When the Paycheck Protection Program began last year to help small businesses that were struggling during the pandemic, the federal government was determined to get the relief money out fast — so it waived much of the vetting lenders traditionally do on business loans.
The absence of those safeguards meant that fraud was highly likely. But just how much of the program’s $800 billion was taken illicitly?
A new academic working paper released on Tuesday contains an estimate: Around 1.8 million of the program’s 11.8 million loans — more than 15% — totaling $76 billion had at least one indication of potential fraud, the researchers concluded.
“There’s been a lot of anecdotes about fraud, but the tricky thing about anecdotes is that it’s very difficult to put them together and get at the scale of what’s going on,” said Samuel Kruger, an assistant professor of finance at the University of Texas at Austin’s McCombs School of Business and one of the paper’s authors. “We wanted to look for patterns in the data.”
The study pins blame for many of the questionable loans on one particular group of lenders: financial technology firms, known as “fintechs,” which focus on digital lending.
“Certain fintech lenders seem to specialize in dubious loans,” the authors wrote. Collectively, fintechs made around 29% of the program’s loans but accounted for more than half of its suspicious loans, the study concluded.
The $76 billion figure contains some false positives, the researchers acknowledged. One of their indicators, for example, is multiple loans going to multiple businesses located at the same residential address. That’s often a warning sign. But there are also legitimate reasons a household could contain more than one home-based business.
In particular, the study cites two lenders, Capital Plus and Prestamos CDFI, as having fraud flags on roughly half their loans. Both made nearly all of their loans through Blueacorn, a loan facilitator that drew in borrowers through a marketing blitz. Two other large online lenders, Cross River Bank and Harvest Small Business Finance, also had exceptionally high rates of suspicious loans, the researchers said.
All four lenders said they strongly objected to the study’s methodology, data and conclusions. At the same time, they emphasized that the populations they focused on — particularly solo entrepreneurs and tiny companies, including those without traditional business banking relationships — were inherently riskier.