Report - 2022 12 01 Clyburn To Hon Guzman Re Fintech Report Recommendations 3F5170E42C4C

Summary

Letter dated December 1, 2022, from the Select Subcommittee on the Coronavirus Crisis to Administrator Isabella Guzman, stating that the Select Subcommittee has been investigating waste, fraud, and abuse in the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). It says an enclosed staff report uncovered evidence that certain financial technology (fintech) companies contributed to fraud in the $800 billion program. It states that the Select Subcommittee found that some fintechs and their lending partners, specifically fintechs Womply and Blueacorn and lenders Harvest and Capital Plus, may have violated SBA rules governing lenders in 7(a) programs. The signature block names James E. Clyburn, Chairman.

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Issuer: Congressional materials
Document type: Report
Date: 2022-12-01
Case: 2022 12 01 Clyburn To Hon Guzman Re Fintech Report Recommendations 3F5170E42C4C

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“Report - 2022 12 01 Clyburn To Hon Guzman Re Fintech Report Recommendations 3F5170E42C4C.” Dated 2022-12-01. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2022-12-01-2022-12-01-clyburn-to-hon-guzman-re-fintech-report-recommendations-3f5170e42c4c/, SHA-256 3f5170e42c4c57b39b0716e37ae2237fabffd1bbda5cc19305ef25b2c1234e1f.

Full text

December 1, 2022

The Honorable Isabella Guzman
Administrator
Small Business Association
409 3rd Street, S.W.
Washington, D.C. 20416

Dear Administrator Guzman:

The Select Subcommittee on the Coronavirus Crisis has been investigating waste, fraud,
and abuse in the Paycheck Protection Program (PPP) administered by the Small Business
Administration (SBA).1 The Select Subcommittee’s investigation—documented in the enclosed
staff report being released today—uncovered evidence that that certain financial technology
(fintech) companies involved in processing PPP loans contributed to fraud in the $800 billion
program. Specifically, some fintech companies facilitated millions of loans while taking
shortcuts on fraud controls, and certain lenders put taxpayer funds at risk by delegating their
compliance responsibilities to fintechs without conducting adequate oversight. The Select
Subcommittee identified evidence showing that some fintech owners may have used the program
to enrich themselves and their families—potentially engaging in fraud in some cases. These
findings illustrate patterns of conduct among fintechs and their lenders that may warrant
additional steps by SBA to protect the integrity of current and future SBA lending programs.

I. Recommendations for Improving SBA Programs

The enclosed report includes multiple instances in which lenders delegated their fraud
prevention and eligibility verification controls to third parties not overseen by the SBA, but
apparently failed to “exercise[] day-to-day responsibility” for those third parties, as contemplated
by the SBA’s Standard Operating Procedures.2 The Select Subcommittee’s findings suggest that
SBA’s mechanisms for oversight of lender service providers (LSPs) may be insufficient to
protect taxpayers, particularly as applied to LSPs facilitating significant numbers of loans and

1
Select Subcommittee on the Coronavirus Crisis, Press Release: Select Subcommittee Launches
Investigation into Role of FinTech Industry in PPP Fraud (May 28, 2021) (online at
https://coronavirus.house.gov/news/press-releases/select-subcommittee-launches-investigation-role-fintech-industry-
ppp-fraud).
2
Small Business Administration, Office of Capital Access, Lender and Development Company Loan
Programs (Oct. 1, 2020) (SOP 50 10 6) (online at https://sba.gov/document/sop-50-10-lender-development-
company-loan-programs-0).
The Honorable Isabella Guzman
Page 2

those responsible for fraud-related controls. Accordingly, the Select Subcommittee recommends
that the SBA take action to protect the integrity of future programs.

Specifically, SBA should promptly issue and enforce guidelines that clarify the
responsibilities of lenders and their service providers in SBA programs, particularly in regard to
underwriting, fraud screening, and suspicious activity reporting. Additionally, if the SBA opens
participation in 7(a) programs to fintechs and other non-depository institutions, a well-defined,
more rigorous, and better-resourced initial review process should be put in place, with entities
subject to continuous monitoring to confirm their adherence to SBA rules and industry best
practices. At the same time, any participant found to have engaged in unlawful or unethical
conduct while participating in the PPP should be barred from future SBA programs. Finally, due
to the number of fraudulent loans that were fully forgiven, the Select Subcommittee recommends
that, in any future emergency financial assistance programs that prioritize speed of loan issuance,
the SBA should conduct aggressive and large-scale reviews of loans prior to their forgiveness to
detect fraudulent and ineligible loans.

