Quickie lender Kabbage doled out billions in PPP loans. A number of borrowers raised red flags.

When the pandemic struck in March, Kabbage, the Atlanta-based online lender, seemed to be just as imperiled as the small businesses that are the bread and butter of its company. The lender furloughed a “significant” number of employees and paused operations. Things seemed bleak. But a federal bailout aimed at rescuing its customer base wound up being the lender’s salvation.

Kabbage was one of the first online financial technology companies to issue loans through the U.S. Small Business Administration’s Paycheck Protection Program, and issue loans it did. By the end of the program’s extension in early August, Kabbage had issued the second-largest number of PPP loans in the country and in doing so caught the eye of American Express, which agreed to acquire substantial parts
of the company Aug. 17.

But the company’s redemption story may not be entirely feel-good.

A joint investigation by the Miami Herald/McClatchy DC and Anti Corruption Data Collective, a nonprofit group of journalists and data scientists, flagged more than 75 companies that received loans of at least $150,000 from the coronavirus small business relief program but don’t appear to have existed before this spring or to have met other eligibility criteria for the program. Under the rules of the
program, businesses were required to have been “in operation on Feb. 15, 2020,” meaning that new companies were not eligible to receive PPP loans.

Of those more than 75 companies, approximately one in five got their loans from Kabbage. For context, Kabbage processed fewer than 1 percent of all the loans included in the overall analysis. The questionable loans went to owners with a number of red flags, including a former Louisiana state employee who had previously fallen behind on his federal taxes and an earlier loan from the SBA and a Florida woman who served time in federal prison for fraud.

But the true extent of potentially ineligible PPP loans approved by Kabbage is unknown since the recipients of loans under $150,000 were not publicly reported. The average Kabbage loan was $23,546, according to a report the company released. And while the SBA has said it will audit all PPP loans above $2 million, none of the nearly 300,000 loans approved by Kabbage cross that threshold, meaning none of the loans approved by Kabbage will get that extra level of review.

Kabbage has touted the relatively modest size of the loans it processed as a sign of its commitment to “the smallest, most vulnerable businesses,” but there’s a financial incentive, too. Under the rules of the program, lenders earned the highest percentage fees for loans under $350,000. All told, Kabbage figures to have earned between $330 million and $340 million in fees on the $7 billion in approved loans the
company said it processed.

Paul Bernardini, a spokesman for Kabbage, declined to say how much the company took in from PPP fees. He also declined to discuss specific loans but said the company approved “far fewer applications than the total number it received due to ineligibility.” He acknowledged that the PPP approval process was not perfect and said the company continues to review the loans it issued to try to detect potential fraud.

“Programs of such scale as the PPP will see challenges. The SBA’s guidance had lenders rely on PPP applicants to provide data they attested to be true and accurate, including their date of incorporation,” Bernardini said.

“[W]hile privacy rules forbid us from disclosing customer account details, the SBA’s public data from July does not necessarily illustrate the current state of loans,” Bernardini added. “A loan with an approved status may not mean funded or complete. Kabbage issued verification checks at every step of the application, including after approval and before funding. Kabbage further mandated each applicant to acknowledge and verify they understood any false information may be punishable by law, including under 18 USC 1001 and 3571, 15 USC 645, and 18 USC 1014 carrying sentences as high as 30 years and fines as high as $1,000,000. In the event fraud is substantiated, Kabbage promptly notifies the
authorities and supports ongoing investigations.”

He added that the company estimates that the loans it approved helped save “over 945,000 U.S. jobs for Main Street businesses in America.”

The SBA declined to answer specific questions about the loans issued by Kabbage and its review of potentially fraudulent loans, providing the following statement to the Herald: “The SBA does not comment on individual borrowers. Evidence of waste, fraud, and abuse with any of SBA’s loan programs is not tolerated and should be reported … The SBA successfully distributed 5.21 million loans and $525 billion to small businesses in an unprecedented amount of time, through the Paycheck Payment Program” — actually the Paycheck Protection Program.

An algorithmic advantage

Kabbage was founded in February 2009 on the idea of having an automated system be able to quickly process loan applications. Its TV commercials feature the actor Gary Cole as a champagne cork-popping “10 minutes in the future spokesguy” to illustrate how quickly and efficiently Kabbage can provide funding to small businesses. That speed comes with a cost, though, as Kabbage loans tend to come with a higher effective interest rate than a traditional loan.

But the company’s reliance on algorithms rather than face-to-face meetings to dole out loans proved to be an advantage in the post-coronavirus world.

“Prior to the PPP, Kabbage had never processed a loan for the SBA. In less than two weeks, Kabbage entirely restructured its lending platform and developed new automated systems to ingest, analyze, verify, and approve PPP applications, distilling a complex and paper-heavy application into a logical, easy-to-follow, process built around advanced data analysis,” a report published by Kabbage says.

