Exclusive US Department of Justice investigates Kabbage and fintechs over PPP loan calculations – Sources
The US Department of Justice is investigating whether fintech companies including Atlanta-based Kabbage Inc may have erred in handing out billions of dollars in pandemic aid to struggling small businesses, said to Reuters three people familiar with the matter.
The investigation, led by the Civil Division of the Justice Department, examines whether Kabbage and other fintech companies miscalculated the amount of assistance borrowers were entitled to under the Paycheck Protection Program. (PPP) because of the confusion over how to account for payroll taxes, the three people said. .
A fourth person with direct knowledge of the matter said a number of fintechs were asked about P3 tax issues, but declined to provide names.
An investigation does not necessarily indicate wrongdoing and it is not clear whether the investigation will result in sanctions against the companies, two of the three sources said.
A spokesperson for the Department of Justice declined to comment.
Kabbage Inc., which manages Kabbage’s PPP loans and also operates under the K Servicing brand, did not respond to multiple calls and emails seeking comment. Spokesperson for American Express Co. (AXP.N), who in August bought most of Kabbage’s assets other than its loan portfolio, declined to comment.
The previously unpublished investigation highlights how the unprecedented $ 780 billion program, launched by the Small Business Administration (SBA) on April 3, 2020, to mitigate the fallout from COVID-19 closures, has created legal and human risks. reputation for some lenders.
Reuters reported in November, a handful of federal agencies were monitoring lenders on a range of P3 issues, including failing to properly verify borrower payroll expense calculations and potentially discriminatory lending policies.
Under the PPP, major banks, community lenders, and fintechs have provided millions of government-guaranteed loans to small businesses affected by pandemic lockdowns. If borrowers spend the money on payroll and other business expenses, the government reimburses the lender on behalf of the borrower.
Although the program was hailed as a lifeline for small businesses, its launch was rushed and many of its rules were initially unclear. One of the challenges that lenders faced in April 2020 was how to account for federal, state, and local taxes when calculating a company’s overall salary costs, which determined their maximum eligible loan.
Some lenders overestimated taxes, potentially increasing lending, while others underestimated taxes, potentially denying borrowers the help they were entitled to, the two sources said.
Fintechs came to the government’s attention because they were processing high-speed loans using software that in some cases had problems causing errors in applications, one of the sources said. Other industry sources also said that fintechs’ use of automated lending platforms with few manual checks led to the replication of errors across thousands of loans.
SBA data showed that fintechs issued around $ 26.5 billion in PPP loans. Kabbage made nearly 300,000 PPP loans worth $ 7 billion between April 3, 2020 and August 8, 2020, according to his website.
Lenders have said they are under enormous pressure to quickly lend huge sums of money to millions of businesses, while being forced to follow the ever-changing rules of P3s.
An SBA spokeswoman declined to comment.
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