II. Potential Violations of SBA 7(a) Lender and Lender Service Provider Rules

The Select Subcommittee recommends that the SBA investigate the following potential
violations of SBA rules by certain PPP lenders and lender service providers (LSPs). The Select
Subcommittee found that some fintechs and their lending partners—specifically, fintechs
Womply and Blueacorn and lenders Harvest and Capital Plus—may have violated SBA rules
governing lenders in 7(a) programs. The Coronavirus Aid, Relief and Economic Security
(CARES) Act created the PPP under SBA’s 7(a) program, which guarantees loans for small
businesses that are unable to obtain credit on reasonable terms in the private credit markets.3
Under the program, existing SBA-certified 7(a) lenders and newly approved lenders were given
authority to originate, underwrite, and service PPP loans. To fulfill these obligations, lenders
often turned to agents and LSPs. As participants in the 7(a) program, PPP lenders, referral
agents, and LSPs were all subject to SBA 7(a) participant rules. The Select Subcommittee found
evidence that Womply and Blueacorn performed tasks that suggest they should be properly
considered to be LSPs under the SBA’s guidelines, and therefore subject to SBA rules. Yet
evidence obtained by the Select Subcommittee indicates that they, as well as lenders Harvest
Small Business Finance (Harvest) and Capital Plus Financial (Capital Plus), may have engaged
in conduct that runs contrary to these rules:

A. Womply:

SBA regulations provide that “implying or stating that the work to be performed for an
Applicant will include use of political or other special influence with SBA” may constitute good
cause for suspension or revocation of the privilege to conduct business before the SBA.4 As
detailed in the Select Subcommittee’s report, the Select Subcommittee learned that Womply

3
Small Business Administration, Business Loan Program Temporary Changes; Paycheck Protection
Program, 85 Fed. Reg. 20811 (Apr. 15, 2020) (interim final rule).
4
13 C.F.R. § 103.4(d) (2022).
The Honorable Isabella Guzman
Page 3

implied to lenders that it had a close association with the SBA, in possible violation of this
standard.5 In addition, Womply’s conduct may have violated SBA 7(a) rules that permit the
SBA to revoke or suspend the privilege to conduct business with the SBA to any participant
found to be “[e]ngaging in any conduct indicating a lack of business integrity or business
honesty,” including criminal conviction or civil judgment for fraud within the last seven years.6
Womply’s CEO Toby Scammell has a 2014 criminal conviction for securities fraud.7 These
factors suggest that the SBA may have good cause to revoke Womply’s privilege to participate
in the 7(a) program.

B. Blueacorn:

Blueacorn’s executives awarded multiple, questionable PPP loans to themselves and their
family members and business partners.8 In addition to presenting conflicts of interest, some of
these loans may have in fact been fraudulent, and may therefore run afoul of SBA standards for
7(a) programs which permit the SBA to revoke permission for an entity to conduct business with
the SBA if it has participated in “conduct indicating a lack of business integrity or business
honesty.”9 Additionally, by asking multiple borrowers to pay substantial fees out of the proceeds
of their PPP loans, Blueacorn and its owners may have run afoul of both SBA and PPP rules that
expressly state: “Agents may not collect fees from the borrower or be paid out of the PPP loan
proceed.”10 The Select Subcommittee found evidence indicating that a Blueacorn co-owner
asked borrowers to pay substantial fees out of the proceeds of their PPP loans on multiple
occasions, in apparent violation of this rule.11

C. Harvest:

The SBA requires lenders to “exercise due diligence and prudent oversight” on any
agents or LSPs they partner with on SBA programs, which includes “monitoring performance of
loans referred by an Agent or where an Agent provided assistance.”12 Although Harvest
5
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (C)(5)).
6
13 C.F.R. § 103.4(f) (2022).
7
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (C)(3)).
8
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (B)(9), (10) and (11)).
9
13 C.F.R. § 103.4(f) (2022).
10
13 C.F.R. § 120 (2022); Small Business Administration, First Draw PPP Loan (online at
www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/first-draw-ppp-loan)
(accessed Nov. 17, 2022) (“Neither the government nor lenders will charge small businesses any fees.”).
11
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (B)(8)).
12
Small Business Administration, Office of Capital Access, Lender and Development Company Loan
Programs (Oct. 1, 2020) (SOP 50 10 6) (online at https://sba.gov/document/sop-50-10-lender-development-
company-loan-programs-0).
The Honorable Isabella Guzman
Page 4

received more than 800,000 PPP loan application referrals from Womply, Harvest appears to
have performed little oversight of Womply, even when alerted to suspicions of fraud by another
lender.13 The Select Subcommittee found that Harvest did not perform any formal audits,
assessments, or evaluations of Womply, and ceased its manual spot-checks early in the program.
This lack of prudent oversight suggests that Harvest may not have exercised the appropriate
diligence required of a 7(a) lender to continue participating in the program.

