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Text of the Paycheck Protection Program

Alabama Firm Took PPP Loan, Then Moved Plant To Mexico

Reprinted with permission from ProPublica

Late last summer, after churning along through the pandemic with only a two-week pause, managers at FreightCar Americacalled hundreds of workers into the break area at the company's factory near Muscle Shoals, Alabama, to tell them that the plant was closing for good.

For some employees, the news wasn't a shock: They'd been hearing rumors that management would move the work elsewhere for years. The timing, however, seemed odd. Only a few months earlier, the publicly traded company had received a $10 million Paycheck Protection Program Loan — the maximum amount available under a pandemic relief program designed to keep workers employed. Some had believed the funds would keep the doors open for a little while longer.

Nevertheless, the plant's managers announced that all production would move to FreightCar's new facility in Mexico, which meant most of the assembled workers would lose their jobs.

Jim Meyer, FreightCar America's CEO, told ProPublica in an email that he had not intended to shutter the plant when he received the PPP money, and that it had allowed the company to keep workers on the job through most of 2020 despite a sharp dropoff in new orders.

Robert Bulman, however, thinks the $10 million just helped FreightCar's Shoals plant keep producing while company officials got ready to shut it down.

"When the Mexican plant opened, we were told at the beginning they would just be helping Shoals and making parts for the trains," said Bulman, who worked at the Alabama plant for seven years before getting laid off last year. "But the whole time, it was a setup, we were gone."

FreightCar America isn't the only large company to have taken out a multimillion-dollar Paycheck Protection Program loan and then laid off a substantial chunk of its workforce. An analysis of applications for trade adjustment assistance, which the federal government provides to workers whose jobs have disappeared due to imports, shows that at least half a dozen companies that applied for more than a million dollars apiece in PPP loans terminated more than 50 workers in 2020 after their aid was approved.

To be clear, the companies may have complied with program rules, which put a premium on getting money out fast. The regulations changed frequently in the months after the Congress established the PPP as part of the CARES Act in March 2020, and the law was later amended to allow more of the money to be used for non-payroll expenses. The law also contained many exemptions that stretched the definition of what qualifies as a small business.

A paper mill in northeast Washington state called Ponderay Newsprint, for example, went bankrupt and laid off 150 workers, two months after being approved for a $3.46 million loan. Its bankruptcy trustee John Munding said the money was used to pay workers and the government forgave the loan, while the company's assets were acquired by a private equity firm.

A Nebraska aircraft parts manufacturer called Royal Engineered Composites was approved for $2.74 million in April 2020 in order to support 250 jobs, but laid off 99 workers by mid-May. The company declined to comment.

Canadian-owned Supreme Steel took $1.69 million in May 2020 for its plant in Portland, Oregon, which it closed five months later, terminating 112 employees. Spokesperson Rhandi Berndt said that "the closure was the result of market forces" and declined to answer further questions.

In order for PPP loans to be forgiven, the federal Small Business Administration initially required borrowers to spend 75% of the funds on payroll over eight weeks. Since the maximum PPP loan amount was for 2.5 times companies' average monthly payroll in 2019, that should have guaranteed that wages and hours could be maintained, as required by the CARES Act.

In the case of FreightCar and some other borrowers, the original eight-week "covered period" of the PPP loan passed before layoffs occurred, allowing the companies to have their loans fully forgiven. But the other cases may have easily qualified as well, because Congress changed the rules.

Last June, after businesses protested that they couldn't spend their PPP money fast enough in a stalled economy, the legislation was amended to require only that 60% of a loan go toward workers' pay, and the covered period was extended to 24 weeks. Since borrowers had to spend less of the loan on payroll over a longer period to keep the money, they had wide leeway to let people go as they saw fit.

"It wouldn't be difficult to lay off 50% of your workforce and still get full forgiveness," said Eric Kodesch, an attorney at Lane Powell who has helped many clients with their PPP applications.

The SBA has not publicly released data on forgiveness of specific loans, but aggregate statistics show that so far, out of all applications processed, more than 99% of the total dollar value has been forgiven. The SBA declined to comment on individual borrowers or identify loans that have been forgiven.

There's another reason why a casual reader of the CARES Act might think companies would not qualify for PPP money: Many are actually very large businesses.

In general, the CARES Act set an upper size limit of 500 employees. With a few exceptions, the law required SBA to count all "affiliate" companies toward that total. That would include companies owned by private equity firms as well as subsidiaries contained within holding companies. It exempted hotels, restaurants and franchises, but no other industries. (That's why Shake Shack and Ruth's Chris Steak House qualified for loans, though each returned the money after a barrage of negative press coverage.)

However, a number of program nuances allowed large companies to obtain PPP loans.

FreightCar laid off 550 people with the Shoals plant shutdown, according to a notice filed with the state of Alabama. Along with its headquarters employees, that alone would exceed the PPP's ostensible 500-employee cap. But FreightCar availed itself of a loophole baked into the PPP. The SBA's alternative size standards, a complex set of industry-by-industry thresholds that have been debated for decades, allowed it to qualify with up to 1,500 workers.

