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How to Avoid PPP Fraud In Lending: Top 3 Frauds To Avoid

Sep 24, 2020 MicroBilt News

How to Avoid PPP Fraud In Lending: Top 3 Frauds To Avoid

In response to the economic repercussions of the COVID-19 pandemic, the U.S. government unveiled several assistance programs for small businesses. These initiatives saved several companies from going under and enabled them to remain sustainable during difficult times. The Paycheck Protection Program (PPP) was created as a component of the larger government CARES Act passed. PPP was designed to be a quick and simple loan solution for small businesses to maintain payroll and avoid laying off staff during the pandemic.

Unfortunately, numerous instances of fraud occurred during the period PPP loans were distributed and it was discovered both individuals and businesses were using the money towards expenditures unrelated to payroll or for completely fraudulent purposes.

How PPP Fraud Impacts Lenders

In September 2020 federal law enforcement has so far identified 500 individuals, including some organized criminal rings, who may have defrauded the PPP program. The U.S. government has not released the dollar amount associated with this fraud other than it was “significant.” Lenders are now having to work closely with authorities to backtrack and identify these cases of fraud. This is going to be a very costly process because the Department of Justice is taking these fraud cases extremely seriously.

Banks and other lenders need to be cautious going forward because once Congress authorizes the next round of funds for the PPP, it will likely be the last chance for businesses to get this special funding and this can create an environment ripe for further fraud. Lawmakers are watching lenders very closely to determine what they are doing to mitigate fraud.

The Small Business Administration (SBA) highlights the following top types of PPP fraud to avoid.

Loan Agent Fraud

Loan agents prepare documentation for SBA loans and offer referrals. Lenders working with loan agents should watch out for potential behavioral red flags for fraud if the loan agent:

  • Possesses a history of early defaults.
  • Manages all communication between the lender and the borrower.
  • Makes threats to “shop” the loan elsewhere.
  • Provides a high number of “qualified” borrowers in rapid time.
  • Steers lenders to specific appraisers and title companies.
  • Gives a “no” answer when asked if a “packager” was paid to prepare the SBA loan.
  • Submits several loan applications simultaneously to different lenders for the same borrower.
  • Charges excessive fees.

The SBA recommends lenders track loan agent participation, track record with loans, ask for references from other lenders, search public databases to identify problems and check Better Business Bureau records. They should also directly communicate with borrowers about their loans, applications, and loan agent fees, along with using reputable appraisers and title companies they are familiar with – in other words, they shouldn’t necessarily go with the loan agent’s recommendations.

Borrower Fraud

Lenders should be on alert for any borrowers that intentionally provide false information during the loan application process which includes:

  • False equity injection where a borrower (or loan agent) attempts to falsify or conceal actual sources of funds.
  • Overstatement of income.
  • Understating or failing to disclose liabilities and debts.
  • Providing an overvaluation of collateral.
  • Not disclosing a criminal record.
  • Claiming U.S. citizenship when not a citizen.
  • Concealing the true owner of the business.
  • Submitting false Social Security numbers to hide poor credit histories.
  • Creating a false work history.
  • Submitting altered tax returns.

Lenders have the responsibility to perform due diligence when processing PPP loans to ensure borrowers or their loan agents are not trying to commit fraud. Lenders can have borrowers sign a good faith certification at closing and verify all bank records to ensure the loan is deposited into accounts actually utilized by the business for the intended purposes.

Lender Fraud

Lender fraud is rare but the SBA indicates this is an issue all lending institutions should be aware of. The federal agency recommends all lenders put specific internal controls into place to ensure proper lending practices are followed. Such initiatives will deter any potential fraud occurring. The SBA recommends lenders should:

  • Provide sufficient oversight of loan approval, including several different sets of “eyes” to review loan packages.
  • Place limits on commissions and other enticements for employees to approve loans.
  • Establish a Code of Conduct that outlines the necessity to disclose the involvement of a loan agent in loans.
  • Create review and auditing processes to identify lending officials that process higher than the average number of loans, an increased number of loans going into early default, or other problematic loans.

To mitigate potential fraud, lenders should carefully examine all documents submitted by applicants or loan agents that appear to signal false loan equity. This would include items such as falsified or altered including gift letters, gift affidavits, promissory notes, bank statements, cashier checks, and other financial statements. Also, lenders should be on the lookout for any bank statements indicating unexplained large dollar amounts deposited or evidence of borrowers with poor credit histories claiming substantial amounts of cash on hand.  

Other Red Flags for Fraud

The PPP and Economic Injury Disaster Loans (EIDL) programs were inclusive in the CARES Act to help small businesses weather the COVID-19 pandemic. The National Credit Union Administration highlights additional warning signs lenders can look out for:

  • PPP applications with fraudulent supporting documentation.
  • Different PPP applications containing almost identical application information originating from the same IP address.
  • Evidence of businesses established during the pandemic that might have been created for the sole purpose of obtaining PPP loans.
  • Accounts with consistently low balances with no evidence of previous payroll expenses.
  • Loans distributed are immediately transferred out to investment accounts, wired to non-business accounts, used to buy luxury assets, or withdrawn in cash.

Legitimate businesses eligible for PPP funds will be able to demonstrate a need and show a history of why they need access to money to help their businesses remain sustainable. With PPP loans moving quickly once funds are released, it’s important to establish good oversight so this situation isn’t repeated if Congress authorizes additional PPP loans.

PPP Fraud Can Be Significantly Reduced With Automated Verification

As a lender, to avoid PPP fraud, an automated solution can significantly reduce the chances of lenders getting caught in the middle of deceptive activities. MicroBilt’s PPP solution is a system designed to help lenders avoid fraud. As a consumer reporting agency at heart, MicroBilt’s mission is to help our clients identify risk in their business models and solve that equation.

Our platform has long been extensively used in the consumer lending environment and we realized we could quickly extend our existing technology to the small business underwriting of PPP loans. The manual processes that come with small business lending create an environment that makes it difficult to identify fraudulent activities. Inserting technology into the equation can significantly increase the ability to quickly identify instances of fraud. MicroBilt’s technology enables lenders and banks to quickly gather, verify, and automate all of the required application documents in real-time and prepare for future audits as an independent or as an easy add-on solution.

With the next and likely last wave of PPP loans possible in the near future, lenders should start preparing now. To learn more about MicroBilt’s PPP solution, contact us today at 800-884-4397 or fill out our online form.