Fintechs were almost five times more likely than traditional lenders to be involved with suspicious loans issued through the U.S. government’s Paycheck Protection Program, according to a new study.

Nine of the 10 lenders with the highest rates of suspicious loans were financial-technology firms, according to the study released Tuesday by the University of Texas at Austin’s McCombs School of Business.

The program, aimed at keeping businesses afloat and helping employers hold on to workers during the pandemic, allowed lenders to drop some standard underwriting practices in the interest of speed. But that might have encouraged fraud. The new report said there could be roughly 1.8 million questionable loans with a total value of $76 billion.

“When you have a lot of money going out quickly, there’s the potential for fraud and misconduct,” John Griffin, one of the study’s authors and a finance professor at McCombs, said in an interview. “There are a lot of differences across originators, which indicates that probably origination practices play a big role in potential misconduct.”

In the early stages of the PPP, about 10% of fintech loans had potential indicators of fraud such as misreported income or assets. That soared to more than 40% by the end of the program’s third round, according to the report by Griffin, Samuel Kruger and Prateek Mahajan.

The new research, coupled with other studies showing that the PPP saved relatively few jobs at a high cost, suggest the program “seems to have been a poor allocation of capital,” the authors said in the report.

The government has been pursuing cases of alleged PPP fraud, including charges brought against a technology executive and a former wide receiver for the New York Jets professional football team.

“Anytime you’ve got a government program, particularly one done quickly, there’s going to be people that game the system,” Griffin said. “That’s a huge inefficiency.”

The study examined loan features on more than 10 million PPP loans, looking for potential red flags that could be gleaned from publicly available information. Among the warning signs: unregistered businesses, multiple loans at a single residential address, abnormally high implied compensation relative to industry norms and large inconsistencies between the jobs a borrower reported on a PPP application when compared with other government paperwork filed by the same person.

The study found that three of the largest fintechs involved in the PPP effort—Cross River Bank, Capital Plus Financial and Harvest Small Business Finance—each generated more than $900 million in processing fees while also being responsible for loans that had high rates of misreporting.

First « 1 2 » Next