Originally, the SBA allowed foreign-owned applicants to count only their U.S.-based employees under the 500-person cap. That guidance changed last May, requiring foreign-owned applicants to count their entire global workforce. But plenty of companies had already gotten PPP loans, and were allowed to keep them.

For example, Ledvance LLC, a Chinese-owned global lightbulb manufacturer operating in the U.S. under the brand name Sylvania, was approved for a $9.36 million PPP loan in April 2020. Then, between May and July, it laid off 50 people while closing down a distribution center near Bethlehem, Pennsylvania. Ledvance spokesperson Glen Gracia said in an email that the layoffs were "unrelated to the pandemic and in full compliance with LEDVANCE's participation in the Paycheck Protection Program."

Then there's Chick Master Incubator Company, which took $1.34 million in April 2020. In June, its corporate parent — a Zurich-based private office that invests the fortune of a long-established industrialist family — announced it would combine Chick Master with its other hatchery holdings and close the plant, laying off 68 people in Medina, Ohio, by year's end. Chick Master didn't reply to a request for comment.

One type of applicant, however, still likely should not have qualified: companies controlled by private equity firms whose total holdings exceed the SBA's size standard for the borrowers' specific industries. Cadence Aerospace, a supplier of aerospace and defense parts that itself has bought three companies in the last three years, is majority-owned by Arlington Capital, a private equity firm managing billions of dollars. Cadence was approved for a $10 million PPP loan in April 2020, and later that month laid off 72 people at its Giddens Industries subsidiary in Washington state, according to a notice filed with the state. Arlington Capital did not respond to a request for comment.

The Shoals plant was the last remaining U.S. manufacturing facility for FreightCar, a 120-year-old company headquartered in Chicago that had been shrinking its U.S. footprint for years. In 2008, it shuttered its plant in Johnstown, Pennsylvania. In 2017, it shut down its factory in Danville, Illinois. In 2019, it closed its plant in Roanoke, Virginia and announced it would open a new facility under a joint venture in Castaños, Mexico. When executives informed investors in September that the Shoals facility would also close and manufacturing would shift to Mexico, they projected $25 million in overall savings, including a 60% reduction in labor costs.

"Our manufacturing transformation is now largely complete, and we have taken control of our own destiny," Meyer said on an earnings call in March. "We have dramatically repositioned our competitive profile and in so doing created a new company, one that is able to win."

In 2013, the future looked different. When the Shoals plant opened, it offered about $12 an hour to start and a chance at advancement. One worker, who asked not to be named in order to protect her future employment prospects, left a tile-making job to become a welder, constructing a variety of rail cars, from hoppers to gondolas. Soon, she moved up to air brake tester, sliding underneath the massive steel vehicles to fix pipes.

"I went to FreightCar to retire," said the worker. "I wasn't planning on leaving when I got there."

In the following years, safety, pay and management concerns led to a union drive. During the campaign, anti-union employees circulated flyers warning that the plant would shut down if workers voted to organize, and in 2018 they voted decisively against it.

As it turned out, the Shoals facility wouldn't last long anyway.

Leading up to 2020, FreightCar touted the Shoals plant's competitiveness. A marketing video showed production lines run by industrial robots and skilled workers. "This is the largest, newest, most purpose-built factory in North America," boasted Meyer. "A modern, state-of-the-art factory in every sense of the word."

But the company was still losing money, to the tune of $75.2 million in 2019. When the pandemic further slowed down orders, executives started talking up the new facility in Mexico instead.

"The Mexico labor rate is approximately 20% of that in the U.S.," Meyer said on an earnings call in August 2020. "And the new plant provides other sources of savings beyond just labor."

Also on the August earnings call, executives explained that loan proceeds had made up for some of the cost of the company's move to Mexico. Chris Eppel, then the company's chief financial officer, said that the money also "partially offset" operating losses and inventory purchases. Meyer still got his $500,000 base salary in 2020, plus stock options worth nearly that and a $1 million bonus for securing a $40 million loan from a private investment company.

FreightCar did not take out a second-draw PPP loan; updated rules excluded publicly traded companies.

After the plant closure announcement, the air brake tester found a job making dashboards and bumpers for Toyota. It takes three times as long for her to get to her new job as the 20-minute drive she had to FreightCar, and she's paid six dollars less per hour. Although FreightCar gave employees a few thousand dollars in severance payments, she said all of hers went towards bills.

"It's like starting all over again," she said. "If they did right by us like they did their supervisors, maybe we'd be in more decent shape than what we're in now."

Here’s Who Got Rich From Trump’s Disastrous Response To The Pandemic

Here’s Who Got Rich From Trump’s Disastrous Response To The Pandemic

Reprinted with permission from TomDispatch

Now that we're all unmasking and the economy seems set to roar into the 2020s, what will we remember about how disastrously, how malignantly, the Trump administration behaved as the pandemic took hold? And will anyone be held to account for it?

The instinct to forget pandemics, as I've pointed out when it came to the 1918 "Spanish flu," has historically been strong indeed. In these years, the urge to forget official malfeasance and move on has, it turns out, been at least as strong. Washington's failure to investigate and bring to account those who led the nation and ultimately the world into the folly of the Iraq War may be the most egregious recent example of this.

