Dive Brief:
- KServicing is asking a Delaware court to approve a $58 million settlement agreement it reached with Customers Bank over a Paycheck Protection Program (PPP) loan dispute, according to documents filed Thursday.
- Under the terms of the deal, Customers Bank will pay the cash-strapped small-business loan servicer $23 million and forfeit nearly $35 million in servicing and referral fees withheld by KServicing as part of a PPP loan contractual dispute.
- The settlement comes as KServicing, which filed for bankruptcy last month, is facing several investigations into its PPP operations amid claims it was too lax in its issuing of the government-backed COVID-19 relief payouts.
Dive Insight:
KServicing, formerly known as Kabbage, processed more than $7 billion worth of PPP loans before the company’s technology and a portion of its team were acquired by American Express in 2020, leaving behind the holding company, KServicing, to administer the remaining $1.3 billion portfolio of COVID relief loans.
Like many other fintechs involved in the program, KServicing partnered with banks, processing PPP loans on their behalf.
During the first round of the program in 2020, KServicing processed Customers Bank’s PPP loans without issue, earning approximately $47 million in servicing fees, which the Wyomissing, Pennsylvania-based bank paid in a timely manner, the loan servicer said in a court document.
The bank, however, refused to pay the $65.5 million in fees KServicing was owed during the second iteration of the program in 2021, citing processing failures on KServicing’s part.
KServicing said it responded by withholding $34.8 million in origination fees and other payments it owed Customers as part of its contract.
After KServicing filed suit against Customers in May, the two parties entered into mediation in August and reached a settlement agreement last week, according to court documents.
The settlement agreement will enable KServicing to resolve a dispute with one of its largest stakeholders and is a “key step forward" in its bankruptcy proceedings as it seeks liquidity to wind down its business, the firm said.
KServicing claims it has had to expend significant time and resources defending itself amid multiple investigations into its handling of PPP loans.
The firm’s lending practices are under investigation by the House Select Subcommittee on the Coronavirus Crisis, the Federal Trade Commission and the Small Business Administration, according to court documents filed last month.
Justice Department offices in Massachusetts and the Eastern District of Texas are also investigating claims the firm lacked proper fraud controls in its servicing of PPP loans.
During the pandemic, fintechs were praised for their expediency and willingness to serve businesses that were unable to secure loans from traditional lenders. Fintech PPP lenders, however, were almost five times more likely to be linked to suspicious PPP loans than traditional banks, according to a 2021 study by researchers at the University of Texas, Austin.
An investigation by the Miami Herald found KServicing had the lowest rate of borrower forgiveness of any major lender in the program.
KServicing blames American Express for some of its forgiveness delays, claiming the payments company failed to follow through with promised PPP documentation and forgiveness support after the acquisition.
AmEx, however, has disputed KServicing’s claims, telling the Miami Herald it “has honored its obligations under the transition services agreement and will continue to do so in accordance with its terms.”
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