With just one employee for every 790 employees at major U.S. banks, Kabbage processed more than 75 percent of all its approved PPP applications without human intervention or manual review, according to a report from the company. The company did it quickly, too — the median time from application to approval was just four hours.

This process helped Kabbage gain thousands of new customers, catapulting it to the top of the charts and solidifying its status as a small business lender that was sticking around. During the first four months of the pandemic, the company gained roughly five times as many new customers as it had in the entire year of 2019, according to the report. The new customers represented 98 percent of all approved PPP loans.

While efficient, the automated processing of massive numbers of PPP loans also opened the door for potential fraudulent or noncompliant loans.

Questionable loans

Surujh and Gaitrie Latchman of Winter Garden, Florida, registered a construction business with the state of Florida on May 22 — nearly three months after the Feb. 15 deadline that businesses had to be operational by to qualify for federal paycheck protection program loans.

Nevertheless, on June 19 — less than a month after its official founding — the company received a loan of between $350,000 and $1 million from Kabbage. The exact amount is not public under the rules of the PPP program.

The construction business, Surujh Latchman LLC, claimed on its PPP loan application that it has 53 employees. But it doesn’t have any online footprint, is registered to the couple’s home address and does not have a construction license, though construction companies aren’t necessarily required to do so.

Additionally, the Latchmans have a financially troubled past. They have each filed for bankruptcy multiple times, Surujh as recently as November 2019 and Gaitrie as recently as 2018. Gaitrie also served more than two years in prison for running what federal authorities described as a “driver’s license mill,” selling licenses to undocumented immigrants.

Reached by phone, Gaitrie declined to comment, saying, “I don’t talk to reporters.” Later, someone identifying himself as Jeremy Latchman and the Latchmans’ son said Surujh and Gaitrie did not apply for or receive any PPP loans. Jeremy said Gaitrie had applied for a loan of $3,500 for her separate small business but that it was denied and they never received any money. He couldn’t explain why the Kabbage loan to Surujh Latchman LLC appeared in the publicly released data and added that the company has just one employee — his father — not 53.

Further east in Louisiana, another set of companies Kabbage gave loans to also raised red flags. Brian Criss, who lives just north of Baton Rouge, Louisiana, is listed as an officer for two companies that got PPP loans through Kabbage: Criss Solutions LLC, which got a loan of between $150,000 and $350,000 on May 5, seven days after the company was first registered in Louisiana, and Anderson Criss Construction, LLC, which also got a loan between $150,000 and $350,000 on June 13, three days after the company was registered in Louisiana.

Anderson Criss Construction is not a licensed contractor in the state of Louisiana and there’s no record of any licensed contracting company connected to him, though contractors are not required to be licensed if the cost of the work they do falls under a certain threshold.

Criss, who worked at Louisiana’s Department of Administration from September 2013 to November 2018, filed for bankruptcy in both 2009 and 2017. His debts in 2017 included nearly $9,000 in unpaid federal taxes and $60,000 owed to the Small Business Administration for a 2016 disaster loan.

Criss said in a filing related to the bankruptcy that the SBA had a lien on the house he had previously owned with his ex-wife and had taken $30,000 from the proceeds of the sale of the house when the two divorced in 2017. Borrowers with delinquent SBA loans or who have defaulted on an SBA loan in the past seven years were barred from receiving PPP loans under the rules of the program. Criss did not respond to multiple requests for comment.

Miami Democratic Rep. Donna Shalala said banks that are found to have had insufficient oversight of the loans they approved should be held accountable.

“I have zero tolerance,” she said. “They should be financially accountable. This may be criminal activity.”

Florida Republican Sen. Marco Rubio, one of the architects of the PPP program, didn’t respond to requests for comment.

Potential consequences

But while the Department of Justice has said it will go after companies that fraudulently obtained PPP loans — and has already started to do so — it likely won’t do the same to the lenders who distributed those loans. The SBA has said it would claw back fees for loans determined to have gone to ineligible borrowers.

“The banks were kind of absolved of any responsibility. I think the banks were almost like a pass-through to the SBA. Here’s the steps that you take and we’re not going to take any action against you,” said Jeffrey Scheer, an attorney for Bond, Schoeneck and King who represents small and mid-sized businesses. “I think the banks are pretty much operating on the basis of as long as they acted in good faith, they’ll be okay.”

But banking institutions involved in the PPP program could conceivably have to answer to banking authorities down the road. “Financial institutions always need to be wary that even if their conduct doesn’t rise to the level of criminal investigation, they may still face consequences from banking regulators for deficiencies in their internal controls,” said Matthew Axelrod, a former DOJ official involved in financial institution enforcement who’s now a partner at the law firm Linklaters.

This article originally appeared on Miamiherald.com