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House Subcommittee Launches Investigation into FinTech Companies’ Role in Allegedly Fraudulent PPP Loans

The House Select Subcommittee on the Coronavirus Crisis recently announced an investigation into the role of four Fintech companies and partner banks in issuing allegedly fraudulent Paycheck Protection Program (PPP) loans.  The Subcommittee’s press release references certain reports that the Fintech industry and its bank partners “have been linked to a disproportionate number of fraudulent PPP loans . . . raising questions about whether FinTechs and their bank partners have adequately screened PPP loan applications for fraud.”  This announcement builds on the Subcommittee’s March 25 findings that the Treasury Department and SBA failed to institute adequate safeguards to prevent waste, fraud, and abuse in pandemic relief programs, leading to nearly $84 billion in potentially fraudulent loans.

Together with this announcement, Representative Jim Clyburn, Chairman of the Subcommittee, sent letters to these companies requesting documents and information relating to, among other things, establishing or governing the process used to review and approve PPP loan applications, and all communications concerning potential fraud or other financial crime related to

PPP loans.  The letters note that criminal actors sought out FinTechs for fraudulent PPP loans because of their speed in processing such loans – in some cases as little as one hour – while implementing minimal due diligence.  Letters from the Subcommittee can be found hereherehere, and here.

Putting it Into Practice:  As yet another example of the scrutiny pandemic relief program participants face from regulators, FinTechs and their partner banks should be prepared for future government inquiries.  While the Subcommittee seeks to understand the fraud controls and compliance systems that the companies applied to their PPP loan programs, this investigation highlights the value in strict and consistent due diligence policies and procedures to detect fraudulent applications for those processing and funding business loans generally.  To help mitigate potential risk, FinTechs should ensure that their commercial lending programs include:

  • Loan origination policies and procedures that verify the accuracy of loan documents and information, and include processes for high risk borrowers and transactions, such as implementing management oversight;

  • Improved internal controls and post-closing due diligence, including audits of closed loans and red flag procedures for taking immediate corrective action;

  • Avoiding or limiting commissions and other internal inducements that provide incentives for employees to concentrate on loan volume at the expense of loan quality; and

  • A highly-trained and effective team of quality control professionals.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 167

About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...