In the end, that's why I wrote my new book Virus — to memorialize a clear and accessible historical record of the deliberate and deadly decision-making that swept us all into a kind of hell. I had the urge to try to stop what happened to us from being instantly buried in the next round of daily reporting or, as appears likely now, relegated to the occasional voluminous government or foundation report on how to do things better.

In the early months of 2020, as rumors of distant death morphed into announcements of an imminent pandemic, followed by a patchwork of state and local lockdowns, most Americans were too stunned by daily events to absorb the bigger picture. Memories of those days still click by like surreal snapshots: prepper shopping, toilet-paper hoarders, forklifts moving bodies into refrigerated trucks, and a capricious leader on TV night after endless night talking about quack cures, his own ratings, and how he "liked the numbers low." Meanwhile, he left desperate states to compete with each other for badly needed protective gear.

What looked like chaos or ad hoc decision-making by an improbably elected fraudster president was, in fact, deeply rooted in ideology; specifically, in the belief that the job of the government was neither to exercise leadership, nor activate government agencies to assist the American people. It was to promote private industry and its profits as the solution to anything and everything pandemic.

That ideology led to profiteering, politicized science, and mass death. Now, as the pandemic wanes (at least for the time being, though not necessarily for the unvaccinated) in this country, it deserves an investigation. Somewhere between almost 600,000 and more than 900,000Americans have died so far from Covid-19, a significant number of those deaths unnecessary, as even the former administration's medical expert, Dr Deborah Birx, has said.

The virus arrived in America after the Trump administration — steered by right-wing Heritage Foundation policy wonks and their donor-class comrades — had already laid waste to key agencies like Health and Human Services (HHS) and the Centers for Disease Control. Their instant response to the pandemic was to similarly sideline government emergency-management experts, put inexperienced 20-something volunteers in charge of finding and distributing protective gear, and circulate lists of possible suppliers — one of whom, typically enough, a Silicon Valley entrepreneur with no medical contracting experience, snagged a cool $86-million contract from the state of New York for ventilators he would never deliver.

While most of the country hunkered down in a state of stunned paralysis, a faction of Trumpworld recognized the pandemic not for what it took away — human lives and livelihoods — but for what it offered. The chaos of the moment allowed them to road-test their dream system, to prove once and for all that the forces of supply and demand, the instinct to make a buck, could do a better job managing a natural disaster than the government of the United States and its bureaucrats.

Is any of this likely to be investigated? Will anyone be held accountable for what appears to have been a response deliberately mismanaged by religious zealots and crony capitalists, crews equally cynical about expertise, science, and the government's ability to prevent or ameliorate disaster?

What We Don't Know About The Trump Pandemic Disaster

Here, as a start, is a rundown of where inquiries into that disaster now stand.

Buried in the alphabet soup of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act is the Pandemic Response Accountability Committee (PRAC), established in March 2020 to keep track of the federal money (by now $5.5 trillion) that was to be spent on the pandemic. It's a consortium of agency inspector generals, headed by Michael Horowitz, a career Department of Justice lawyer. His name will be familiar to anyone who followed the Trump-Russia investigations. He produced a report in 2019 that — to the dismay of Trump's supporters — failed to conclude that the FBI had begun investigating connections between Vladimir Putin's Russia and the Trump campaign without legal cause and as a political dirty trick.

PRAC is authorized to conduct oversight of pandemic-related emergency spending of any sort. Its inspector generals have already issued nearly 200 pandemic-related oversight reports and charged 474 people with trying to steal more than $569 million. (Details in its quarterly reports are available online.)

While PRAC has been genuinely nonpartisan in its acts, its focus so far has been on the small fry of the pandemic era, not the truly big fish. In its most recent semi-annual report, for example, it makes clear that 55 percent of its charges had to do with fraud in the Paycheck Protection Program and 40 percent were related to fraudulent unemployment assistance claims. Among the bigger PRAC successes: charging a Texas man in a $24-million Covid-relief fraudulent loan scheme last October and seven men in another fraud scheme in which they used their ill-gotten pandemic gains to buy, among other things, a Porsche and a Lamborghini.

The CARES Act also authorized the Government Accountability Office (GAO) to monitor the federal response to the pandemic. Its most recent semi-annual report included 16 recommendations in selected public-health areas like testing, vaccines, and therapeutics, only one of which has so far been implemented. A source at the GAO told me that a report on some contracting irregularities can be expected this summer.

So far, such government self-assessments have shown little appetite for dealing with the true cronyism, profiteering, and disastrous politicization of the federal pandemic response by Trump's minions. Among the schemes begging for a deeper look is Operation Airbridge. Led by the president's son-in-law, Jared Kushner, it was an attempt to use federal funds to underwrite the air-shipping costs of private companies in an effort to speed the delivery of the kinds of personal protective equipment that were in such short supply last spring. That unorthodox effort included large no-bid contracts granted to a small group of private health-care companies without restrictions on pricing or even on where the desperately needed products were to be delivered.

