New York CNN Business  — 

Fintech lenders helped speed the delivery of forgivable government loans to small businesses crushed by the pandemic. But these tech-savvy lenders may also have opened the door to widespread fraud and misuse of taxpayer money.

Fintechs are almost five times more likely than traditional banks to have made “highly suspicious” loans through the $780 billion Paycheck Protection Program (PPP), according to research published Tuesday.

Nine of the top ten PPP lenders with the highest rate of suspicious loans are fintechs — and the remaining one acts like a fintech company, according to the study by researchers at the McCombs School of Business at the University of Texas at Austin.

Altogether, the researchers found that 1.8 million PPP loans with a total value of $76.3 billion had suspicious characteristics.

The report points to regulatory gaps and due diligence failures that allowed for suspicious lending of taxpayer money intended to help mom-and-pop shops hurt by the pandemic.

“These findings highlight the large costs of low oversight and lack of sufficient negative ramifications to borrowers and lenders for poor lending practices in the PPP,” the academics concluded.

‘Turned a blind eye’

In particular, the report found that the largest three fintech issuers of PPP loans — Cross River, Capital Plus and Harvest — all had “high and increasing rates” of misreporting and received more than $900 million each in processing fees.

The sheer scope of the suspicious lending by the fintechs, the authors wrote, suggests that “many lenders either encouraged such loans, turned a blind eye to them or had lax oversight procedures.”

The fintech industry pushed back against those arguments.

“Cross River stepped up to answer the mandate from Congress and in the process, deployed fraud detection standards that far exceeded the continuously evolving SBA program requirements,” a spokesperson for Cross River said in a statement, adding that it reached nearly half a million of the “smallest and most vulnerable businesses in need.”

Fort Lee, NJ-based Cross River said it’s “disappointing that some would use misdirected criticism, gross assumptions and unsubstantiated claims to undermine the sacrifice and countless hours that were dedicated to getting the American economy back up and running.”

The Financial Technology Association, an industry trade group, defended the role of fintechs during the pandemic.

“Despite evolving government guidance and inadequate processing systems, financial technology companies executed the goal of the PPP program with the regulatory compliance standards in mind throughout the lending process, helping to save hundreds of thousands of small businesses,” Penny Lee, the trade group’s CEO, said in a statement.

Lee also pointed the finger at traditional lenders.

“While small businesses suffered, many large, legacy financial institutions refused to provide loans to businesses without existing relationships,” she said in the statement.

Capital Plus and Harvest did not respond to requests for comment.

Red flags in PPP loans

Fintechs use digital technology to issue loans, hold deposits and provide other banking services, typically without physical bank branches. This newer model leans heavily on algorithms to screen loan applications and sometimes lacks the robust compliance procedures that traditional banks rely on. Fintechs also tend to face less oversight from regulators.

“There is a tradeoff between quick and easy access to government funds and potential for abuse,” Sam Kruger, one of the study’s authors and an assistant finance professor at the University of Texas at Austin, said in an interview.

To identify potential fraud, the academics looked for red flags in PPP loan applications, including businesses that weren’t registered, the existence of multiple businesses at a residential address, unusually high implied compensation per employee and large inconsistencies in the number of workers reported in applications for other government programs.

The Justice Department has launched more than 70 criminal cases into alleged PPP fraud.

Of course, some fintechs bucked the trend. The research found that Square (SQ) and Intuit (INTU) had among the lowest misreporting rates among all lenders.

“Online lending does not appear to be the problem in and of itself,” the report said. “One thing that sets Square and Intuit apart is that they have established relationships with customers based on a broad suite of payment, accounting, payroll, and other financial support services.”

Luxury cars, jewelry and other items bought with PPP funds

Created in March 2020 as the pandemic erupted, the PPP delivered more than 11 million loans worth almost $800 billion that the government pledged to forgive if the recipient used a certain portion of the money to pay workers.

The Small Business Administration’s Office of Inspector General said that as of July 15 more than $611 million had been returned or seized from loan recipients as a result of investigations involving PPP or Economic Injury Disaster Loans. The agency watchdog said there were 139 open PPP investigations as of mid-July and more than 10,200 PPP loans have been flagged as involving identity theft.

Federal prosecutors have gone after dozens of applicants who allegedly exploited the emergency program.

Since the PPP launched, the Justice Department says it has prosecuted more than 100 defendants in over 70 criminal cases involving the program. The DOJ has seized more than $65 million in cash proceeds from what it says were fraudulently obtained PPP funds. Prosecutors have also seized real estate and luxury items purchased with the loans.