Fintech-provided Paycheck Protection Program loans were “highly suspicious” at nearly five times the rate of loans from traditional lenders, and included billions of dollars in fraudulent loans.
Those findings were part of a University of Texas report developed by Department of Finance professors John M. Griffin, Samuel Kruger and Prateek Mahajan. Fintech-provided loans were initially a small share of PPP loans when the initiative began in April 2020, but gradually increased. According to the Federal Reserve Bank of New York, during the first wave of PPP funding, fintechs made less than 4 percent of loans, totaling less than 2 percent of money approved, compared to 91 percent and 96 percent, respectively for banks, partially reflecting delayed Small Business Administration authorizations for fintechs as SBA lenders. As more fintechs were approved as PPP lenders, their lending share increased to more than 10 percent of loan amounts and 20 percent by number of loans in the second wave.
The University of Texas professors found that more than 1.8 million questionable fintech-provided loans were provided overall, representing $76 billion in capital or nearly 10 percent of the total $780 billion program. According to the report, 13 out of 20 fintech lenders had above-average rates of suspicious loans, and the 10 lenders with the most suspicious loans — nine fintechs — had at least 28.7 percent of their loans implicated compared to the overall average of 17.3 percent. Fintech loans were 2.7 times as likely as traditional banks to have at least one primary indicator of misreporting.
According to the New York Fed, fintechs have become important lenders to small businesses, especially in places where banks have pulled out. Compared to banks, fintech lenders might be more efficient in processing applications and more likely to lend to underserved businesses that are unable to borrow from banks. Just one in three small employers that applied to a fintech lender had worked with that lender before. Those borrowers had fewer employees, lower credit scores, greater difficulty in accessing PPP credit and were more likely to be Black-owned and have reduced their workforce: Approximately one-in-four Black-owned firms applied to fintech lenders, more than twice the rate of white-, Asian- and Hispanic-owned firms.
“These findings highlight the large costs of low oversight and lack of sufficient negative ramifications to borrowers and lenders for poor lending practices in the PPP,” the University of Texas report stated.
However, there has been pushback to the report: As reported in USA Today, Capital Plus Chief Operating Officer Greg Jacobson called the study “grossly inaccurate, and filled with bad assumptions and bad data.”
“We think the report’s loan count was inflated by more than 20 percent, and that includes a large portion of loans we eventually caught with our additional due diligence,” Jacobson said. “We weren’t supposed to go around checking business registrations. The only reason you’d do that is if you believe you’ve been provided something that’s inaccurate.”
However, Consumer Bankers Association President and CEO Richard Hunt said the study “reinforced the immediate need for policymakers to ensure all market participants, including fintechs, are held to the same broad oversight requirements as traditional banks. As CBA and many others have repeatedly warned, failure to act threatens the safety and soundness of the financial system and the high level of protection consumers deserve.”