D. Capital Plus:

Capital Plus may have similarly violated the SBA’s requirement that lenders exercise due
diligence and prudent oversight of Lender Service Providers.14 As the Select Subcommittee’s
investigation found, Capital Plus delegated its PPP fraud prevention and eligibility verification
responsibilities to Blueacorn, without diligently overseeing the company to confirm that they
were successfully implementing anti-fraud controls.15 Capital Plus was unable to provide
documentation of manual reviews or details from any Capital Plus meetings or communications
discussing PPP fraud and oversight of Blueacorn. In addition, Capital Plus approved multiple
PPP loans for Blueacorn’s owners and the owners of Blueacorn’s antifraud consultant—at least
some of which may themselves have been fraudulent—and failed to detect the potentially
ineligible loans until Capital Plus was notified of them by an unnamed third party.16 Though
Capital Plus later required the repayment of some of the ineligible loans, their demonstrated lack
of oversight of Blueacorn suggests Capital Plus may also not have exercised the appropriate
diligence required of a 7(a) lender.

III. Use of PPP Applicant Personal and Business Data

Following Womply’s work in the PPP, several former Womply executives founded a new
company in February 2022, Solo Global, Inc., which provides financial and marketing services
to small businesses.17 On May 20, 2022, Womply updated its privacy policy to notify its
customers—which may have included the millions of small businesses, contractors, and sole
proprietors who applied for a PPP loan through Womply—that Womply’s retroactively-updated
terms gave Solo Global the right to use their personal and business data for future commercial
use.18 Information submitted to government agencies, including the SBA, is typically protected
by the Privacy Act of 1974, which places limitations on federal agencies’ use and disclosure of
13
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (C)(2)(a) and (9)).
14
Small Business Administration, Office of Capital Access, Lender and Development Company Loan
Programs (Oct. 1, 2020) (SOP 50 10 6) (online at https://sba.gov/document/sop-50-10-lender-development-
company-loan-programs-0).
15
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs
Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022) (Section III (B)(12)).
16
Id.
17
Solo Global, Inc., About (online at https://solo.co/about/) (accessed Nov. 29, 2022) (stating “the Womply
team has created a new company called Solo”).
18
Womply, Inc., Privacy Policy (May 20, 2022) (online at https://womply.com/legal/privacy/).
The Honorable Isabella Guzman
Page 5

data on individuals that is controlled by federal agencies.19 While contractors receiving records
from the SBA must themselves comply with the Privacy Act, the regulations are unclear as to the
status of data provided to the SBA from agents acting on behalf of lenders to provide Americans
access to SBA programs. The SBA should make a determination as to whether Womply’s use of
personal and business data submitted by American borrowers as part of the PPP violates SBA
rules and the Privacy Act of 1974 (5 U.S.C. 552a). If the SBA determines such use is not
permitted, SBA should take action to protect that data. If such use is permitted under current
rules, SBA should consider updating its rules to protect the personal information of Americans
who apply to SBA programs.

The PPP and other pandemic relief programs provided a vital lifeline to Americans
struggling during the coronavirus crisis. Our work today is important to ensure accountability
for those responsible for waste, fraud, and abuse and to inform improvements to similar
programs that may be necessary to address future crises. Accordingly, I recommend that the
SBA investigate Womply, Blueacorn, Harvest, and Capital Plus to determine whether they
should be eligible to participate in any future SBA 7(a) programs.

If you have any questions regarding this matter, please contact Select Subcommittee staff
at (202) 225-4400. Thank you for your assistance.

Sincerely,

___________________________
James E. Clyburn
Chairman

Enclosure

cc: The Honorable Steve Scalise, Ranking Member

19
5 U.S.C. § 552a; Department of Justice, Office of Privacy and Civil Liberties, Overview of the Privacy
Act of 1974 (2020) (online at www.justice.gov/opcl/overview-privacy-act-1974-2020-edition/) (summarizing
protections); Small Business Administration, Privacy Act (online at www.sba.gov/about-sba/open-
government/privacy-act) (accessed Nov. 29, 2022).

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