Uncovering COVID-19 Loan Fraud Schemes 

As John Griffin was casually opening his work email on a Saturday morning in August 2021, he found a threatening letter from a fintech lawyer. The lawyer had sent it directly to University of Texas President Jay Hartzell and copied Griffin. He sensed a fight ahead. 

The Texas McCombs finance professor, along with associate finance professor Samuel Kruger, was preparing to release a study of potential fraud in the Paycheck Protection Program, a government program that lent money to businesses during the COVID-19 pandemic. 

The study focused on fintech — short for financial technology — lenders who operated mostly online. They competed with traditional banks by touting faster approvals and more flexible credit standards. 

Perhaps too flexible, the study suggested. Fintech loans were three times as likely as bank loans to show red flags of possible fraud, such as businesses that didn’t register with their states until after the PPP was launched. 

A couple of fintech lenders had gotten word of the study from reporters planning to break the story. Now, these fintechs were insisting that UT officials halt the study’s public release. 

The letter attacked the researchers’ data and methods, warning the University of “reputational damage” and “large scale repercussions.” 

Looking back on that weekend, Griffin says, “I’ve never been one to back down from a controversy.” He and Kruger were prepared to refute the lenders and put out their research. They looked to the University to back them up. 

“Our financial system revolves around its users having a lot of trust,” Kruger says. “Fraud has the potential to cause big breakdowns in that trust.” 

Incentives for Fraud 

Starting in April 2020, the PPP offered small businesses up to $10 million in forgivable loans for keeping workers on their payrolls. Its goal was to inject money into the economy as quickly as possible. But its structure, the professors feared, was an invitation to con artists. 

The Small Business Administration used 4,800 lenders to take applications and disburse funds. Lenders had strong incentives to make loans. They collected up to 5% of a loan’s amount as a processing fee — with flat fees that were proportionally even larger for small loans — adding up to a total of $38 billion. 

They had less incentive to screen out bogus borrowers. If a loan went bad, Uncle Sam took the loss. “You shouldn’t have a middleman who doesn’t have any exposure to whether fraud is being committed,” Kruger says. 

How much fraud was occurring? Kruger and Griffin used techniques from forensic finance, a field that analyzes sets of big data for fingerprints of financial foul play. 

They cross-checked public SBA data on individual loans against other public databases for signs of suspicious activity, such as multiple loans to the same residential address. 

Out of 14 months’ worth of loans, they found that 12% showed at least one indicator of potential misreporting, totaling $64 billion. Among fintech lenders, the rate was 23%. 

Going Public 

If they hoped to prevent further fraud, the professors couldn’t wait years to publish their research in a peer-reviewed journal. They planned to follow an academic practice that is becoming more and more common: publishing preliminary findings online as a working paper. 

“The activity was still going on,” Griffin says. “We wanted people to be aware of it, to try to reduce the amount of fraud, and to encourage law enforcement to go after it.” 

In the days just before online publication, the researchers approached the McCombs communications team, which offered the paper to a few reporters ahead of its official release date. In return, the reporters agreed not to publish their stories until the embargo lifted at 5 a.m. Tuesday, Aug. 17, 2021. 

In the interim, the reporters did their jobs, contacting fintech lenders to get their sides of the story and providing those who asked with a copy of the paper. Two of those lenders had their attorneys send UT officials the threatening letters that Griffin read that Saturday morning. 

During the weekend, while UT lawyers looked over the lenders’ objections, Griffin did as well. 

By Monday, University lawyers agreed. The researchers were given the green light to publish their findings. 

Having an Impact 

The research received immediate and massive media attention: at least 448 mentions in print, radio, TV, and online. Some of the coverage tracked down details of specific loans, such as $38,674 to two orange groves in Minnesota. 

Some lenders were found to have uploaded headshots of Barbie and Ken dolls as ID pictures for fake businesses. A Florida borrower was charged by prosecutors with using a $7.2 million loan to buy a 12,579-square-foot mansion and three luxury cars. 

Most gratifying to the researchers, however, was that their work caught the attention of the U.S. House Subcommittee on the Coronavirus Crisis. 

The committee’s final report in December 2022 confirmed the professors’ conclusions. It wrote, “Many fintechs . . . took billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP.” 

Final vindication came from the SBA itself. In June 2023, its inspector general estimated that there were over $200 billion in fraudulent loans from the PPP and a companion program. 

Both professors are disappointed about one thing: Most fraudsters got away with it. The SBA reports it has gotten back only $28 billion. 

Nonetheless, the researchers think they’ve had a positive impact. “There wasn’t much understanding of what lenders were facilitating this and where the gaps in the system might have been,” Kruger says. 

Griffin adds: “I found it disturbing when the wrongdoers tried to stop the release of important information. I appreciate the University for standing behind us and for valuing academic freedom.” 

— Steve Brooks