The Department of Justice is investigating whether online lenders, including Kabbage, erred in distributing government-backed small business relief loans, according to sources cited by Reuters.
The Justice Department's civil division is examining whether Kabbage and other fintech companies miscalculated how much Paycheck Protection Program (PPP) aid borrowers were entitled to, citing a confusion over how to account for payroll taxes, three anonymous DOJ sources told the wire service.
Atlanta-based Kabbage was one of the program’s most prolific nonbank participants, making 300,000 PPP loans worth $7 billion between April 3, 2020, and Aug. 8, 2020, according to its website. American Express purchased a significant portion of the fintech’s assets in August, except for its loan portfolio, which is owned by Kabbage, Inc. and has been doing business as K Servicing since the acquisition.
The DOJ probe does not necessarily indicate wrongdoing, a source told Reuters, adding it is unclear if the investigation will result in penalties against the companies.
At issue, is whether fintech lenders accurately included payroll taxes in determining the size of borrowers' payrolls, according to sources.
Some lenders over-accounted for taxes, potentially inflating the loans, while some under-accounted for taxes, potentially resulting in borrowers being denied aid they were entitled to, sources told the wire service.
Fintechs processed the PPP loans using software that on some occasions had glitches, causing application errors, a source said.
Another source said fintechs' use of automated lending platforms with few manual checks caused errors to be replicated across thousands of loans.
The opportunity to participate as direct lenders in the SBA lending program was a historic moment for fintech firms, which were excluded from the PPP for the first several weeks of the program last year.
The PPP loans, aimed to help small businesses struggling amid the pandemic, are forgivable if borrowers meet certain conditions, such as using the funds to maintain payroll and retain employees.
The speed at which the program was rolled out, as well as the hurdles lenders faced amid the SBA’s unclear and often evolving guidelines, have attracted scrutiny in the past.
The Government Accountability Office (GAO) in June said the number of PPP loans approved, the speed with which they were processed, and limited safeguards left the program open to "significant risk that some fraudulent or inflated applications were approved."
As of May 2, the SBA said it has approved more than 10.8 million PPP loans totaling $780 billion. Loans issued by fintechs accounted for around $26.5 billion of the loans.
The SBA and American Express declined to comment on the investigation, while Kabbage has not responded to multiple requests for comment, Reuters said.