PPP loan manager KServicing files for bankruptcy amid fraud investigations

Diving Brief:

  • Small business loan manager KServicing filed for bankruptcy on Tuesday amid allegations that it was too lax in issuing government-backed COVID-19 relief loans, according to court documents.
  • The company, formerly known as Kabbage, processed more than $7 billion in Paycheck Protection Program (PPP) loans before the company’s technology and part of its team were acquired by American Express in 2020, leaving behind the holding company, KServicing, to administer the remaining $1.3 billion portfolio of COVID relief loans.
  • KServicingGenericName uses the bankruptcy process to get a reprieve from having to constantly defend against multiple federal and state investigations into her handling of loans, Deborah RiegerPaganisthe company’s restructuring adviser, wrote in KServicing’s bankruptcy filing.

Overview of the dive:

During the pandemic, KServicing has issued more than $7 billion in PPP loans to more than 300,000 borrowers, making it the nation’s second-largest PPP lender by application volume, the company noted in its bankruptcy filing.

The company, which is in the process of winding down operations, is ‘overburdened’ by a number of disputes over its lending practices, forcing the company to spend significant time and resources defending itself on ‘multiple costly fronts’ , filing claims.

The company’s lending practices are under investigation by the House Select Subcommittee on the Coronavirus Crisis, the Federal Trade Commission and the Small Business Administration, according to court documents. The Massachusetts Department of Justice and Eastern District of Texas offices are also investigating allegations that the company failed to properly control fraud in its PPP loan service.

Ongoing investigations into alleged PPP errors, which the company said it “vigorously contests,” have delayed the process of canceling some loans, Rieger-Paganis wrote.

“The post-mortem investigations and misdirected review severely impede the company’s ability to accomplish its mission of managing the PPP loan balance of its loan portfolio and has resulted in significant incremental costs for closing its operations,” a- she writes.

KServicing had the lowest borrower discount rate of any major lender in the program, according to a Miami Herald investigation.

The company blames American Express for some of its forgiveness delays, saying the payment company failed to follow through on promised PPP documentation and forgiveness support after the acquisition.

American Express acquired a substantial majority of KServicing’s business for about $750 million, a transaction that specifically excluded a small legacy loan portfolio and the firm’s PPP business, KServicing said in the court filing.

KServicing said AmEx’s lack of cooperation following the transaction forced the company to turn to a third-party vendor, Biz2Credit, to process loan forgiveness requests.

AmEx disputed KServicing’s claims, telling the Miami Herald that it “has honored its obligations under the Transition Services Agreement and will continue to do so in accordance with its terms.”

During the pandemic, fintechs like Kabbage have been praised for their speed and willingness to serve businesses that were unable to secure loans from traditional lenders. Fintech PPP lenders, however, were almost five times more likely to be linked to suspicious PPP loans than traditional banks, according to a study 2021 by researchers at the University of Texas, Austin.

KServicing said it processed PPP loan applications “in good faith” as quickly as possible despite shifts in direction and a lack of clarity from the SBA during the initial PPP rollout, Rieger-Paganis wrote.

“Despite this lack of clarity, government officials have publicly told participating lenders that time is of the essence when it comes to loan administration, sometimes even asking lenders to process loans to eligible PPP borrowers the same day they apply. “, she wrote. “There was no other way to objectively view these facts and circumstances – it was a national emergency.”

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