In response to a congressional report criticizing its handling of fraud in the massive Paycheck Protection Program, the Small Business Administration says it plans to investigate several prominent PPP participants — including two fintechs and three community banks — spotlighted in the report.
"The SBA will continue to work with the House Select Subcommittee [on the Coronavirus Crisis] to examine the evidence laid out in its report and continue taking corrective action to address the fraud and weak controls that were so prevalent at the onset of the PPP," the agency said in a statement this week.
The report and subsequent controversy come at a sensitive juncture for the SBA. In October it revealed plans for a proposed regulation
Problem is, the report by the coronavirus-crisis subcommittee, which is chaired by Rep. James Clyburn, a South Carolina Democrat, was highly critical of fintechs that participated in the PPP and openly skeptical about granting unregulated lenders access to 7(a).
According to the panel's report, "Congress and the SBA should consider carefully whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be permitted to play a leading role in future federal lending programs."
Congress created the Paycheck Protection Program in March 2020, at the height of the coronavirus pandemic, as an emergency program to provide forgivable loans to employers. Borrowers could use the cash to pay their workers and relatively small list of other business expenses, including occupancy and utility costs. In just over 14 months, the SBA approved more than 11.8 million PPP loans for $799.8 billion.
Initially, PPP participation was limited to approved 7(a) lenders, a list that included banks, credit unions and a small group of nondepository small-business lenders.
SBA opened PPP to fintech lenders in April 2020, after an intensive lobbying effort.
Fintechs suspended
The Dec. 1 report concluded fintechs "likely facilitated a disproportionate number of fraudulent and otherwise ineligible PPP loans." The report singled out two fintechs, Womply and Blueacorn, as "paths of least resistance" for fraudsters.
In a May 25 press release, Blueacorn said it "facilitated" more than 860,000 PPP loans totaling about $14 billion. In a release issued Feb. 3, 2021, Womply claimed to have helped more than 250,000 businesses apply for PPP loans. Both companies collected millions of dollars in fees from the SBA, but the report concluded Blueacorn's fraud-prevention efforts were critically underfunded, while Womply's fraud screening failed to prevent what it characterized as "rampant fraud."
Wednesday, SBA suspended Womply and Blueacorn from working with the agency in any capacity, adding that it "will be investigating appropriate action against their management, owners and successor companies."
A spokesperson for Blueacorn had not responded to a request for comment at deadline. Efforts to reach Womply were unsuccessful.
But the SBA didn't stop there. Its dragnet also included two small-business lending companies, Fountainhead in Lake Mary, Florida, and Harvest LLC Small Business Finance in Laguna Hills, California, as well as three banks: Customers Bancorp in West Reading, Pennsylvania; the Salt Lake City-based Celtic Bank; and Cross River Bank in Fort Lee, New Jersey. The agency plans to take a closer look at those five lenders' PPP activities but did not suspend them from participating in other agency programs.
The SBA tabbed the banks and SBLCs despite the fact all were prolific PPP lenders and have remained active in the 7(a) program. The $1.9 billion-asset Celtic is the nation's sixth-largest 7(a) lender, with fiscal 2023 approvals totaling $93.5 million, according to the SBA. Moreover, the subcommittee report indicated that all made efforts to police their PPP programs and cooperate with authorities. In the case of Celtic and the $8.9-billion-asset Cross River, it found that both banks appeared to have conducted due diligence in selecting partners and pressured those partners to improve their business operations.
The $20.4 billion-asset Customers initially used one of the troubled fintechs profiled by the subcommittee, Kabbage, as servicing partner, but terminated the relationship in August 2020, according to the report.
Both David Patti, Customers' communications director, and Fountainhead founder and CEO Chris Hurn pledged to cooperate fully, with Hurn adding Thursday that Fountainhead "always strived to conduct itself honorably and carry out the objectives of the Paycheck Protection Program."
Customers is confident the SBA's investigation "will find that our policies, procedures and actions satisfied our obligations under the PPP program and other applicable laws," Patti said Thursday.
At Cross River, Phil Goldfeder, senior vice president of global public affairs, said Thursday that he and his colleagues were surprised to learn the SBA would investigate their bank, noting the subcommittee report "actually lauded the work of responsible banks like Cross River."
"Cross River answered the call of Congress to help the smallest businesses survive the pandemic, and now we count on the SBA to do the right thing and differentiate between those who truly helped during the pandemic and those who didn't do enough to deter fraud," Goldfeder said.
Spokespeople for both Harvest and Celtic did not respond to a reporter's inquiries at deadline.
Growing concerns
SBA Administrator Isabella Casillas Guzman has made increased capital access for women, minority and veteran entrepreneurs a signature objective of her tenure, which began in March 2021. To that end, Casillas Guzman has sought to boost small-dollar 7(a) loans of $150,000 or less. Casillas Guzman's first effort, ultimately unsuccessful, involved a plan permitting the SBA
Trade groups representing banks and credit unions strongly opposed the agency's plan to become a direct lender, as opposed to a guarantor. The SBA's current proposal to end the longstanding moratorium on approving new nondepository 7(a) lenders (beyond the 14 SBLCs that are allowed to hold licenses) comes in the form of a regulation, so it doesn't require congressional approval. Even so, bank and credit union representatives have responded skeptically.
Earlier this month, a coalition of trade groups, including the American Bankers Association, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions, Credit Union National Association and National Association of Government Guaranteed Lenders, sent a joint letter to lawmakers on the House and Senate small business committees decrying the plan.
In the Dec. 2 letter, the groups called agency plans to open 7(a) to fintechs a "detrimental shift in the 7(a) lending program." They also referenced the subcommittee report, arguing no program changes involving fintechs should be undertaken while investigations into PPP fraud are ongoing.
"Given these explosive findings have just come to light, pressing pause on allowing these types of entities into the SBA's flagship loan program is more than reasonable," the letter stated.