In the spring of 2020, as hospital workers began popping up on social media and network news programs clad only in garbage bags and makeshift or reused face masks, sometimes in tears and pleading for help, the White House maintained its focus on private enterprise as the way out of the disaster. The administration called for volunteers to staff what would become another public/private bonanza, the White House Covid-19 Supply Chain Task Force, also helmed by Trump family fixer, Jared Kushner.

We don't know what, if anything, Kushner's group actually accomplished. The audacity of the former administration's disregard for federal rules and regulations coupled with the scale of the no-bid contracts they issued certainly attracted political pushback at the time. Democrats and civil-society groups in Washington filed requests for more information about how such contracts had eluded federal guidelines, and where the supplies actually went.

It's possible, however, that we may never know.

Ventilating Money

In April 2020, a group of Democratic senators led by Elizabeth Warren, citing the administration's secrecy, opened an investigation into the operation. They sent a letter to the six Operation Airbridge beneficiary health-care giants — Cardinal Health, Concordance, Henry Schein, McKesson, Medline, and Owens & Minor — requesting explanations for reports of "political favoritism, cronyism, and price-gouging" in the ongoing supply effort. "Taxpayers have shelled out tens of millions of dollars on this secretive project and they deserve to know whether it actually helped get critical supplies to the areas most in need," Warren said that June.

Three of the six suppliers did, in the end, give the senators copies of memorandums of agreement (MOAs) indicating that they "had complete discretion about how to distribute supplies across hotspot counties" and that "nothing in the MOAs appears to prevent a supplier from sending all of its supplies designated for hotspots to just a single customer in one of the hotspots." The government hadn't, in fact, put any kind of conditions on the cost for that protective equipment and the Trump Justice Department would insist that it was none of its business how suppliers arrived at the prices they charged for it.

Using taxpayer funds to grease private enrichment was, of course, a Trump family tradition, going back to the Eisenhower years when Donald's father, Fred, fleeced the government of millions of dollars in loans aimed at housing World War II veterans. Hauled down to Capitol Hill to explain himself, the New York builder was unrepentant, arguing that a loophole in the law allowed for his private gain and, under such circumstances, only a fool would have left all that money on the table.

What, from the outside, came to look like White House inspired chaos — of which Operation Airbridge was just one example — should, in fact, be seen as a deliberate effort to disengage the federal government and leave the blame and the logistics problems to Covid-afflicted states, at the time mostly run by Democrats.

On March 24, 2020, for instance, New York Governor Andrew Cuomo begged the federal government to help get more ventilators for what was clearly going to be a surge of coronavirus patients. (New York City's health-care system was already overwhelmed by then.) At the time, hooking patients up to ventilators seemed like the best way to go, though doctors later realized that, for many patients, the tricky disease could be foiled earlier with anticlotting and steroid medication.

"How can you have New Yorkers possibly dying because they can't get a ventilator?" asked Cuomo. Three days later, Trump tweeted, "General Motors must… start making ventilators, now! Ford, get going on ventilators, fast!"

Yaron Oren-Pines, an electrical engineer for tech firms like Google, tweeted back at the president, "We can supply ICU ventilators, invasive and non-invasive." Within days, he turned up on a list vetted by Kushner's team of volunteers and, at their recommendation, officials in New York closed a deal with him.

The only problem: Oren-Pines had no ventilators and had never been in the medical supply business. When he failed to deliver on the $86 million deal, Wells Fargo froze his account and New York canceled the order, demanding the money back, though by summer 2020, it had yet to collect a final $10 million.

The Great Forgetting?

In addition to making various large or politically well-connected health-care companies far wealthier, the administration also lavished staggering billions on a small group of Big Pharma firms for Operation Warp Speed, the project it backed to develop vaccines and medicines to treat Covid-19. Those contracts, too, were written outside normal government channels and the companies themselves were chosen by a panel of industry insiders without any oversight. Many of them stood to (and did) profit from the soaring stock prices of those firms when the news about clinical trial successes was released.

In November 2020, to launch an investigation into that situation, Senator Warren teamed up with Representative Katie Porter (D-CA) to request copies of all federal contracts for Covid-19 therapeutics and vaccines. "The American people," they stated, "deserve to know that the federal government is using their tax dollars to develop Covid-19 medical products at the best possible price for the public — not to line the pockets of wealthy companies by cutting corners in consumer protection, pricing, and quality."

Warren raised questions about a Department of Health and Human Services deal with Gilead Sciences for the pandemic therapeutic remdesivir (part of the "cocktail" of drugs administered to Donald Trump and other Republican insiders like Chris Christie and Rudy Giuliani when they got Covid). HHS had indeed acquired a large supply of remdesivir at an exorbitant cost to American taxpayers and Gilead itself would charge American hospitals $3,200 per treatment for it, $860 more than its price in other developed countries.

In addition to Warren, who sent a letter to the administration requesting information on HHS's pricing negotiations with Gilead for the drug, other people also stood up. Whistleblower Dr. Rick Bright, former director of the Biomedical Advanced Research and Development Agency (BARDA), for instance, filed a whistleblower complaint alleging that Dr. Robert Kadlec, a Trump HHS political appointee, had engaged in multiple schemes to funnel contracts to politically connected companies — and that this had begun even before the pandemic was even a reality. According to Bright, Kadlec then pushed him out of the government, despite the fact that federal law officially protects whistleblowers.

