Kabbage, a bankrupt fintech lender, settles PPP fraud case with DOJ

Bloomberg News

The bankrupt shell of Kabbage has reached a $120 million settlement with the Department of Justice in connection with allegations that the small business lender committed fraud under the Paycheck Protection Program.

The settlement is the latest fallout from the PPP, which helped to avert catastrophic job losses during the pandemic but also proved vulnerable to fraud. The DOJ argued that Kabbage did not closely scrutinize PPP applications for signs of fraud — reaping larger fees from the U.S. government for processing loans that were bigger than they should have been — and also that the lender's own actions defrauded the program.

Lenders that enabled the misuse of government funds "should be held accountable, as they ignored signs of fraud, and chose profit at the expense of taxpayers and struggling small businesses badly hit by the COVID-19 pandemic," said Damien Diggs, U.S. attorney for the Eastern District of Texas, in a news release.

The settlement comes as the wind-down of Kabbage continues in bankruptcy court. In August 2020, American Express agreed to buy Kabbage's technology, but it did not purchase the company's loan portfolio, including the loans it made through the PPP. 

The remnants of Kabbage are now known as KServicing, which did not immediately respond to a request for comment.

The DOJ alleged that Kabbage "systemically inflated tens of thousands of PPP loans," which led to the Small Business Administration forgiving loans that were larger than borrowers were eligible for. The loan program required lenders to verify businesses' payroll costs and paid them a fixed fee based on the size of each loan. Borrowers could get their loans forgiven if they met PPP requirements.

Under the settlement, Kabbage acknowledged that it double-counted some employee taxes, didn't exclude wages above $100,000, as it was supposed to, and didn't properly calculate leave and severance payments.

Prosecutors alleged that Kabbage did not fix the issues despite knowing about them as early as April 2020. More specifically, the DOJ maintained that the lender removed steps from its underwriting process so that it could process more loans and "knowingly set substandard fraud check thresholds."

Another problem flagged by the DOJ was Kabbage's reliance on automated tools that proved inadequate. Prosecutors said that the small business lender didn't have enough personnel for fraud reviews, and that it discouraged the fraud review staff it did have from requesting more information from borrowers. 

Under the settlement, the government is entitled to $120 million, though the DOJ said the size of the payment will ultimately depend on how the company's bankruptcy plays out. Kabbage will get a $12.5 million credit for payments it made to the SBA during an earlier investigation on the issue.

The Miami Herald has reported on the disproportionate amount of suspicious loans that Kabbage made relative to other PPP lenders. It's also flagged massive shortcomings in Kabbage's ability to help businesses obtain forgiveness from the SBA.

The DOJ's actions grew out of a COVID fraud enforcement task force that Attorney General Merrick Garland assembled in 2021.

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The SBA has also investigated PPP fraud at a handful of fintechs and midsize banks after lawmakers flagged concerns about those lenders.

Among the lenders that were 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 settle a dispute over the partnership.

Kabbage said at the time that Customers owed it $65.5 million in servicing and referral fees. The $21 billion-asset bank argued that it wasn't liable for that sum due to Kabbage's numerous failures in loan processing.