distribution of PPP loans by Kabbage during the COVID-19 pandemic. This has since prompted investigations from various authoritative organizations such as the House Select Subcommittee on the Coronavirus Crisis, Federal Trade Commission, Small Business Administration, DOJ offices in Massachusetts and Eastern District of Texas. According to the report, 378 fake business entities had been granted loans to the tune of $7 Million by Kaffle.
It has also been alleged that the company neglected its fraud controls when allocating these funds. Currently, Kabbage holds one of the largest portfolios of SARS-CoV-2-related Paycheck Protection Program (PPP) loans issued by the U.S. Small Business Administration.
Kabbage’s PPP performance: Unforgiven Loan
The CARES Act established the Paycheck Protection Program (PPP) to provide much-needed financial relief to businesses affected by the COVID-19 pandemic. Several companies applied for PPP loans through Kabbage, but some have faced difficulty in achieving forgiveness of the loan. It has been observed that among major PPP creditors, Kabbage had one of the lowest rates of loan forgiveness. Business owners need to be aware of the loan forgiveness requirements in order to ensure they allot their PPP funds properly and are thus eligible for forgiveness. If you obtained your loan through Kabbage and were unable to get loan forgiveness, make sure to contact your lender for advice on next steps. Creditors like Kabbage must take responsibility in providing knowledgeable help in the loan forgiveness process so business owners can use the funds correctly as outlined in the program for payroll or other approved expenses.
KServicing, a loan servicer, is facing a class-action lawsuit brought by several borrowers who allege that it has failed to fulfill its duties related to loan forgiveness. The lawsuit further posits that KServicing has taken advantage of the ravages of the COVID-19 pandemic to line its pockets with profit from borrowers. In its attempt to have the case dismissed, KServicing has cited the lack of private right of action in the CARES Act. Nevertheless, the court should critically evaluate this legal challenge and the primary aim of the CARES Act in providing financial relief during times of duress.
KService Corp. declares bankruptcy as fraud investigations heat up
KService filed for bankruptcy in October 2020 due to multiple federal and state inquiries into its implementation of the Paycheck Protection Program (PPP) loans. The company asserts that it acted with integrity when issuing the loans, despite being provided unclear guidelines from the Small Business Administration (SBA).
Through this bankruptcy process, KServicing hopes to shift focus to addressing all pending investigations while also providing protection from potential creditors and preventing fraud claims. It has been stressed that KServicing performed its duties concerning PPP Loans with precision, caution and immediacy to better serve their customers.
Kabbage: New Report Shows Risk to PPP Creditors, Debtors
New information has revealed that Kabbage, one of the largest providers of funds through the Paycheck Protection Program (PPP), may have been involved in fraudulent activity. A report issued by the Select Subcommittee on the Coronavirus Crisis documented how Kabbage was able to bypass the protective measures meant to keep PPP funds safe. By pushing applications through before conducting proper due diligence, they put both creditors and debtors at risk, undermining the program’s legitimacy. Furthermore, their lack of transparency likely enabled more illegitimate processes to take place.
The Select Subcommittee has presented recommendations for guaranteeing PPP’s efficacy in future times and to stop similar companies from taking advantage of citizens and businesses.
New Select Subcommittee Reports: How Kabbage Facilitated PPP Fraud
On December 1, 2022, Rep. Jim Clyburn, Chair of the Select Subcommittee on the Coronavirus Crisis, released a staff report examining the misconduct of certain financial technology companies during the COVID-19 pandemic. The study revealed that these fintechs had not undertaken adequate screening measures for applications for the Paycheck Protection Program, leading to approval of fraudulent requests. The evaluation determined that these fintechs had been negligent in their processing responsibilities and lacked sufficient measures for preventing fraud. According to the findings of the report:
- Kabbage has recently come under scrutiny for the implementation of their Paycheck Protection Program (PPP) loan review process, causing confusion and concern among employees and financial institutions. Reports of an increased level of fraud by partner banks have highlighted a potential failure to protect against it. Such failing has dire implications for Kabbage’s reputation as a dependable financial institution, risking the trust of its customers, employees, and bank partners. It is imperative that Kabbage measures up to their responsibilities and takes proactive steps to minimize instances of fraud for future loan programs. This includes actively monitoring for signs of suspicious activity and responding swiftly to any identified discrepancies.
- Kabbage, a digital small business lender, made the concerning decision to approve loans with obvious signs of fraud, despite the associated risk. This call was taken because their program allowed them to evade financial liability for these applications. An interchange between the company’s risk manager and his team highlighted that since the liability of any potential fraud would rest with the Small Business Administration (SBA), they could give their stamp of approval to dubious loans. The ramifications of this action on the recipients of these funds, along with SBA itself are worrying. It is essential that small business lenders are held accountable for any risky lending practices to ensure a safe economic future for all small businesses and their owners.
- At the apex of the Paycheck Protection Program (PPP) in 2020, Kabbage’s asset division dramatically reduced its full-time fraud protection team by almost half. In October 2020, the majority of Kabbage’s resources were acquired by American Express and their PPP loan portfolio was assigned to a company with minimal staff. Shockingly, this entity only appointed one full-time anti-fraud personnel despite having tens of thousands of loans to fund. It is plausible that the lack of an appropriate number of experts and resources to counter fraud may have left both Kabbage and their PPP customers exposed to potential fraudulent activities. To mitigate this risk, American Express could leverage sophisticated technologies to better secure anti-fraud capabilities while providing their customers with greater assurance.
Also Read: MoneyLion Sued for Violations: Allegations by CFPB
Impact of Fintechs on PPP: Report Implications
The United States Office of Inspector General (OIG) has released a report on the impact financial technology (fintech) firms have had on the Paycheck Protection Program (PPP) and their potential role in other future governmental programs. The report found that fintechs have been instrumental in efficiently distributing PPP loans, however risks arise due to traditional financial regulations that such lenders may not abide by.
As such, the report recommends that the Small Business Administration (SBA) take these findings into account when contemplating the inclusion of fintechs in any other federal loan programs. It further suggests that both the SBA and its OIG maintain vigilance in investigating possible fraud within PPP, as well as greater oversight if expansion of SBA programs include unregulated lenders like fintechs. Finally, the report advises Congress to acknowledge these important factors when drafting legislation for future emergency programs.
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