Crisis, Cash and Catastrophe: Pandemic Relief Highlights Loan Fraud

Welcome to the May 2021 edition of our newsletter!  In this issue, we’ll examine how fraudsters exploited coronavirus-related emergency loan programs, and what their schemes may say about vigilance in lending, even in more normal times.

Banks, Bailouts and Bonanzas: What Emergency Loan Fraud Can Teach Us

Slightly more than a year ago, as public health-driven lockdowns shuttered many businesses – some temporarily, others for good – many sought lifelines to survive, and government programs both old and new sought to fill the void created as the risk modeling of traditional lenders was paralyzed.  When the new normal of business operations was “zero for a few months, maybe longer,” who could credibly trust that they could lend money and ever see it repaid?

Yet while the Paycheck Protection Program and other federally and state funded programs were essential to the survival of many businesses, the hurried and harried environment in which they existed created ample opportunities for fraud.  Loan processors relied on considerable technological advancements to streamline the application and documentation processes, which allowed them to maintain some semblance of traditional underwriting requirements.  But despite these efforts, fraudsters were able to lie about the number of employees they had, their revenue, and even the very existence of their business, and receive funding.

Such stories may be seen as outliers of what everyone hopes is a once in a lifetime crisis, but lessons still remain.  Some of the banks’ traditional tools, such as suspicious activity reports, can catch many frauds in nearly real time, and other straightforward methods also help when reviewing an application (for a loan or for its forgiveness.)  Is the cost of goods sold consistent with the nature of the business? Are other costs also within industry standards?  If not, the applicant may be inflating the company’s paper losses in order to increase the amount of loan eligibility – sometimes by running up credit card expenses they may never intend to pay, especially if the business itself is a sham.

This also reiterates the need for traditional due diligence about a business principal: what is his track record, personally and with any prior businesses?  Has he been sued for loan, mortgage or other promissory fraud in the past?

Also worth considering is the growing role of non-bank lenders as a result of this crisis, whether emerging “fintech” companies or family members helping out someone in a tight spot.  The needs may be unique and the timing urgent, but if anything, those circumstances call for greater deliberation and consideration, even in an emergency, to avoid transferring one entity’s financial hardships into another’s legal ones.