In his complaint, among other things, Bright alleged that in 2017, a Kadlec friend and Big Pharma consultant pressured the agency to maintain a contract with a company owned by a friend of Jared Kushner's, even after an independent review determined it should be cancelled. Bright testified before Congress, and the fate of his whistleblower suit remains to be litigated.

As for the rest of the inquiries, so far, money and power appear to have eluded the investigators. It's unclear whether Senator Warren's and Representative Porter's requests met with any response from the former administration, or even whether they've continued their inquiry into Big Pharma and no-bid contracting. They have made no further announcements and neither office replied to requests for updates.

You won't be surprised to learn, I'm sure, that the name "Jared Kushner" is so far not to be found in GAO or PRAC reports.

The best chance for public accountability — if not legal liability — might be the House of Representatives, especially its Select Subcommittee on the Coronavirus Crisis, launched in April 2020. The Trump administration blew off its subpoenas for former HHS Secretary Alex Azar and then-CDC Director Robert Redfield to testify in December 2020, and blocked documents and witnesses related to politicized data, testing, and supply shortages, among other areas of inquiry. But the subcommittee did manage to expose emails from Trump political appointees, revealing efforts to skew CDC data. It is also investigating some whopping no-bid or sole-contractor deals that the former administration cut with preferred businesses. One was a $354-million four-year contract awarded on a non-competitive basis to PHLOW, which was incorporated in January 2020 to manufacture generic medicines to fight Covid. It's the largest contract ever awarded by BARDA and includes a 10-year option worth $812 million.

And the House has continued to seek transparency. According to a Brookings House Oversight Tracker, as of March 2021, 30 percent of congressional oversight letters and 40 percent of its hearings were related to the federal government's pandemic response. But there are signs that the Biden administration, while more cooperative, is not eager to force agencies to comply with requests the previous administration ignored.

My sense is that the emergency created by the insurrection at the Capitol last January and the desperate need of the new Biden administration to have palpable policy achievements in order to do well in election 2022 has taken the steam out of any inclination to dig deeper into the profiteering, cronyism, political scheming, and chaos with which the Trump administration met the Covid-19 virus. It went far deeper than an article like this can possibly indicate, leaving so many hundreds of thousands of potentially unnecessary deaths in its wake.

Think of it as a memory hole, still brimming with schemes and money.


Nina Burleigh, a TomDispatch regular, is a journalist of American politics and the author of six previous books. Her seventh, Virus: Vaccinations, the CDC, and the Hijacking of America's Response to the Pandemic(just published by Seven Stories Press) is a real-life thriller that delves into the official malfeasance behind America's pandemic chaos and the triumph of science in an era of conspiracy theories and contempt for experts.

Text of the Paycheck Protection Program

Feds Probing Hundreds Of PPP Loans To Fake Farms

Reprinted with permission from ProPublica

The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.

As the first round of the federal government's relief program for small businesses wound down last summer, "Ritter Wheat Club" and "Deely Nuts," ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. "Tomato Cramber," up the coast in Brielle, got $12,739, while "Seaweed Bleiman" in Manahawkin got $19,957.

None of these entities exist in New Jersey's business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, "Beefy King," was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.

"There's no farming here: We're a sandbar, for Christ's sake," said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.

All of these loans to nonexistent businesses came through Kabbage, an online lending platform that processed nearly 300,000 PPP loans before the first round of funds ran out in August 2020, second only to Bank of America. In total, ProPublica found 378 small loans totaling $7 million to fake business entities, all of which were structured as single-person operations and received close to the largest loan for which such micro-businesses were eligible. The overwhelming majority of them are categorized as farms, even in the unlikeliest of locales, from potato fields in Palm Beach to orange groves in Minnesota.

The Kabbage pattern is only one slice of a sprawling fraud problem that has suffused the Paycheck Protection Program from its creation in March 2020 as an attempt to keep small businesses on life support while they were forced to shut down. With speed as its strongest imperative, the effort run by the federal Small Business Administration initially lacked even the most basic safeguards to prevent opportunists from submitting fabricated documentation, government watchdogs have said.

While that may have allowed millions of businesses to keep their doors open, it has also required a massive cleanup operation on the backend. The SBA's inspector general estimated in January that the agency approved loans for 55,000 potentially ineligible businesses, and that 43,000 obtained more money than their reported payrolls would justify. The Department of Justice, relying on special agents from across the government to investigate, has brought charges against hundreds of individualsaccused of gaming pandemic response programs.

Drawn by generous fees for each loan processed, Kabbage was among a band of online lenders that joined enthusiastically in originating loans through their automated platforms. That helped millions of borrowers who'd been turned down by traditional banks, but it also created more opportunities for cheating. ProPublica examined SBA loans processed by several of the most prolific online lenders and found that Kabbage appears to have originated the most loans to businesses that don't appear to exist and the only concentration of loans to phantom farms.

In some cases, these problems would've been easy to spot with just a little more upfront diligence — which the program's structure did not encourage.

