15% of Salary Protection Program Loans May Be Fraudulent, Study


When the Paycheck Protection Program began last year to help small businesses struggling during the pandemic, the federal government was determined to get the relief money fast – thus waiving what lenders traditionally do with business loans.

The absence of these safeguards meant that the probability of fraud was high. But how much of the program’s $800 billion was obtained illegally?

A new academic worksheet It includes an estimate released Tuesday: Researchers concluded that about 1.8 million of the program’s 11.8 million loans — more than 15 percent — had at least one indication of potential fraud, totaling $76 billion.

“There are a lot of anecdotes about fraud, but the hard thing about anecdotes is that it’s very difficult to put them together and get to the scale of what’s going on,” said Samuel Kruger, an assistant professor of finance at the University of Texas. He’s at the McCombs School of Business in Austin and one of the paper’s authors. “We wanted to look for patterns in the data.”

The study blames a particular group of lenders for most of the dubious loans: fintech firms known as “fintechs” that focus on digital lending. Nine out of 10 banks with the highest bad debt ratios fell into this group.

“Some fintech lenders appear to specialize in questionable loans,” the authors wrote. Collectively, fintechs accounted for about 29 percent of the program’s loans, but more than half of doubtful loans, the study found.

Run intermittently from April 2020 to May 2021, the Paycheck Protection Program relied on banks and other lenders to make government-guaranteed loans designed to be forgiven if borrowers adhered to program rules. Government watchers have long warned of the high risk of fraud in rushed loans; There is the Ministry of Justice accused more than 500 people by improperly soliciting hundreds of millions of dollars in debt.

Dr. Kruger and two other researchers at the university, John M. Griffin and Prateek Mahajan, identified four primary and five secondary indicators of a questionable benefit loan. Among the red flags are businesses that claim to pay workers significantly more than their industry norms, and companies without government business registration, and other formally structured businesses. Then they combined credit records It was published by the Small Business Administration, which manages the program, along with other data sources such as registration records and industry salary data to find loans with anomalies.

Researchers acknowledged that $76 billion contains some false positives, because not every loan that raises red flags is inappropriate. For example, one of its indicators is multiple loans going to multiple businesses at the same residential address. This is often a warning sign, according to researchers and program creditors, and many said they give these types of loans extra scrutiny. But there are also legitimate reasons for a household to include more than one home-based business.

A more restrictive calculation by the researchers of loans with at least two dubious features identified 1.2 million potential fraudulent loans, totaling $38 billion.

A professor of finance at the university, Dr. “We were pretty conservative in the way we approached the whole analysis, so there are probably billions of us missing out,” Griffin said. “The cost of fraud in this program appears to be high.”

The team’s principal investigator, Dr. griffin, owner of four companies Companies that advise on financial fraud investigations. He said none of them had any contract with the Salary Protection Program.

Specifically, the study notes that two lenders, Capital Plus and Prestamos CDFI, had signs of fraud in roughly half of their loans. Both of these lenders made almost all of their loans through a loan facilitator, Blueacorn. attracted debtors through a marketing attack and referred them to their partners. Two other major online lenders, Cross River Bank and Harvest Small Business Finance, also have extremely high bad debt rates, the researchers said.

All four creditors said they strongly disagreed with the methodology, data, and results of the study. At the same time, they emphasized that the audiences they focus on – particularly solo entrepreneurs and small companies, including those without traditional commercial banking relationships – are inherently riskier.

“We have made every effort to screen out ineligible applications,” said José Martinez, president of Prestamos CDFI. “My team works round the clock to support small-to-small businesses and we are proud of the work we do to ensure critical emergency funds reach all eligible applicants.”

Mostly big banks Salary Protection Program limits credits to existing customers, which reduces fraud but disproportionately excluded businesses owned by women and people of color. Online lenders and fintechs were often the only options available to those without commercial bank accounts and lines of credit. Giving loans to those who have no previous affiliation with the lender increases the risk of fraud significantly, especially if there is no strict underwriting.

“Cross River is a state-chartered, FDIC-insured bank with strong regulatory standards,” said bank spokesman Phil Goldfeder. “Unlike other lenders who put their own clients first, Cross River SBA has taken the call to action and not limited the program to existing clients.”

Before the study was published, Blueacorn sent a letter to Jay Hartzell, president of the University of Texas at Austin, objecting to the researchers’ approach. Based on interim data released by the Small Business Administration before the PPP ended, Blueacorn said the study counted loans that lenders initially approved but later canceled due to questionable features. About 157,000 applications—about 16 percent of all loans approved by Blueacorn’s lenders—were canceled before they were paid off by lenders.

“As we review increasing volumes of loan applications, we have learned, adapted and improved our fraud detection capabilities and protocols,” said Barry Calhoun, CEO of Blueacorn. “Along the way, we partnered with the SBA and other officials to ensure the integrity of the PPP while providing a traditionally ignored population with access to the funds they need and deserve.”

The researchers said they hope their work will help inform the ongoing policy debate about the effectiveness of the Salary Protection Program.

“Our evidence is that PPP saved relatively few jobs at a high cost“provides increasing evidence that PPP appears to be a poor capital allocation,” they wrote. “The coverage of tens and hundreds of thousands of dubious loans created by many fintech lenders suggests that many lenders encourage, condone or have lax surveillance procedures.”

The Small Business Administration did not immediately comment.


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