AmEx’s purchase of online lender Kabbage left desperate PPP borrowers in the cold

When the pandemic shut down Dawn Lindsay’s family carpet cleaning business last year, the U.S. government’s paycheck protection program provided a brief but essential lifeline. To get her $7,500 PPP loan, Lindsay turned to online lender Kabbage, a service recommended by her accountant.

Lindsay, who runs the company with her husband, Todd, said the process was smooth and easy. But the second round of PPP funding, which the Small Business Administration opened up in January amid the ongoing economic crisis, has been a nightmare. That’s because the Lindsays are now dealing with a very different Kabbage from the one they remember.

American Express acquired Kabbage in August. Not included in the deal was Kabbage’s loan book, which had become one of the biggest in the country for distributing PPP funds. The orphaned division, now known as K Servicing, has left borrowers frustrated, confused and searching for answers as their businesses hang on by a thread.

“This is the worst company and we may lose our loan that we desperately need for our business,” said Dawn Lindsay from her home in Lula, Georgia, about 70 miles northeast of Atlanta. The couple started Esteamed Solutions in 2018 with retirement money from Dawn’s years of waiting tables at a sushi restaurant and Todd’s career at Cargill. “We’re down to our last bit of savings,” she said.

The Lindsays’ struggles are familiar to thousands of Kabbage customers, who were relieved last year when the fintech company came to their aid with an easy-to-use online application that could walk them through a complicated process. Many banks and credit unions were struggling to meet the needs of recipients in the government’s $349 billion program for small businesses.

As part of its Disruptor 50 series last year, CNBC included Kabbage (ranked 24th on the 2020 list) and highlighted the company’s rapid move to partner with small banks and jump into PPP loans, helping get emergency assistance to restaurants, boutique hotels, beauty shops and corner retailers. At the time of publication in June, Kabbage had delivered funding to over 130,000 businesses, with an average loan size of about $29,000. Rob Frohwein, Kabbage’s co-founder and then CEO, called it “fintech’s shining moment.”

By the end of the PPP’s early extension in August, the number of applications the company had approved swelled to almost 300,000, totaling $7 billion in small business funding, according to Kabbage, making it the second-largest U.S. PPP lender by volume, behind only Bank of America.

Later that month, American Express swooped in, buying “substantially all” of Kabbage, including the Atlanta-based company’s team as well as its small business lending technology and data platform.

But when PPP borrowers returned for their second loans in early 2021, it became apparent that American Express had left a mess behind.

In an email to CNBC, American Express reiterated its past statements about the transaction and suggested borrowers reach out to K Servicing.

“That portfolio and associated servicing obligations were retained by Kabbage, Inc., which now operates as K Servicing,” American Express said. “Customers of these loans need to contact K Servicing for support. We know this is a challenging time for small businesses and lenders that are managing PPP requests. We hope K Servicing can quickly resolve any servicing issues impacting its customers.”

Customers have been contacting K Servicing in droves. It’s not helping. The Better Business Bureau has been flooded with one-star reviews from borrowers complaining of K Servicing’s “negligence” and “incompetence” and offering strong recommendations that others, “DO NOT USE THEIR SERVICES!” A Facebook page called K Servicing PPP Loan Support Group has over 2,000 members.

While American Express has distanced itself from K Servicing, existing Kabbage customers are understandably confused about who’s accountable.

The new website reads “K Servicing for Kabbage” at the top. Further down it says, “In connection with American Express’s acquisition of Kabbage, we’ve established K Servicing to maintain consistency in the way you manage your existing loans.” And the bottom of the page includes a disclaimer that says “Kabbage Funding is a trademark of American Express,” referring to the lending operation that the credit card company actually did acquire.

K Servicing doesn’t include the names of any executives or employees on its website. There are three phone numbers for borrowers to use, depending on whether they’re a Kabbage customer, PPP borrower or repaying a loan.

The only email address available is support@kservicing.com. CNBC sent multiple messages to that address and didn’t get a response. A customer support representative who answered a call to the number for PPP loans was able to answer some questions on the condition that we not use her name.

The rep said she was working out of a call center in the Philippines. She said she joined K Servicing recently and never worked for Kabbage. She indicated that many loans are being delayed because customers don’t provide proper documentation. If they change banks, the loan could get flagged for review. She was unsurprised by the extent of the complaints and said that representatives can’t provide a timeframe to customers for how long a review will take.

When asked if she could provide any details on who runs the company and how many people are employed there, the rep checked with a supervisor and returned a few minutes later. She said she couldn’t give a headcount number, but said the CEO is Laquisha Milner, who’s based in Atlanta. Milner is also listed as CEO of K Servicing at the Better Business Bureau. According to her LinkedIn profile, Milner has worked at Kabbage for almost nine years, with the title of head of program management since July 2019.

Just after initial publication, Milner emailed the following statement:

The SBA opened the second draw process for PPPs in January, with authorization from Congress to issue up to $284 billion in loans of up to $2 million each. To be eligible, companies must have no more than 300 employees and have experienced at least a 25% reduction in gross receipts in a quarter between 2019 and 2020.