"Pushing this through financial institutions created some pretty bad incentives," said Naftali Harris, the CEO of Sentilink, which helps lenders detect potential identity theft. "This is definitely a case where companies that decided they wanted to be more careful in terms of giving out loans were penalized for doing so."

Presented with ProPublica's findings, SBA inspector general spokeswoman Farrah Saint-Surin said that her office had hundreds of investigations underway, but that she did "not have any information to share or available for public reporting at this time." Reuters reported that federal investigators were probing whether Kabbage and other fintech lenders miscalculated PPP loan amounts, and the DOJ declined to confirm or deny the existence of any investigation to ProPublica.

Kabbage, which was acquired by American Express last fall, did not have an explanation for ProPublica's specific findings, but it said it adhered to required fraud protocols. "At any point in the loan process, if fraudulent activity was suspected or confirmed, it was reported to FinCEN, the SBA's Office of the Inspector General and other federal investigators, with Kabbage providing its full cooperation," spokesman Paul Bernardini said in an emailed statement.

As soon as the pandemic swept across America, Kabbage was in trouble.

The online lending platform had launched in 2009 as part of a generation of financial technology companies known as "non-banks," "alternative lenders" or simply "fintechs" that act as an intermediary between investors and small businesses that might not have relationships with traditional banks. Based in Atlanta, it had become a buzzy standout in the city's tech scene, offering employees Silicon Valley perks like free catered lunches and beer on tap. It advertised its mission as helping small businesses "acquire funds they need for their big breaks," as a recruiting video parody of Michael Jackson's "Thriller" put it in 2016.

The basic innovation behind the burgeoning fintech industry is automating underwriting and incorporating more data sources into risk evaluation, using statistical models to determine whether an applicant will repay a loan. That lower barrier to credit comes with a price: Kabbage would lend to borrowers with thin or checkered credit histories, in exchange for steep fees. The original partner for most of its loans, Celtic Bank, is based in Utah, which has no cap on interest rate, allowing Kabbage to charge more in states with stricter regulations.

With backing from the powerhouse venture capital firm SoftBank, Kabbage had been planning an IPO. Its model foundered, however, when Kabbage's largest customer base — small businesses like coffee shops, hair salons and yoga studios — was forced to shut down last March. Kabbage stopped writing loans, even for businesses that weren't harmed by the pandemic. Days later, it furloughed more than half of its nearly 600-person staff and faced an uncertain future.

The Paycheck Protection Program, which was signed into law as part of the CARES Act on March 27, 2020, with an initial $349 billion in funding, was a lifeline not just to small businesses, but fintechs as well. Lenders would get a fee of 5% on loans worth less than $350,000, which would account for the vast majority of transactions. The loans were government guaranteed, and processors bore almost no liability, as long as they made sure that applications were complete.

At first, encouraged by the Treasury Department, traditional banks prioritized their own customers — an efficient way to process applications with little fraud risk, since the borrowers' information was already on file. But that left millions of the smallest businesses, including independent contractors, out to dry. They turned instead to a collection of online lenders that have sprung up offering short-term loans to businesses: Kabbage, Lendio, Bluevine, FundBox, Square Capital and others would process applications automatically, with little human review required.

For the platforms, this was also easy money. In the first funding round that ran out last August, Kabbage completed 297,587 loans totaling $7 billion. It received 5% of each loan it made directly and an undisclosed cut of the proceeds for those it processed for banks; its total revenue was likely in the hundreds of millions of dollars. A lawsuit filed by a South Carolina accounting firm alleges that Kabbage was among several lenders that refused to pay fees to agents who helped put together applications, even though the CARES Act had said they could charge up to 1% of the smaller loans (a provision that was later reversed). For Kabbage, that revenue kept the company alive while it sought a buyer.

"For all of these guys, it was like shooting fish in a barrel. If you could do the minimum amount of due diligence required, you could fill up the pipeline with these applications," said a former Kabbage executive, one of four former employees interviewed by ProPublica. They spoke on the condition of anonymity to avoid retaliation at their current jobs or from industry giant American Express.

To handle the volume, Kabbage brought back laid-off workers starting at $15 an hour. When that failed to attract enough people, they increased the hourly rate to $35, and then $40, and awarded gift cards for reaching certain benchmarks, according to a former employee with visibility into the loan processing. "At a certain point, they were like, 'Yes, get more applications out and you'll get this reward if you do,'" the former employee said. (Bernardini said the company did not offer incentive compensation.)

In a report on its PPP participation through last August, Kabbage boasted that 75% of all approved applications were processed without human review. For every 790 employees at major U.S. banks, the report said, Kabbage had one. That's in part because traditional banks, which also take deposits, are much more heavily regulated than fintech institutions that just process loans. To participate in the PPP, fintechs had to quickly set up systems that could comply with anti-money laundering laws. The human review that did happen, according to two people involved in it, was perfunctory.

"They weren't saying, 'Is this legitimate?' They were just saying, 'Are all the fields filled out?'" said another former employee. As acquisition talks proceeded, the employee noted, Kabbage managers who held the most company stock had a built-in incentive to process as many loans as possible. "If there's anything suspicious, you can pass it along to account review, but account review was full of people who stood to make a lot of money from the acquisition."

