This article is about an issue that unfolded during the COVID-19 pandemic – the distribution of the massive $793 billion Paycheck Protection Program (PPP) funds, and how this seemingly beneficial program might have been exploited, particularly by FinTech lenders.
A paper published in the Journal of Finance, Forthcoming, by John Griffin, Samuel Kruger, and Prateek Mahajan from the Department of Finance at the University of Texas, has uncovered the potential role FinTech lenders played in PPP loan fraud.
The background of PPP loans
The PPP was launched to help businesses stay afloat during the pandemic. It was supposed to be a lifeline for small businesses, ensuring they had funds to keep their operations going and employees paid. However, where there’s money, there’s often foul play. And that’s what the recent investigation aimed to uncover – did some FinTech lenders use this opportunity to engage in fraud?
A story of rapid growth and potential misuse
Initially, FinTech companies only handled a small fraction of these loans, but by the end of the program, they were managing over 80% of the PPP funds. This rapid growth in FinTech’s role raised eyebrows, because with quick growth often comes the loosening of checks and balances.
How data told a suspicious story
Researchers used an extensive dataset, including 11.5 million PPP loans, to probe deeper. They particularly looked at loans to businesses that weren’t registered properly, those operating out of homes, and loans with unusual payment amounts per employee – signals that often suggest something suspicious.
A vital tool in their investigation was data from OpenCorporates, which provided details on state business registrations. This helped identify which businesses were real and which could be shell companies, existing only on paper to siphon off funds.
Findings that raised concerns
- Who handled the loans? At the start, FinTechs were just a small part of the program, handling less than 5% of all loans. But by the end of the program, they were in charge of more than 80% of the loans. That’s a huge jump.
- Suspicious loans: It turns out that loans given out by FinTechs were more than three times as likely to show signs of potential fraud compared to those managed by traditional banks.
- How much money are we talking about? The researchers pointed out that about 1.41 million loans, which added up to $64.2 billion, looked pretty questionable. And when they looked even closer, they thought the actual amount could be as high as $117.3 billion.
- Comparing numbers: In places where there were more loans than businesses, 39.3% of those extra loans came from FinTechs, but only 14.0% from traditional banks.
- Background checks: When checking for criminal records, people who got loans from FinTechs were more than three times as likely to have a felony in their past compared to those who got loans from traditional banks.
What we see here is that as FinTechs started to manage more of these loans, the chances of something not adding up increased significantly.
What does this mean for us?
This investigation sheds light on a crucial issue – while technology and innovative lending practices can make financial services more accessible, they can also open the door to misuse if not carefully regulated. It underscores the need for balance between innovation and oversight.
As we reflect on these insights, it’s a reminder of the ongoing battle between leveraging new technologies for growth and ensuring they don’t become avenues for exploitation. It’s crucial for all stakeholders, from policymakers to technology leaders, to consider these findings as a call to tighten the reins and ensure that aid reaches those who truly need it, without falling prey to fraud.
For more information
Read the full paper here.
