Chairman Cardan, Senior Member Paul, and members of the Committee, thank you for inviting me today to discuss the role of financial technology (“fintech”) companies and fraud in the payroll protection program (PPP) community and their access to capital in the context of today’s hearing on underservicing. I work as a senior investigator for the nonprofit Project On Government Oversight (POGO). For more than two years, I have been investigating fraud and potential fraud in payroll protection programs and have authored several reports detailing my findings.1
Founded in 1981, POGO is a nonpartisan, independent watchdog that investigates and exposes waste, corruption, abuse of power, and government failure to serve the public or suppress those who report misconduct. We support reforms to achieve a more effective, ethical, and accountable federal government that upholds constitutional principles.
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Before I say more, I should make it clear that research shows that fintech lenders and related companies are doing a lot to help underserved communities access PPP loans.2 “Fintech lenders provide a greater share of loans to black-owned businesses than traditional lenders,” a paper published by the National Bureau of Economic Research paper.3 Another paper published by the National Bureau of Economic Research examining PPP found that “fintech use is disproportionately high in ZIP codes, with fewer bank branches, lower incomes, and a larger share of minority populations.” 4
POGO currently has no position on the Small Business Administration’s (SBA) proposed rules, one of which would give fintech lenders the opportunity to participate in the agency’s lending programs outside of the PPP.5 But as a general proposition, historically disadvantaged and underserved communities could benefit if nontraditional lenders, including fintech companies, were able to participate in SBA lending programs.
At the same time, fintech companies do not always provide loans to the very people the Paycheck Protection Program is designed to serve.6 Many have begun to defraud the program, successfully using fintech to transfer funds.
The SBA must have adequate safeguards in place to ensure that fintech companies and other lenders do not contribute to high fraud rates.7 In discretionary programs such as the PPP, where funds are fixed through grants, fraud reduces the amount of federal funds available to legitimate businesses seeking access to funds.8 If federal estimates are correct, that would mean that for every $8 in PPP 1 (or 12.5 percent) is lost-more than the high end of estimates for Medicare fraud.9
But concerns about fraud should not stop the government from trying to address the very real equity issues that impede access to capital for underserved communities.
The SBA’s Office of Inspector General wrote earlier this year that the level of fraud in the PPP is “unprecedented. “10 Indeed, just last week, the SBA suspended further cooperation between major fintech companies and the agency as part of its efforts to “address the fraud and weak controls that were prevalent at the outset of the PPP. Weak controls” as part of its efforts to “address the fraud and weak controls prevalent at the outset of PPPs.
But fraud concerns should not stop the government from trying to address the very real equity issues that impede access to capital for underserved communities.
Fintech and PPP Fraud
In October 2020, POGO and Bloomberg News – independently and within hours of each other – highlighted that fintech lenders were processing a disproportionate number of PPP loans that the Department of Justice claimed were obtained through fraud.12
Using court records and Small Business Administration data, POGO was able to identify the lenders of 97 PPP loans that were allegedly obtained through fraud. Of these 97 loans, we found that 48 were obtained through one of seven fintech companies and banks that worked closely with these fintech companies, representing nearly half of the approved loans involved in these alleged schemes. These seven fintech companies and affiliated banks processed 13 percent of the 5.2 million PPP loans originated up to that point.13
A whistleblower at a fintech lender who also informed POGO of its work told us that their company did not have “much incentive to monitor” because the funds came from the government, the rules governing PPPs were lax, and the beneficiary lender was charged a fee for each PPP loan processed.14
In the past two years, more reports, studies and surveys have added to this picture.15
Researchers at the University of Texas at Austin found that PPP loans processed by fintech lenders are typically more likely to be accompanied by questionable indicators than loans processed by traditional banks and credit unions.
Researchers at the University of Texas at Austin found that PPP loans processed by fintech lenders are generally more likely to have questionable 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.16
The difference in fraud rates suggests that fintech and other participating PPP lenders have different underwriting practices.17 Some fintech lenders appear to have adopted stricter underwriting practices, including conducting due diligence on prospective customers and adhering to “know your customer” rules, thereby reducing potential fraud rates.18 As the lax rules governing PPP programs have led to The lax rules governing the PPP program have led to significant variations in practice, with the program relying on self-certification by loan applicants rather than verifying the accuracy of documentation and tax information provided by applicants in support of their loan requests.19 As the Government Accountability Office wrote in June 2020, “To streamline the process, SBA requires lenders to conduct minimal loan underwriting -limited to actions such as acknowledging receipt of borrower certifications and supporting payroll documents- making the program more vulnerable to fraudulent applications.” 20
Earlier this month, the House Select Subcommittee on the Coronavirus Crisis released a report on the role of fintech in PPP fraud. The report states that “Congress and the SBA should carefully consider whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be allowed to play a leading role in future federal loan programs.” 21 I urge this Committee and the SBA to review the report because it contains troubling details about the practices of some of the major fintech participants in the PPP.
The SBA’s Role in Evaluating Fintech Lenders
Given that some fintech companies are not associated with high rates of potential PPP fraud, it seems unlikely that there are certain inherent flaws in the fintech model that make these lenders more vulnerable to abuse. Instead, there is evidence that the government has not taken sufficient steps to ensure that non-traditional lenders participating in PPPs have adequate anti-fraud controls in place.
The SBA has an opportunity to learn from 2020 if it proceeds with its proposal to expand its loan program participation beyond traditional lenders. Unlike the chaotic days of March 2020 and April 2020, now is the time for Congress and the SBA to take thoughtful steps to address the problem 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.22 The SBA issued interim rules governing the PPP on April 2, 2020, the day before the program began accepting loan applications.
There is a good reason to expand participation: speed is critical in the spring of 2020, when unemployment rates are soaring. Expanded participation in more lenders means more loans can be processed faster and funds can be distributed more equitably.
Evidence suggests that the government is not doing enough to ensure that non-traditional lenders participating in the PPP have adequate anti-fraud controls in place.
The Coronavirus Assistance, Relief, and Economic Security Act (CARES Act) gives the federal government, and specifically the Secretary of the Treasury in consultation with the SBA, the authority to open participation in PPPs to “other lenders” and gives them the authority to issue “regulations and guidance. ” 23
The standards set by the Treasury Department and the SBA required participating lenders to comply with the Bank Secrecy Act, an anti-money laundering law that requires lenders to conduct due diligence and comply with Know Your Customer (KYC) rules.
As the then SBA administrator made clear in an April 2, 2020 press release, lenders will “use their own systems and processes to originate these loans.” 24
The SBA told the Pandemic Response Accountability Board that “the more rigorously PPP lenders apply