One situation in which Kabbage approved a suspicious loan became public in a Florida lawsuit filed by a woman, Latoya Clark, who received more than $1 million in PPP loans to three businesses. When the funds were deposited into accounts at JPMorgan Chase, the bank discovered that Clark's businesses hadn't been incorporated before the PPP program's cutoff and froze the accounts. Clark sued Chase, and Chase then filed a counterclaim against the borrower and Kabbage, which had originated the loan despite its questionable documentation. In its response, Kabbage said it had not yet completed its investigation of the incident.

Although the Justice Department rarely names lenders that processed fraudulent PPP applications, Kabbage has been named at least twice. One case involved two loans worth $1.8 million to businesses that submitted forged information, and the otherinvolved a business that had inflated its payroll numbers and submitted a similar application to U.S. Bank, which flagged authorities. Kabbage had simply approved the $940,000 loan. American Express' Bernardini declined to comment further on pending litigation.

Shortly after the application period for PPP's first round closed on Aug. 8, American Express announced the Kabbage purchase. But the transaction included none of Kabbage's loan portfolios, either from the PPP or its pre-pandemic conventional loans. The PPP loans had either been sold to SBA-approved banks or bought by the Federal Reserve. Bernardini wouldn't say which banks now own the loans, however, and said that no potentially fraudulent loans had been pledged to the Fed.

In April, an Ocean County, New Jersey, resident contacted ProPublica after seeing his name attached to a Kabbage loan for a nonexistent "melon farm." To see whether it was an isolated incident, ProPublica took basic information the government released after a Freedom of Information Act lawsuit by ProPublica and others and compared it with state business entity registries. Although registries don't pick up all sole proprietorships and independent contractors, the absence of a name is an indication that the business might not exist.

As it turned out, Kabbage had made more than 60 loans in New Jersey to unlisted businesses. Fake farms also showed up repeatedly in the SBA's Economic Injury Disaster Loan Program, according to reports from local news outlets.

A common tie became apparent when the resident of the home to which one nonexistent business was registered said that he was a client of the certified public accountants at Ciccone, Koseff & Company. In March 2020, the firm notified its clients of what it called an "ultimately unsuccessful ransomware attack" that occurred the previous month. According to information filed with Maine's attorney general, the attackers acquired Social Security numbers and financial information.

Several other clients of the accounting firm, including Mancini, the Long Beach mayor, also had loans registered to their addresses. Reached by phone, firm founder Ray Ciccone declined to comment.

But that CPA's data breach didn't account for all of the suspicious loans ProPublica found across the country. Searches for PPP applicants that didn't show up in state registration records yielded hundreds in 28 more states, with dense clusters in Florida, Nebraska and Virginia. Other lenders had nonexistent businesses as well, but fake farms only showed up in Kabbage loans. Most followed a distinctive naming convention, with part of the name of a resident or former resident of the home to which the business is registered, plus a random agricultural term.

PPP loan applications approved by Kabbage, an online lender, to recipients who appear not to exist or say they did not apply, by county.


Source: Small Business Administration Credit: Derek Willis/ProPublica

Some of the fake loans listed addresses of people who'd also legitimately applied for their businesses. Hartington, Nebraska, anesthesiologist Bruce Reifenrath received a PPP loan for his practice in nearby Yankton, South Dakota. That's why the idea of one being approved for a "potato farm" was so strange. "We did a PPP loan last spring and it's pretty extensive, the documentation," Reifenrath said.

Reifenrath was part of a cluster of dubious Kabbage loans in Hartington that also included the home of J. Scott Schrempp, the president of the Bank of Hartington, who confirmed that he did not own a strawberry farm. Schrempp said he had noticed the fake loan, and reported it to the SBA.

The SBA data only reflects approved applications received from lenders, some of which are then caught and not funded. The SBA also periodically updates its dataset to remove loans canceled by lenders. But none of the suspicious loans pulled by ProPublica show undisbursed funds, and they all have remained in the dataset for more than eight months.

One possible mechanism for the invented businesses is a technique known as synthetic identity theft, in which a criminal obtains pieces of personally identifiable information — such as a home address, a Social Security number and a birthdate — and combines it with fake information to build a credit profile. The associated bank account then routes to the fraudster, not the owner of the original information.

None of the residents of the phony farms ProPublica contacted were getting notices that they needed to repay the loans they didn't apply for, because they didn't get any money. But that doesn't mean they're not at risk, according to James Lee, chief operating officer at the Identity Theft Resource Center.

"Just having an address linked to your name on a fraudulent loan can impact your credit," Lee said. It can also pose problems for pre-employment background checks, insurance applications or new identification documents like passports and driver's licenses.

Meanwhile, if not corrected, the fabricated identities will stay in circulation and become better at fooling other financial institutions. "Those records get built into the credit and authentication systems used by government and commercial entities," Lee said. "Each next time they are used and authenticated, the more 'real' they become. That's what makes synthetic identity fraud so insidious."

This, however, is largely not Kabbage's problem anymore.

