Online lender Kabbage was one of the biggest lenders in the first year of the Paycheck Protection Program, processing more than $7 billion in loans.
But for more than two years, the company has also been dogged by questions of whether it was too lax in approving loans that it should have known were fraudulent.
Facing numerous federal investigations into its PPP lending practices, Kabbage or, to be more accurate, the shell of what was once Kabbage, filed for bankruptcy this week.
Kabbage was acquired by American Express in the fall of 2020. The credit card giant took the online lender’s technology and many of its employees, but left behind the PPP loan portfolio, which would be handled by a holding company that now does business under the name KServicing.
That holding company disclosed in the filings that it is currently facing investigations into its PPP lending practices from the House Select Subcommittee on the Coronavirus Crisis, the Federal Trade Commission, the U.S. Small Business Administration and two U.S. Attorneys, working in conjunction with the U.S. Department of Justice.
The PPP program was created by Congress in March 2020 to help small businesses struggling with COVID-19 closures and disruptions. Under the terms of the program, small businesses could obtain loans of up to $10 million that would be forgiven if used for approved purposes, such as payroll.
While money for PPP the program came from the federal government, banks and other lenders were tasked with vetting applicants to the program and distributing cash, and were paid a small percentage of each loan as a fee. The lenders were also responsible for helping qualified small businesses obtain forgiveness.
And Kabbage has also fared poorly in trying to help borrowers obtain that forgiveness.
The Miami Herald reported earlier this year that the company had the lowest rate of borrower forgiveness of any major lender in the program, with borrowers describing an agonizing process of trying to have their loans erased.
The bankruptcy filings provide some clues as to what was behind those struggles.
They show that the holding company has a skeleton staff of only 19 full-time employees and currently has only $11 million in available cash on hand. Those employees, along with an army of contractors, are responsible for overseeing a loan portfolio that currently includes 48,000 PPP loans with an outstanding balance of $1.3 billion and dealing with a mounting array of legal woes.
And forgiveness for nearly 60,000 loans processed by Kabbage was held up due to multiple investigations into potential errors made by Kabbage in processing the loans.
The holding company also blames American Express for some of the problems, saying the credit card giant failed to deliver necessary documents and loan forgiveness support after the merger.
‘Speed was the watchword’
Kabbage, which specialized in speedy small business loans approved by algorithms rather than loan officers, had been struggling at the outset of the pandemic. But fees from the $7 billion in PPP loans the company helped shore up its finances, making it an attractive target for American Express.
Concerns about those loans soon emerged, however.
Lenders were told to essentially take borrowers at their word in vetting PPP applications.
“Speed was the watchword of the PPP,” wrote Deborah Rieger-Paganis, who has advised Kabbage on its bankruptcy, in one of the filings.
That speed came with a cost, as fraud experts said from the outset that the program would be rife with fraud.
But even in a sea of fraud, Kabbage stood out.
Kabbage approved a disproportionate share of suspicious loans identified in a September 2020 Miami Herald investigation into seeming PPP fraud. Other media reports would follow and Kabbage was linked to a growing number of PPP fraud arrests by the Department of Justice.
The office of the U.S. Attorney for Massachusetts first began investigating Kabbage in December 2020 for potential violations of the False Claims Act, which punishes government fraud. (Kabbage would later hire the former U.S. Attorney for Massachusetts, who served in that role when the investigation was initiated, Andrew Lelling, to represent the company.)
That would soon be followed by an investigation by the Federal Trade Commission, launched in Feb. 8, 2021, into whether Kabbage engaged in “deceptive and/or unfair acts,” in connection with its “advertising, marketing, underwriting, originating, and servicing of PPP loans.”
Three months later the House Select Subcommittee on the Coronavirus Crisis launched an investigation into the company’s PPP lending practices, while in July the U.S. Attorney for East Texas launched an investigation into the company’s fraud controls.
The U.S. Small Business Administration, which oversaw the PPP program, also investigated an issue with Kabbage’s processing of loans that resulted in Kabbage and two banks it had partnered with approving borrowers for more than they were eligible to receive — and raking in more in corresponding fees — due to a miscalculation of the borrowers’ taxes. Kabbage would ultimately pay the SBA $30 million as part of a settlement to resolve the issue.