The original deadline for the program was March 31, but lawmakers extended it by two months. Through March 28, the SBA had awarded almost 3.6 million loans this year worth a total of nearly $212 billion.

When Lindsay applied for her second loan in January, she at first saw no reason for concern. Her application for another $7,500 was quickly approved, but Lindsay noticed on the online dashboard that her old bank account was linked to the loan. She called K Servicing and had them update her profile with her new bank.

After she sent a voided check to K Servicing, the lender sent two microdeposits to her new account on Feb. 1, confirming the account. Lindsay shared a bank statement with CNBC, showing deposits from Kabbage of 3 cents and 46 cents.

Still, when Lindsay signed the loan documents, the money was sent to her old bank account. Since then, she’s called and emailed K Servicing dozens of times to clean up the situation. Despite sending utility bills, tax returns and bank statements, as requested by various call center representatives, the money hasn’t been moved to her current account.

According to the SBA, the forgivable loan was issued on Feb. 18, and the Lindsays are required to repay it if they can’t show that the money has been used for qualified expenses like payroll and supplies. Because the loan has been approved and has what’s known as an E-Tran number from the SBA, Lindsay can’t cancel it and reapply elsewhere.

“We have jumped through every hoop they have given us on a loan in our name,” she said.

A common complaint from Lindsay and other borrowers is that the representatives they reach in the various call centers are unhelpful. They take down information, promise they’ll elevate the matter, and the customer hears nothing until calling again and going through the same process with another rep. Weeks later, there’s no progress.

Jessica Edwards, an accountant, received her first PPP loan of $9,474 through Kabbage in May of last year, after losing some of her top clients during the pandemic. Later in the year, Edwards moved with her family from Montana to Utah after her husband’s employer transferred him.

Edwards’ second loan of the same amount was approved in January and disbursed on Feb. 4. However, like with Lindsay, the money was sent to an old account. Over two months later, she’s still waiting and has been calling multiple times a week for updates. Twice in late March, Edwards spoke with representatives, who requested additional information, like her 2019 taxes and a utility bill.

PPP rules give borrowers 24 weeks to put the money to work on qualified expenses. That period is more than one-third expired and Edwards doesn’t have the loan. She said she first used Kabbage because people in her network of accountants raved about it, and now they’re all perplexed.

“This wasn’t what we were seeing before the acquisition,” Edwards said. “My experience before was great.”

K Servicing is far from the only PPP lender that’s struggling to meet borrower needs. In addition to the size of the program and the sheer number of borrowers, the SBA is constantly making changes that require participating financial institutions to tweak their software and systems, said Eyal Lifshitz, CEO of online small business lender BlueVine.

For example, in March the SBA said that self-employed individuals could switch to using gross income instead of net profit when applying for a loan, making them eligible for more money. Lifshitz said it took several days for BlueVine to build in that functionality, forcing the company to pull engineering resources from other projects. Staying up to date with all of the SBA’s rules is costly and requires ongoing investment, he said.

“You can’t do this without putting muscle into it,” said Lifshitz. “Some are doing it. Some are tired.”

K Servicing tried to relieve some pressure by partnering with fintech company SmartBiz in late March to help borrowers with their second draws. K Servicing’s website now actively sends people to SmartBiz, which processes the applications and gets the loan from a small lender called Customers Bank.

“At this time, KServicing is not accepting new second draw loan applications for borrowers that took their first PPP loan through Kabbage,” K Servicing says. “Please use the link below to apply for your second draw loan through our partner, SmartBiz.”

SmartBiz said in an emailed statement that K Servicing asked for its support last month, when the new formula for calculating loan amounts was introduced.

“SmartBiz Loans was asked to process loan applications for KServicing’s PPP customers because the new formula was being implemented in their PPP loan application while it wasn’t in KServicing’s and this would potentially be a better outcome for their customers,” the company said.

The first time Joanne Cleaver heard of SmartBiz was March 23, when she received an email from K Servicing telling her that the company “recently partnered with SmartBiz to process PPP second draw applications” and directing her to a link where she could apply.

By that time, Cleaver had already given up on K Servicing and moved onto a local credit union that processed her loan right away.

Cleaver, who runs Wilson-Taylor Associates, a consulting firm in North Carolina, said she had no problem with her first $16,773 loan last year. She applied for her second round in February and was notified in early March that the application was complete. But on March 6, she was told that her loan was withdrawn. In multiple calls the following week, she was told that “it was a known issue affecting many customers and we are working on it,” Cleaver said.

On March 16, K Servicing informed Cleaver that her loan was rejected. She said the company didn’t provide an explanation and told her there was was no way to appeal.

A week later, after Cleaver had turned elsewhere for her money, the email landed from K Servicing telling her to reapply through SmartBiz.

“They are constantly changing what they say about how to pursue the PPP process,” Cleaver said. “And yet cannot execute their way out of a wet paper bag.”

Update: This story was updated to include comments from K Servicing and SmartBiz received by CNBC after initial publication.

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