After its huge blitz of PPP loans last summer, Kabbage had hundreds of thousands of borrowers whose loans would need to be serviced until they were closed out. The loans could either be forgiven, if the borrower demonstrated that they spent most of the money on payroll, or paid back with interest. But American Express didn't acquire the part of Kabbage's business that owned those loans. Instead, a separate entity called K Servicing would handle loan forgiveness and take applications for a second PPP draw that Congress funded in December. The servicer is led by former Kabbage employees and its website looks very similar to Kabbage's, but American Express says it has no affiliation.

If Kabbage was understaffed for the volume of PPP loans it took on before the acquisition, the situation has apparently worsened since then. Reddit, Yelp, Consumer Affairs, Trustpilot, Facebook and Better Business Bureau threads are replete with complaints from customers whose applications were denied or who received no communication from the company. When the SBA changed the rules in February to make the program more generous to independent contractors, K Servicing couldn't incorporate the new forms into its processing system. So it told all new applicants to apply through another company, SmartBiz, which had operated as a mostly online processor of SBA loans even before the pandemic.

K Servicing is run by Kabbage's former head of program management, Laquisha Milner, who also runs her own consulting firm. "Due to extenuating circumstances beyond our control, currently, our processing function is delayed," Milner emailed in response to detailed questions from ProPublica. "We are relentlessly exploring all available options to ensure our existing customers are able to maximize their loan forgiveness."

Jennifer Dienst is a freelance travel and events writer who received her first-draw loan from Kabbage and wants to apply for forgiveness before her window for doing so closes in the fall, but she has been stymied by K Servicing's failure to make the forms available. "Please be patient with us as we prepare for the new forms," a message on the loan portal reads.

Meanwhile, Dienst's account has started accruing interest, which Milner said will not be charged if the loan is forgiven. But it's making Dienst nervous.

"It's always the same response from K Servicing — we're updating our forgiveness forms and they'll be made available soon," Dienst said. "They've been saying that for months."

Clarification, May 18, 2021: This story has been clarified to more accurately reflect the terms of Kabbage's acquisition by American Express.

Despite Pandemic Pressures, Big Banks Screwed Consumers On Overdrafts

Despite Pandemic Pressures, Big Banks Screwed Consumers On Overdrafts

Reprinted with permission from Daily Kos

Last year was a difficult one for millions of people in the United States.

It was not so difficult for big banks, and one of the ways the banks raked in revenue was by hitting struggling people with overdraft fees.

During the final quarter of 2020, when the coronavirus pandemic was battering the country, JPMorganChase, Bank of America, and Wells Fargo each took in more than $300 million in overdraft fees alone. Those fees are slapped on people who are by definition struggling, and banks often use strategies to maximize the number of fees people pay, like ordering transactions so that the biggest amounts go through first, which lets them charge fees on more, smaller transactions. And it's no thanks to the banks that it wasn't much, much worse—COVID-19 relief from the government protected many people from the worst.

Around one in three checking accounts has at least one overdraft a year, and five percent of checking account holders have 20 or more overdrafts a year, accounting for more than 60 percent of overdraft fees. In 2020, the average overdraft fee was over $33. Many of these fees are triggered by debit card transactions for less than $25 that are repaid within three days.

This is an ongoing story—bank overdraft fee policies have been terrible for years. But it took on new dimensions during the pandemic, with sky-high unemployment creating a financial emergency for so many people.

"Banks could've capped overdraft fees for a certain number of months, or had no fees during the pandemic, but they didn't want to give up a dollar of overdraft revenue in any formal way," Rebecca Borné, senior policy counsel at the Center for Responsible Lending, told The American Prospect's Alexander Sammon. "So what we see now is a return to business as usual, where our largest banks each took over a billion dollars out of the checking accounts of people during one of the worst years in our history. It's a gobsmacking amount of money."

It would have been much worse without COVID-19 relief bills, from the CARES Act to the American Rescue Plan. Check out how Google trend data on searches for "overdraft" tracked the passage of those laws:

OverdraftandGoogleSearches1.png

After each round of relief payments, you see searches for "overdraft" drop. Because the banks weren't interested in going easy on people being hammered by a once-in-a-century pandemic and the accompanying economic devastation.

Consider it one more reminder that what we need are regulations and laws to protect consumers. There are two prime ways that could happen on this issue. Early in the pandemic, Sens. Cory Booker (D-NJ) and Sherrod Brown (D-OH) proposed legislation to crack down on overdraft fees during the COVID-19 emergency, banning them altogether for the duration of the emergency and preventing banks from reporting overdrafts to credit reporting agencies—but that didn't get passed. Booker and Rep. Carolyn Maloney (D-NY) have other legislation on overdraft abuses more generally, but as always, there's that Senate filibuster problem blocking progress.

Under President Biden, though, the Consumer Financial Protection Bureau (CFPB) could do a lot more protecting consumers than the agency did under Donald Trump. Biden's nominee to head the CFPB, Rohit Chopra, hasn't yet been confirmed, but he's known as a strong consumer advocate. He could regulate the practice, which is extraordinarily abusive even in non-pandemic times.