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Did FinTech Lenders Facilitate PPP Fraud?

Journal: Journal of Finance

Date: 20230601

Author: Griffin, John M.; Kruger, Samuel; Mahajan, Prateek

Abstract:
In the $793 billion Paycheck Protection Program, we examine metrics related to potential misreporting including nonregistered businesses, multiple businesses at residential addresses, abnormally high implied compensation per employee, and large inconsistencies with jobs reported in another government program. These measures consistently concentrate in certain FinTech lenders and are cross-verified by seven additional measures. FinTech market share increased significantly over time, and suspicious lending by FinTechs in 2021 is four times the level at the start of the program. Suspicious loans are being overwhelmingly forgiven at rates similar to other loans.

Link: Google Scholar

Key Findings

Suspicious Lending Rates

FinTech lenders had suspicious loan rates 6.52x higher than traditional banks, with 23% of FinTech loans flagged as suspicious compared to 7.1% of traditional bank loans.

Scale of Suspicious Lending

1.41 million loans totaling $64.2 billion were identified as suspicious, with FinTech lenders responsible for 60.9% of flagged loans despite only 32.5% market share.

Increasing Fraud Over Time

Suspicious lending increased dramatically from 6.3% in Round 1 to 16.3% in Round 3, with FinTech lenders' suspicious rates reaching ~30% by end of program.

FinTech vs Traditional Bank Suspicious Loan Rates

  • FinTech lenders had 23% suspicious loan rate vs 7.1% for traditional banks
  • Higher rates persist even after controlling for loan characteristics
  • Data from Table II showing dramatic differences in suspicious lending rates

Suspicious Lending Growth Across PPP Rounds

  • Round 1: 6.3% suspicious loans
  • Round 2: 7.8% suspicious loans
  • Round 3: 16.3% suspicious loans
  • Based on data from Figure 9 showing escalating suspicious activity

Loan Forgiveness Rates

  • ~90% forgiveness rate for both suspicious and non-suspicious loans
  • Minimal difference in forgiveness between FinTech and traditional loans
  • Data from Figure 11 showing high forgiveness rates regardless of loan status

Contribution and Implications

  • First comprehensive academic analysis of potential PPP loan fraud
  • Highlights significant weaknesses in FinTech lending practices when traditional market forces are removed
  • Demonstrates need for stronger oversight in government lending programs
  • Questions effectiveness of PPP program given high rates of suspicious lending

Data Sources

  • Suspicious rates chart: Based on Table II comparing FinTech vs traditional lender suspicious loan rates
  • Rounds chart: Constructed using data from Figure 9 Panel A showing suspicious lending rates across PPP rounds
  • Forgiveness chart: Created using data from Figure 11 showing loan forgiveness rates by lender type and loan status