Fintech
Kabbage, a bankrupt fintech lender, settles PPP fraud case with Department of Justice
The U.S. government is entitled to $120 million under a settlement with Kabbage’s bankruptcy, but the Justice Department has said the size of the payment will ultimately depend on how the bankruptcy pans out.
Bloomberg News
Kabbage Bankruptcy has reached a $120 million settlement with the Department of Justice in connection with allegations that the small business lender committed Paycheck Protection Program fraud.
The deal is the latest fallout from the PPP, which helped avoid catastrophic job losses during the pandemic but also proved vulnerable fraud. The Justice Department argued that Kabbage did not carefully review PPP applications for signs of fraud — collecting higher fees from the U.S. government for processing loans that were larger than they should have been — and also that the lender’s own actions defrauded the program.
Lenders who enabled the misuse of government funds “should be held accountable, as they ignored signs of fraud and chose profit over taxpayers and struggling small businesses severely impacted by the COVID-19 pandemic,” said Damien Diggs, U.S. attorney for the Eastern District of Texas, in a press release.
The deal comes as Kabbage’s liquidation continues in bankruptcy court. In August 2020, American Express agreed buy Kabbage technologybut did not purchase the company’s loan portfolio, including loans made through the PPP.
The remnants of Kabbage are now known as KServicing, which did not immediately respond to a request for comment.
The Justice Department said Kabbage “systematically inflated tens of thousands of PPP loans,” which led the Small Business Administration to forgive loans that were larger than borrowers were entitled to. The lending program required lenders to verify businesses’ personnel costs and pay them a fixed fee based on the size of each loan. Borrowers could have their loans canceled if they met the PPP requirements.
Under the settlement, Kabbage acknowledged that it double-counted certain employee taxes, that it did not exclude wages over $100,000, as it should have done, and that it did not correctly calculate vacation and severance pay.
Prosecutors alleged that Kabbage failed to fix the problems despite knowing about them as early as April 2020. More specifically, the Justice Department argued that the lender removed steps from its underwriting process so it could process more loans and “consciously set substandard fraud control thresholds.”
Another issue reported by the Department of Justice was Kabbage’s use of automated tools that proved inadequate. Prosecutors said the small business lender did not have enough fraud review staff and that it discouraged the fraud review staff it had from requesting more information from borrowers.
Under the settlement, the government is entitled to $120 million, although the Justice Department has said the size of the payment will ultimately depend on how the company’s bankruptcy unfolds. Kabbage will receive a $12.5 million credit for payments made to the SBA during an earlier investigation into the matter.
The Miami Herald reported it disproportionate amount of suspicious loans that Kabbage has achieved compared to other PPP lenders. And also reported huge shortages in Kabbage’s ability to help businesses obtain forgiveness from the SBA.
The Justice Department’s actions arose from a COVID fraud task force assembled by Attorney General Merrick Garland in 2021.
The ASB has also investigated PPP fraud against a handful of fintechs and mid-sized banks after lawmakers flagged concerns about those lenders.
Among the lenders investigated: Customers Bancorp in West Reading, Pennsylvania, which initially used Kabbage as a loan servicing partner but ended the relationship in August 2020.
KServicing filed for bankruptcy protection in October 2022. Later that month, Customers agreed to pay the bankrupt company $58 million to resolve a dispute about the company.
Kabbage said at the time that customers owed it $65.5 million in support and referral fees. The $21 billion bank argued it was not liable for that sum because of Kabbage’s numerous failures to process loans.