Congress opens investigation into BlueVine and Kabbage after reports of PPP fraud

[Bloomberg]

• Congress is investigating fraudulent loans facilitated by fintech lenders BlueVine and Kabbage.
• While fintech lenders only processed 15% of total PPP volumes, they’re involved in 75% of fraudulent loans identified by the DOJ.
• Fintechs boasted fully-automated PPP applications and faster approvals than traditional banks.

Congress has opened a formal investigation into potentially fraudulent Paycheck Protection Program loans facilitated by online lenders like BlueVine and Kabbage.

The investigation follows reports from Bloomberg and ProPublica that looked into reports of allegedly fraudulent loans approved by lenders like Kabbage.

The House of Representatives’ Select Subcommittee on the Coronavirus Crisis announced the probe on Friday, sending letters to BlueVine and Kabbage.

75% of PPP loans connected to fraud through a DOJ investigation were facilitated by fintech lenders, the committee says in the letter, citing a Bloomberg report. Those fintech lenders processed just 15% of total PPP volumes, it said. 

“I am deeply troubled by recent reports alleging that financial technology (FinTech) lenders and their bank partners failed to adequately screen PPP loan applications for fraud,” representative James E. Clyburn, chairman of the Select Subcommittee on the Coronavirus Crisis, said in a statement.

“This failure may have led to millions of dollars in FinTech-facilitated PPP loans being made to fraudulent, non-existent, or otherwise ineligible businesses.”

An investigation by ProPublica found that Kabbage facilitated 378 loans totalling $7 million to businesses that likely don’t exist. Many of these fraudulent applications were tied to farms registered to residential addresses in areas like southern New Jersey and Palm Beach, Florida.

While it was BlueVine and Kabbage’s tech that processed the loan applications, the fintechs themselves are not banks, and therefore have partner banking relationships that support their lending businesses. BlueVine’s partner bank Celtic Bank and Kabbage’s partner Cross River Bank are both part of the subcommittee’s probe.

The probe seeks to determine whether BlueVine, Kabbage, and their partner banks had adequate controls in place to prevent PPP funds from ending up in the wrong hands.

American Express acquired Kabbage in October 2020, though the deal did not include Kabbage’s existing credit portfolio, which included PPP loans. Kabbage’s outstanding loans were transferred to a new entity called K Servicing.

A Kabbage spokesperson told Bloomberg it conducts “rigorous verification checks” that “go well beyond the minimum requirements issued by the SBA.” For its part, BlueVine told Bloomberg it “conducted advanced fraud-prevention techniques” and tried to “safely support” business owners.

Fintech lenders boasted that automation helped underserved small businesses

The rollout of the PPP, an effort to buoy small businesses amid coronavirus pandemic-driven closures, was less than smooth. 

As businesses rushed to fill out applications for the forgivable loans, the nation’s largest banks, like JPMorgan Chase and Wells Fargo, prioritized existing customers that had already gone through compliance processes. 

That left many small businesses unable to access PPP loans. Ultimately, many turned to fintechs, including BlueVine, Kabbage, PayPal, and Square.

These digital-only lenders boasted automated application processes with very little human intervention required, which meant they were able to get business approved quickly. 

But the majority of their PPP applicants were new customers, meaning they hadn’t already gone through the necessary compliance steps, like ‘know your client.’

98% of Kabbage’s PPP borrowers were new clients. And Kabbage says that due to its “commitment to data and technology to drive automation,” more than 75% of its approved loans were processed without human intervention.

Now, Congress wants to know whether these fully-automated processes made fintechs the lenders of choice for fraud rings.

“A Bloomberg report points to multiple instances of fraud that could have been prevented had FinTechs simply conducted web searches for the company name of inactive, nonexistent, or otherwise clearly ineligible applicants,” the House subcommittee said in its letter to BlueVine.

By Shannen Balogh