- KServicing is asking a Delaware court to approve a $58 million settlement agreement reached with Customer Bank over a Payroll Protection Program (PPP) loan dispute, according to documents filed Thursday.
- Under the terms of the agreement, Customer Bank will pay the cash-strapped small business loan provider $23 million and forfeit nearly $35 million in servicing and referral fees withheld by KServicing as part of the PPP loan contract dispute.
- The solution comes as KServicing, which filed for bankruptcy last monthis facing several investigations into its PPP operations amid allegations it was too lax in disbursing government-backed COVID-19 relief payments.
KServicing, formerly known as Kabbage, processed more than $7 billion in PPP loans before the company’s technology and part of its team had acquired by American Express in 2020, leaving the parent company, KServicing, to administer the remaining $1.3 billion in COVID relief loans.
Like many other fintechs involved in the program, KServicing works with banks, processing PPP loans on their behalf.
During the first round of the program in 2020, KServicing processed Customer Bank’s PPP loans without issuance, earning about $47 million in servicing fees, which the Wyomissing, Pennsylvania-based bank paid on time, the loan servicer said in court documents.
The bank, however, refused to pay the $65.5 million fee owed by KServicing during the second iteration of the program in 2021, citing a processing failure on KServicing’s part.
KServicing said it responded by withholding $34.8 million in initiation fees and other payments it owed to Customers as part of its contracts.
After KServicing filed suit against Customer in May, the two sides entered into mediation in August and reached a settlement agreement last week, according to court documents.
The settlement agreement will allow KServicing to resolve a dispute with one of its largest stakeholders and is a “significant step forward” in its bankruptcy proceedings as it seeks liquidity to wind down its business, the firm said.
KServicing claims it has had to spend a lot of time and resources defending itself amid various investigations into its handling of PPP loans.
The firm’s lending practices are being investigated 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.
Department of Justice offices in Massachusetts and the Eastern District of Texas are also investigating allegations the firm lacked proper fraud controls in its PPP loan servicing.
During the pandemic, fintechs have been praised for their adaptability and willingness to serve businesses that cannot get loans from traditional lenders. Fintech PPP lenders, however, are 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.
Investigation by Miami Herald found that KServicing has the lowest borrower forgiveness rate of any major lender in the program.
KServicing blamed American Express for some of its forgiveness delays, claiming the payment company failed to implement promised PPP documentation and post-acquisition forgiveness support.
AmEx, however, has disputed KServicing’s claims, telling the Miami Herald that it “has fulfilled its obligations under the transition services agreement and will continue to do so in accordance with its terms.”
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