Fintech lender charged with defrauding millions over client losses

Like many fintechs, Grain Technology promises its banking partners that it will back its product in case of fraud, covering potential losses when it fails to identify a scammer. Now is the time to pay.

Ponce Financial Group told shareholders this week it was to take a $6.3 million charge in the first quarter related to unsecured microloans on its books that were issued in its name by Grain. Ponce also added $1.7 million to reserves.

Bronx, New York-based Ponce, a $1.65 billion asset, held 54,247 microloans with a total balance of $31 million as of March 31, according to a related securities filing at the end of the week. last.

While these loans “were, in management’s opinion, comparable to similar portfolios,” Ponce noted that over the past three years, he had repaid 24,719 fraudulent loans to Grain, based in Oakland, Calif. .

Pursuant to their partnership agreement, Grain is responsible for repaying Ponce the principal and any losses on repaid loans, a sum that had risen to $11.8 million as of May 5, according to the securities filing.

Grain’s status as a startup that has yet to report earnings made it difficult to predict when the fintech would be able to repay debt of this size.

“While we are confident that Grain will grow from a for-profit start-up to a solid business, the amortization and depreciation reflect current economic conditions and regulatory requirements,” Ponce CEO Carlos Naudon said Monday. , in a press release.

Ponce added that he had frozen new microloan originations and told Grain that further credit extensions to existing borrowers were subject to fraud screening.

“We are committed to working with Ponce to further mitigate fraud,” said Carl Memnon, co-founder and COO of Grain Technology.

Ponce, who maintains a $1 million stake in Grain, did not say whether he plans to continue the partnership. A spokesperson did not respond to an email seeking comment within a time limit. Naudon, however, said in Monday’s press release that working with minority and underbanked consumers remains an important part of Ponce’s business model as a minority depository institution and community development financial institution.

The writedown and provision, combined with a $5 million contribution to Ponce’s charitable foundation, resulted in a $6.8 million loss in the first quarter for Ponce, a recently converted mutual savings with deep roots in the real estate market. New York multifamily.

Ponce, the 62-year-old holding company of Ponce Bank, released its first quarter results this week. It was the bank’s first quarterly report since completing its second stage of conversion to a fully publicly traded company on Jan. 27, when it raised $133 million from investors.

What’s next for Grain

Carl Memnon, co-founder and COO of Grain, said in an interview that the company realized the extent of the synthetic fraud problem towards the end of 2020 and began taking steps to address it. remedy.

“At the end of the first quarter of 2021, we started implementing a five-tier system and by November we had installed all five stages,” Memnon said in an interview. Grain’s multi-layered defense includes IP device tracking, knowledge-based authentication and biometrics. The fintech works with third-party identity security providers to develop its system.

“That’s just where it’s gotten to when it comes to fraud,” Memnon said. “Criminals have become so sophisticated.”

While Ponce’s revelations appear to call into question Grain’s ability to cover fraud charges, the bank hopes it will be fixed. Ponce noted in the 8-K filing that Grain had agreed to wipe out its deficit “at the end of a Series A funding.”

Memnon declined to discuss Grain’s investors or its other banking partners. He described Grain’s situation with Ponce as a “break,” after which he remains hopeful the partnership can return to normal.

“We are committed to working with Ponce to further mitigate fraud throughout the grain’s lifecycle,” Memnon said. “We don’t necessarily take this pause as an indication that they are not always aligned with our mission, but rather as a reflection of ‘OK, that’s the circumstance. Let’s try to understand better and when we get there, we can get back to the current mission. … We are committed to expanding access to credit to communities excluded from the financial system.”

Grain uses an alternative underwriting methodology to provide borrowers with lines of credit of up to $1,000. Lines are tied to a borrower’s debit card. The vast majority of the more than 50,000 lines of credit Grain has created for Ponce have gone to minority borrowers and borrowers in low- and low-to-moderate income census tracts, according to Ponce.

Synthetic fraud, a real problem

In his 8-K, Ponce described cyber fraud — specifically synthetic fraud, which uses a fake identity constructed from a combination of real and fake personal information — as “a phenomenon that has become prevalent with fintechs.” .

According to Naftali Harris, founder and CEO of SentiLink, a San Francisco-based identity verification technology provider, it can be perpetrated by individuals seeking to avoid a connection with a damaged credit history, or by criminal gangs exploiting stolen personal data.

“Identity fraud impacts all lenders, not just those serving the subprime segment or those with digital backgrounds,” Harris said in an interview.

Since this type of fraud does not usually affect real people – who have become increasingly vigilant about protecting personal information – in some cases it is easier to perpetrate than classic identity fraud, where a real individual’s credit profile is hacked. Indeed, the synthetic fraud problem has worsened significantly over the past five years, Harris said.

“Ten years ago, fraudsters skimmed credit cards. During the pandemic, they targeted government stimulus programs. And as they found out how easy it was to do, they started committing synthetic fraud,” Harris said.

The increase in fraud has led to a corresponding increase in interest in identity verification solutions. SentiLink, which Harris and partner Maxwell Blumenfeld founded in 2017, now has more than 100 banks, credit unions, fintechs and other financial institutions as customers, Harris said. SentiLink’s product set leverages advanced analytics to provide customers with real-time analysis of applicants’ personal data at account opening.

“Fraud is rampant and continues to be a big problem,” Harris said. “It’s an unresolved question, frankly. There are many aspects of life where there is a problem and a solution. I don’t think we’re there yet for identity verification. We are getting there as an industry.

What’s next for Ponce

Analysts who cover Ponce said the issues with Grain overshadowed an otherwise strong quarter marked by loan growth, an expanding net interest margin and excellent core credit quality. First-quarter revenue of $19.6 million was up 17% year-over-year, despite a sharp decline in mortgage banking revenue.

“Lower-than-expected spending and higher net interest income … more than offset weak mortgage banking income,” Jake Civiello, who covers Ponce for Janney Montgomery Scott, wrote in a research note on Wednesday.

Compass Point’s Laurie Havener Hunsicker, who previously flagged Ponce’s Grain’s relationship as “a risk area,” reiterated her “Buy” rating on the stock in a research note on Tuesday, highlighting what she called a “primary” credit, excluding microloans. Ponce” is a real estate-focused lender with a very low loan-to-value ratio [ratios]” Hunsicker wrote.

As of March 31, home loans made up 90% of Ponce’s $1.3 billion asset loan portfolio. Multi-family loans were the largest segment, totaling $368.1 million.

“We continue to view our microloan portfolio as important to our mission and are pleased that…we were able to provide over 54,000 new customers with a reasonably priced alternative to otherwise costly predatory lending options,” said said Naudon.

About Jermaine Chase

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