Kabbage separately sued one of the two banks it partnered with, Customers Bank, over $65 million in PPP fees Kabbage says that Customers Bank owes it. Kabbage agreed to drop the suit, but the two sides haven’t yet finalized their negotiations on the dispute.
Customers Bank declined to comment.
Kabbage suggests that the weight of the various investigations and disputes — which it says have cost the company $19 million in fees this year alone — have effectively crippled the company.
That’s not how the SBA sees it.
“The SBA disagrees with KServicing’s characterization of the reasons for their filing,” said Han Nguyen, a spokesperson for the SBA, in a statement.
Nguyen added that the SBA is monitoring Kabbage’s bankruptcy closely, along with other interested federal agencies, including DOJ. “If there has been any wrongdoing, appropriate legal action will be taken.”
The company’s financial woes haven’t prevented it, however, from creating a “Key Employee Retention Plan,” for 15 of the 19 full-time employees, which sets aside $773,000, or roughly $50,000 per employee, to “retain certain key Employees, and to focus their efforts during [Kabbage’s] complex wind down process.”
‘It’s been a nightmare’
Kabbage also blames the investigations for its poor rate of PPP forgiveness.
While it investigated the overpayment issue, the SBA paused the loan forgiveness process for 53,000 loans. Kabbage could only resume the forgiveness process for those loans in October 2021, after the settlement was reached.
Forgiveness for another 6,200 loans processed by Kabbage was put on hold because of DOJ concerns that Kabbage improperly included high-earning employees and ineligible expenses in determining how much PPP borrowers were eligible to receive. Kabbage said it was prevented from discussing the issue with borrowers while the loans were being investigated.
But even now, as it can proceed with the forgiveness process for those loans, Kabbage’s forgiveness rate is drastically lower than other major lenders in the program. About one-in-four loans processed by Kabbage remain in limbo, not forgiven, paid off or considered in default, the company said in the bankruptcy filings. Overall, more than 95% of loans issued in the program have been forgiven to date, according to the latest SBA numbers.
Beyond its legal woes, Kabbage lays some of the blame at the feet of the company that acquired it: American Express.
It says that the credit card company has failed to share old Kabbage records from before the merger and failed to update the PPP forgiveness portal it had promised to provide the company as part of its transition agreement after the SBA made changes to the loan forgiveness process. Kabbage says it had to hire a third party to complete its forgiveness portal, instead.
American Express disputed that characterization, saying in a statement that it, “has honored its obligations under the transition services agreement and will continue to do so in accordance with its terms.”
Kabbage is requesting that the bankruptcy court allow it to continue to service PPP loans throughout the bankruptcy process, which it expects the court to approve.
“Therefore, the Chapter 11 cases should have no impact on borrowers or otherwise impact their loans,” company advisor Alison Miller said. “All other customer services and systems will continue as normal.”
That promise might be of little consolation to the thousands of Kabbage borrowers still seeking to have their PPP loans forgiven.
Small business owners described to the Herald earlier this year horrendous experiences with Kabbage’s loan forgiveness process, including endless phone calls, repeated requests to submit more paperwork and official documents drawn up by Kabbage that were riddled with errors.
Vicki LeMaster, a Miami Hairdresser, described to the Herald countless hours on the phone seeking forgiveness for a loan she obtained in May 2020 for just above $3,000.
“It’s been ridiculous,” she said.
LeMaster, who is part of a class-action suit brought by PPP borrowers against Kabbage, still hasn’t gotten her loan forgiven.
Meanwhile, Crystal Rischer, a Sarasota model and actress, is also still seeking forgiveness on loans she and her husband, a photographer, obtained in May 2020 that totaled $17,000.
Her loan forgiveness application is still under review, she said. Her husband’s was recently denied. When they appealed the decision, they learned from the SBA that Kabbage hadn’t submitted any of the documents they had given the company in support of their application.
“It’s been a nightmare,” she said.
