House Dems: Fintechs Capitalized on Poor Oversight in PPP Program
A report issued by House Democrats has found that fintech companies took advantage of a lack of regulation in the PPP program. Learn why.
Credit union groups CUNA and NAFCU have called for increased regulation of fintech companies.
Saying that fintech firms capitalized on a lack of regulatory accountability, House Democrats earlier this month charged that companies processed millions of pandemic-related loans that should not have been extended to borrowers.
“While the [Paycheck Protection Program] PPP delivered vital relief to millions of eligible small businesses, at least tens of billions of dollars in PPP funds were likely disbursed to ineligible or fraudulent applicants, often with the involvement of fintechs, causing tremendous harm to taxpayers,” the Democratic staff of the House Select Subcommittee on the Coronavirus Crisis wrote in a report.
The findings include specific details about how fintechs processed loans without proper safeguards and raised a red flag for Congress and regulators.
“Fintechs are claiming an increasingly large role in the financial industry, from providing application portals to borrowers as they did in the PPP, to housing encrypted transactions on complex networks,” the staff report stated. “Although fintechs often behave like banks and traditional depository institutions, they are not subject to banking regulations such as the Bank Secrecy Act, which would require them to implement certain processes and structures to ensure the safety and soundness of their operations. Congress must thoughtfully regulate the industry to better protect consumers and prevent financial crime.”
The concerns echo those expressed by credit union trade groups, who have called on Congress and regulators to create a level playing field in which fintechs are subjected to regulations as strict as those governing credit unions.
Inside the Report
The subcommittee said that fintechs and lenders that worked with them sought to avoid responsibility for taxpayer losses due to fraud. One lender CEO wrote that “the industry should push hard to make sure the SBA accepts the fraud risk,” according to the report.
In another case, a fintech was headed by a CEO who had been convicted of insider trading and permanently barred from participating in the securities industry.
Nearly every lender working with a fintech firm said that they had delegated their fraud prevention and eligibility verification responsibilities to their fintech partner, the Democratic staff said. At the same time, those lenders failed to conduct close oversight of the fintech companies.
Concerns Expressed by CUNA, NAFCU
Credit union trade groups have been calling on policymakers to subject fintechs to greater oversight.
“Credit unions want to ensure that financial products and services available from fintech companies or any company offer the same protections as those offered by regulated entities,” Madison Rose, CUNA’s director of advocacy and counsel for payments and technology, wrote to the CFPB earlier this month. “Our members do not want to discourage innovation they merely want to ensure that innovation does not allow new entrants to make an end run around regulation.”
“Nonbank lenders are not subject to the same safety and soundness regulations as banks and credit unions,” James Akin, NAFCU’s regulatory affairs counsel, wrote, in a May letter to the consumer agency. “This disparity poses serious, systemic risks given the growing market share that these firms represent and could have carry-on effects that impact consumers directly.”