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

[Working Paper Version] [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)

Using a large and novel set of property-level operating statements for commercial properties, we analyze the causes behind the rise in insurance costs, its effects on rents and profits, and how property owners are managing it. First, we document a significant and persistent year-over-year increase in insurance costs across nearly all regions of the US over the last decade. 95% of individuals reside in counties where the increase in commercial insurance costs is at least double that of homeowner insurance costs, which we attribute to regulatory frictions in the homeowner insurance market using a border county-pair difference-in-differences design. Second, we provide evidence of three primary drivers of rising insurance costs: heightened pricing of local risk, a substantial increase in reinsurance costs, and cross-subsidization across states. Third, we find that, on average, 67% of the rise in insurance costs is passed through to rents; however, the passthrough to rent is concave and decreasing over time. Finally, we examine the role of property owners and find that: 1) larger owners are able to maintain lower insurance costs, 2) the impact of owner size on insurance costs are more pronounced in high-risk areas, and 3) owners with a property portfolio that has lower average risk have lower insurance costs, even holding the risk of a given property fixed. The advantage of larger owners in managing insurance costs in risky areas has grown in recent years, resulting in properties in high-risk regions being increasingly owned by larger owners. Our findings suggest that commercial property insurance pricing is influenced by both localized risk factors and broader systematic risk exposure, with risks extending beyond individual properties through insurers and property owners' 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.