Online bank Kabbage's lending represented less than 1% of all...

Online bank Kabbage's lending represented less than 1% of all PPP loans made in Nassau and Suffolk counties. Credit: Getty Images/Smith Collection/Gado

An online bank — credited with awarding government-backed loans to the smallest businesses during the pandemic on Long Island and elsewhere — has agreed to pay up to $120 million to settle fraud charges, prosecutors said.

Kabbage Inc. was the second-largest lender in the federal Paycheck Protection Program, based on the number of loan applications processed in 2020, the year that the coronavirus shut down much the U.S. economy.

The financial-technology company approved about $7 billion in forgivable PPP loans for more than 300,000 businesses, and in turn was paid $190 million in processing fees by the U.S. Small Business Administration, which oversaw the pandemic relief program, according to fraud-settlement documents made public this week.

On Long Island, Kabbage originated nearly 3,880 PPP loans, totaling $69.7 million in 2020, based on a Newsday analysis of SBA data obtained under the Freedom of Information Act.

Kabbage’s lending represented less than 1% of all PPP loans made in Nassau and Suffolk counties. But the Atlanta-based company’s activity disproportionately benefited the smallest businesses and those owned by women and members of minority groups — which other banks often overlooked, the data show.

Still, investigators from the SBA, Department of Justice and FBI have alleged that Kabbage violated the False Claims Act by submitting thousands of fraudulent loan applications, erroneous claims by borrowers for loan forgiveness and inflated bills for processing the applications.

“When the nation was facing a pandemic-induced crisis, Kabbage received tens of millions of dollars through the PPP to help lend taxpayer funds to businesses in need,” said Joshua S. Levy, the acting U.S. Attorney in Massachusetts, who has been probing Kabbage.

“Instead of safeguarding those funds, Kabbage doled out inflated and fraudulent loans, in an effort to maximize its profits. Then, Kabbage sold its assets and left the remaining company so low on cash that it ultimately went bankrupt,” he said on Monday in announcing the two fraud settlements.

Levy was referring to the August 2020 sale of Kabbage to American Express, which left the successor company, KServicing, to manage the portfolio of PPP loans.

Two years later, KServicing filed for Chapter 11 bankruptcy protection from its creditors and now is being liquidated. Company executives couldn't be reached to comment on Tuesday.

The $120 million settlement would come from the sale of KServicing’s assets, if any proceeds are left after the secured creditors are paid. The government is an unsecured creditor in the bankruptcy case, based on the settlement documents.

Shafee Carnegie, an official in the SBA’s Office of Inspector General, said it found Kabbage inflated tens of thousands of PPP loans, causing the agency to guarantee and forgive loans in amounts that exceeded what borrowers were eligible for.

Kabbage double-counted the state and local taxes paid by employees in its calculation of gross wages, failed to exclude annual compensation above $100,000 per employee and improperly accounted for severance and leave payments made to employees — all of which made the loan amount larger than it should have been, according to the documents.

Kabbage officials were made aware of the problems in April 2020, less than one month after the PPP launched. However, they did not remedy all the incorrect loans and continued to approve loans with miscalculations, the documents state.

The SBA has already received $12.5 million from Kabbage for its alleged misconduct and the amount will be deducted from the total settlement payment.

An online bank — credited with awarding government-backed loans to the smallest businesses during the pandemic on Long Island and elsewhere — has agreed to pay up to $120 million to settle fraud charges, prosecutors said.

Kabbage Inc. was the second-largest lender in the federal Paycheck Protection Program, based on the number of loan applications processed in 2020, the year that the coronavirus shut down much the U.S. economy.

The financial-technology company approved about $7 billion in forgivable PPP loans for more than 300,000 businesses, and in turn was paid $190 million in processing fees by the U.S. Small Business Administration, which oversaw the pandemic relief program, according to fraud-settlement documents made public this week.

On Long Island, Kabbage originated nearly 3,880 PPP loans, totaling $69.7 million in 2020, based on a Newsday analysis of SBA data obtained under the Freedom of Information Act.

Kabbage’s lending represented less than 1% of all PPP loans made in Nassau and Suffolk counties. But the Atlanta-based company’s activity disproportionately benefited the smallest businesses and those owned by women and members of minority groups — which other banks often overlooked, the data show.

Still, investigators from the SBA, Department of Justice and FBI have alleged that Kabbage violated the False Claims Act by submitting thousands of fraudulent loan applications, erroneous claims by borrowers for loan forgiveness and inflated bills for processing the applications.

“When the nation was facing a pandemic-induced crisis, Kabbage received tens of millions of dollars through the PPP to help lend taxpayer funds to businesses in need,” said Joshua S. Levy, the acting U.S. Attorney in Massachusetts, who has been probing Kabbage.

“Instead of safeguarding those funds, Kabbage doled out inflated and fraudulent loans, in an effort to maximize its profits. Then, Kabbage sold its assets and left the remaining company so low on cash that it ultimately went bankrupt,” he said on Monday in announcing the two fraud settlements.

Levy was referring to the August 2020 sale of Kabbage to American Express, which left the successor company, KServicing, to manage the portfolio of PPP loans.

Two years later, KServicing filed for Chapter 11 bankruptcy protection from its creditors and now is being liquidated. Company executives couldn't be reached to comment on Tuesday.

The $120 million settlement would come from the sale of KServicing’s assets, if any proceeds are left after the secured creditors are paid. The government is an unsecured creditor in the bankruptcy case, based on the settlement documents.

Shafee Carnegie, an official in the SBA’s Office of Inspector General, said it found Kabbage inflated tens of thousands of PPP loans, causing the agency to guarantee and forgive loans in amounts that exceeded what borrowers were eligible for.

Kabbage double-counted the state and local taxes paid by employees in its calculation of gross wages, failed to exclude annual compensation above $100,000 per employee and improperly accounted for severance and leave payments made to employees — all of which made the loan amount larger than it should have been, according to the documents.

Kabbage officials were made aware of the problems in April 2020, less than one month after the PPP launched. However, they did not remedy all the incorrect loans and continued to approve loans with miscalculations, the documents state.

The SBA has already received $12.5 million from Kabbage for its alleged misconduct and the amount will be deducted from the total settlement payment.

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