Prateek Mahajan

Did FinTech Lenders Facilitate PPP Fraud?

(with John M. Griffin and Samuel Kruger)

Journal of Finance, 78: 1777-1827 (2023) 

[SSRN Version] [Internet Appendix] [Replication Package]

In the $793 billion Paycheck Protection Program (PPP), we examine metrics related to potential misreporting including non-registered businesses, multiple businesses at residential addresses, abnormally high implied compensation per employee, and large inconsistencies with jobs reported in another government program. These measures consistently concentrate in certain FinTech lenders and are cross-verified by seven additional measures. FinTech market share increased significantly over time, and suspicious lending by FinTechs in 2021 is four times the level at the start of the program. Suspicious loans are being overwhelmingly forgiven at similar rates to other loans. 

Cited by U.S. House Committee Report on PPP Fraud and PPP and Bank Fraud Enforcement Harmonization Act of 2022

Media Coverage: New York Times, Bloomberg, USA Today, National Public Radio, Washington Post, Atlanta Journal-Constitution, Miami Herald, CNN, NBC News, Fox News, and over 300 others

Is Fraud Contagious? Social Connections and the Looting of COVID Relief Programs

(with John M. Griffin and Samuel Kruger)

Review of Financial Studies, Forthcoming

[SSRN Version] [2024 WP Version (includes UI, EIDL, and ERC results)] [Replication Package]

Fraud indicators within the Paycheck Protection Program (PPP), a major COVID relief program, are highly geographically concentrated. ZIP codes and counties with high rates of suspicious PPP loans are strongly social connected, with evidence that fraud spreads spatially over time through social networks. Individuals in suspicious social media groups have higher rates of PPP fraud, and socially connected ZIP codes frequently use the same specific FinTech lenders, consistent with social networks influencing detailed loan decisions. Our findings suggest that more proactive data analysis is needed for fraud prevention, detection, and prosecution to prevent the social spread of fraudulent schemes. 

Media Coverage: NBC

Did Pandemic Relief Fraud Inflate House Prices?

(with John M. Griffin and Samuel Kruger)

Journal of Financial Economics, Forthcoming

[Replication Package]

Pandemic fraud is geographically concentrated and stimulated local purchases with effects on prices. Recipients of fraudulent Paycheck Protection Program (PPP) funds significantly increased their home purchasing rate compared to recipients of non-fraudulent PPP funds, and house prices in high fraud zip codes increased 5.8 percentage points more than in low fraud zip codes within the same county. In a horse race, pandemic fraud is one of the largest and most robust factors explaining house price appreciation during COVID. Zip codes with fraud also experienced heightened vehicle purchases and other consumer spending in 2020-21, with a return to normal in 2022.

Media Coverage: Wall Street Journal, Associated Press, National Public Radio, CNBC, Fox Business

The Rise in Insurance Costs for Commercial Properties: Causes, Effects on Rents, and the Role of Owners

(with Minjoo Kim and Zirui Wang)

Leveraging a large, novel set of property-level operating statements, we analyze the drivers and consequences of rising commercial property insurance costs. We document a significant, persistent increase in insurance costs across the U.S. over the last decade. We find that the increased pricing of local risk tracks the rising cost of reinsurance coverage; states with higher ex-ante exposure to reinsurance markets face steeper increases, even holding local risk fixed. Commercial insurance cost growth is more than double that of homeowners insurance in 95% of counties. Using a border county-pair difference-in-differences design, we show that this divergence arises from homeowner-market regulatory frictions spilling over into commercial pricing through cross-product subsidization. On average, 49% of the rise in insurance costs is passed through to rents, though this pass-through rate is declining over time. While the average impact on rents and profitability has been relatively small, the effect in high-risk areas is substantial. Finally, we show that larger owners and those with lower-risk portfolios secure lower insurance costs, particularly in high-risk areas. Consequently, property ownership in high-risk regions is increasingly being consolidated among larger entities. Our findings suggest that commercial insurance pricing reflects both localized and systematic risk exposure and is significantly influenced by owner portfolios.

Is Auto ABS a Vehicle for Misreporting?

Using data on over 20 million auto loans from 398 auto asset-backed security (ABS) deals, I find signs of misreporting that are consistent with those found in other forms of ABS (such as RMBS and CMBS). Loans immediately below discrete LTV are found to be riskier. Borrowers/dealers are inflating book values of vehicles to lower LTV and overstating income to lower PTI and DTI. Differences in inflation across originators are persistent over time. Loans with misreporting are defaulting at increasingly higher rates post-COVID. The misreporting is partially priced at the loan-level in the form of higher interest rates, but investors do not appear to be compensated for the added risk at the deal-level.