Kate Henry

On Dec. 9, the House of Representatives’ Select Subcommittee on the Coronavirus Crisis issued a comprehensive and illuminating report detailing widespread fraud by various financial technology companies throughout the Small Business Administration’s Paycheck Protection Program.  

Among other things, the report highlights how certain fintech companies marketed themselves to banks and other lenders as highly efficient and technologically-savvy specialty companies that could provide accurate, efficient services for such functions as loan application review and verification and fraud screening.  

In reality, the report alleges, these fintech companies were loan review and approval factories that lacked the resources and the acumen to effectively review and approve loan applications and detect fraud, which resulted in hasty and incomplete review of PPP loan applications by inexperienced and understaffed teams, encouraged by their superiors to prioritize quantity of approvals over the quality of their review.  

The report focused primarily on the wrongdoings of four fintech PPP service providers – Womply, Bluacorn, Kabbage and Bluevine – but the report’s comments on the first two firms are worth a closer look. 

Michael Krebs

Womply Prioritized Throughput 

Womply, known also as Oto Analytics, Inc., was founded in 2011 by Toby Scammell and Cory Capoccia primarily as a proprietor of reputation management, email marketing and business intelligence services. In addition to acting as a referral agent for certain PPP lenders, Womply started a program called the “PPP Fast Lane,” through which Womply purported to provide PPP lenders with marketing, underwriting, pre-qualification review and other services.  

Ultimately, Wombly facilitated the origination of over one million PPP loans that provided a total of $16 billion in funding. Womply reportedly pocketed at least half and sometimes up to 90 percent of fees allocated to lenders by the SBA in connection with the PPP. 

Womply marketed the PPP Fast Lane program to lenders as a mechanism to harness high-tech solutions to perform traditional “know-your-customer” functions and fraud review procedures quicker and more efficiently than traditional human review processes.  

Although touted by its founders as being equipped to handle a large number of applications at once, the PPP Fast Lane program ultimately was unable to accurately and effectively evaluate applications to detect fraud. Despite the flaws in its systems hindering accurate and effective review, Womply prioritized reviewing as many PPP loan applications as possible to ensure that the company received maximum fees.  

In March 2021, one chief executive of one of Womply’s largest lending partners indicated to Womply that some applications that were referred to that lender through Womply contained “tax returns with obvious fraudulent information;” another chief executive of a Womply lender stated that “the services promised by Womply, have not only not been provided, but have also placed our company in a very bad predicament due to the high likelihood of fraud involved in many of the referred loans [from Womply].”  

Blueacorn Employees Ignored Fraud Signs 

Blueacorn was a fintech startup created in April 2020 specifically in response to the PPP program. Similar to Womply, Blueacorn marketed itself as a fintech able to provide fraud prevention, eligibility verification, customer support and other tech services for a broad cross-section of PPP lenders.  

To potential PPP borrowers, Blueacorn advertised the PPP program as providing “free money,” stating that “if you end up making it to the [Blueacorn] log-in page, you qualify” for a PPP loan.  

Internal communications subpoenaed by Congress show that such marketing to potential borrowers served the purpose of generating a greater volume of loans, whether legitimate or fraudulent, in order to increase fees received by Blueacorn from the SBA via their lender partners. Further internal communications and testimony from ex-employees indicate that Blueacorn spent very few resources on training for employees to identify fraud and spent only a fraction of fees received on improving fraud detection resources.  

Further, Blueacorn founders and executives instructed employees to ignore all but blatant signs of fraud when reviewing applications in order to ensure Blueacorn procured the maximum amount possible in fees. Additionally, although Blueacorn initially touted itself as a platform to prioritize smaller loans from small businesses and gig economy workers, internal communications indicated that there was an emphasis on large-dollar loans, coined “VIPPP” loans, in order to ensure maximum fees received by Blueacorn and its affiliates. 

Report’s Recommendations 

In light of the fraud and bad practices highlighted in the report, the House subcommittee’s report provides a number of recommendations in an effort to mitigate the damage caused by misuse of the PPP program.  

In addition to calling on the SBA’s Office of Inspector General to investigate further into potential waste, fraud and abuse connected with the PPP program, the subcommittee also called on the inspector general to revisit its prior investigations into oversight of lender service providers to assess systemic risk potentially associated with such lender service providers in light of the issues highlighted by the report.  

In addition to recommendations to continue investigating and prosecuting bad actors in the PPP program, the subcommittee recommended that the SBA provide a “well-defined, more rigorous and better-resourced initial review process” for any future participation by fintechs in SBA lending programs.  

Kate Henry and Michael Krebs are an associate and partner, respectively, in Nutter’s corporate and transactions department. Both are members of the firm’s banking and financial services group.