Please rotate your device to landscape mode to view the charts.

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

Background and Context

Program Overview

The Paycheck Protection Program (PPP) distributed over $793 billion in COVID-19 relief through three rounds between April 2020 and May 2021.

FinTech Role

FinTech lenders' market share grew from less than 5% in round 1 to over 80% by May 2021, highlighting their increasing importance in loan distribution.

Methodology

Researchers analyzed 11.5 million PPP loans using eight disparate datasets, introducing four primary and four secondary indicators of potentially misstated loans.

Dramatic Rise in FinTech Market Share Over Program Duration

  • FinTech lenders began with only 1.1% market share in early Round 1
  • Share increased to 20.1% in Round 2 and 46.4% in Round 3
  • By May 2021, FinTech lenders dominated with over 86% of loans

Higher Suspicious Loan Rates in FinTech vs Traditional Lenders

  • FinTech loans were 3.23 times more likely to show suspicious indicators
  • 23.0% of FinTech loans flagged versus 7.1% for traditional banks
  • Pattern persists even after controlling for loan characteristics

Increasing Suspicious Lending Rates Across Program Rounds

  • Suspicious lending increased from 6.3% in Round 1 to 16.3% in Round 3
  • Growth particularly pronounced in FinTech loans
  • Contradicts expectation that fraud detection would improve over time

High Forgiveness Rates Despite Suspicious Indicators

  • Around 90% of loans have been forgiven regardless of suspicious indicators
  • Similar forgiveness rates for both FinTech and traditional loans
  • Suggests limited effectiveness of forgiveness review process

Estimated Scale of Suspicious PPP Lending

  • 1.41 million suspicious loans identified totaling $64.2 billion
  • FinTech lenders responsible for 60.9% of flagged loans
  • Total suspicious lending could exceed $117.3 billion with more inclusive criteria

Contribution and Implications

  • First comprehensive academic analysis of potential PPP loan fraud, particularly in FinTech lending
  • Demonstrates need for stronger verification requirements in emergency lending programs
  • Highlights importance of lender reputation and established banking relationships in preventing misreporting
  • Questions effectiveness of current enforcement mechanisms with low prosecution rates

Data Sources

  • Market share trends based on Figure 1 Panel B
  • Suspicious loan rates from Table II
  • Round comparison data from Figure 9 Panel A
  • Forgiveness rates from Figure 11
  • Total suspicious lending estimates from Panel B of Figure 9