Kabbage Agrees to $120M Settlement Over PPP Fraud Allegations

Kabbage Inc., a bankrupt online lender, has agreed to pay $120 million to settle allegations of fraud under the Paycheck Protection Program (PPP), a government-backed loan program established in 2020 to support small businesses during the COVID-19 pandemic. The settlement resolves claims that Kabbage submitted thousands of false claims for loan forgiveness and operated without adequate fraud controls, resulting in the misuse of taxpayer funds and significant consequences for the economy." This description focuses on the primary topic of the article (Kabbage's settlement with the DOJ over PPP fraud allegations), the main entities involved (Kabbage, the DOJ, and the SBA), the context of the COVID-19 pandemic, and the significant actions and consequences related to the subject matter. The description also provides objective and relevant details that will help an AI generate an accurate visual representation of the article's content, such as the concept of a government-backed loan program, the idea of fraud and misuse of funds, and the economic implications of the settlement.

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Bijay Laxmi
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Kabbage Agrees to $120M Settlement Over PPP Fraud Allegations

Kabbage Agrees to $120M Settlement Over PPP Fraud Allegations

Kabbage Inc., a bankrupt online lender, has reached a $120 million settlement with the U.S. Department of Justice to resolve allegations of fraud under the Paycheck Protection Program (PPP). The settlement, announced on Monday, stems from accusations that Kabbage submitted thousands of false claims for loan forgiveness and operated without adequate fraud controls in place.

Why this matters: This settlement highlights the vulnerabilities of government-backed loan programs to fraud and abuse, which can have significant consequences for taxpayers and the economy as a whole. It also underscores the importance of robust oversight and accountability mechanisms to prevent such fraud and protect public funds.

Specifically, the government alleged that Kabbage inflated tens of thousands of PPP loans by double-counting state and local taxes, failing to exclude yearly compensation over $100,000 per employee, and miscalculating payments made by employers for leave and severance. These actions caused the Small Business Administration (SBA) to guarantee and forgive loans in excess of what borrowers were eligible to receive under program rules.

The settlement resolves allegations that Kabbage violated the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Acting U.S. Attorney Joshua S. Levy stated, "Kabbage received tens of millions of dollars through the PPP to help lend taxpayer funds to businesses in need. Instead of safeguarding those funds, Kabbage doled out inflated and fraudulent loans, in an effort to maximize its profits."

In 2020, Kabbage processed approximately $7 billion in PPP loans for over 300,000 borrowers, earning about $190 million in processing fees. The company was aware of errors in its loan calculations as early as April 2020 but failed to address the issue and continued approving loans with miscalculations. Kabbage also removed underwriting steps from its pre-PPP procedures and set substandard fraud check thresholds to maximize loan approvals and processing fees.

The settlement consists of two deals totaling $120 million. The first settlement provides the government with a recovery claim of up to $63.2 million, with Kabbage admitting to inflating PPP loans. The second settlement, worth up to $56.7 million, involves allegations that Kabbage knowingly failed to implement appropriate fraud controls. Kabbage will receive a $12.5 million credit for payments it had already returned to the SBA during the investigation.

The Paycheck Protection Program was established in 2020 to provide loans to small businesses affected by the COVID-19 pandemic. The program was administered by the SBA and intended to help businesses keep their employees on the payroll. However, the PPP has been vulnerable to fraud, and Kabbage's settlement is not the only PPP-related settlement this year. Fintechs Biz2Credit and Womply agreed in March to pay a collective $59 million to settle Federal Trade Commission allegations of deceiving small businesses seeking PPP loans during the pandemic.

Kabbage's technology and a portion of its team were acquired by American Express in 2020, leaving the holding company, KServicing, to administer the remaining $1.3 billion portfolio of PPP loans. KServicing filed for bankruptcy in October 2022 and was forced to turn to Biz2Credit to process PPP loan forgiveness applications due to a lack of cooperation from American Express. The civil settlement includes the resolution of claims brought under the qui tam whistleblower provisions of the False Claims Act by an accountant and a former legal analyst in Kabbage's collections department.

Key Takeaways

  • Kabbage Inc. reaches $120M settlement with DOJ over PPP fraud allegations.
  • Kabbage submitted thousands of false claims for loan forgiveness and lacked fraud controls.
  • The company inflated PPP loans by double-counting taxes and miscalculating payments.
  • Kabbage processed $7B in PPP loans, earning $190M in fees, despite knowing of errors.
  • This settlement highlights vulnerabilities in government-backed loan programs to fraud.