What happened
KServicing — the holding company left behind when American Express bought fintech lender Kabbage's technology and part of its team for about $750 million in 2020 — delivered more than $7 billion in Paycheck Protection Program loans to over 300,000 borrowers, making it the second-largest PPP lender in the nation by application volume. AmEx's deal excluded the PPP portfolio, leaving KServicing to administer its remaining $1.3 billion.
On October 4, 2022, KServicing filed for bankruptcy, telling the court it was 'overburdened' by disputes over its lending practices and needed relief from 'multiple costly fronts': investigations by the House Select Subcommittee on the Coronavirus Crisis, the FTC, the SBA, and Justice Department offices in Massachusetts and the Eastern District of Texas into claims it lacked proper fraud controls.
The allegations had teeth: per a Miami Herald investigation, KServicing had the lowest rate of borrower forgiveness of any major lender in the program. A 2021 University of Texas at Austin study found fintech PPP lenders were almost five times more likely to be linked to suspicious loans than traditional banks.
KServicing said it processed applications 'in good faith' as fast as possible amid shifting SBA guidance, arguing officials had pressed lenders to fund loans the same day — 'it was a national emergency.' It also blamed American Express for failing to deliver promised documentation and forgiveness support, forcing it to hire Biz2Credit; AmEx disputed that, saying it had honored its transition-services obligations.
What it cost
Chapter 11 filed October 2022; the House coronavirus subcommittee, FTC, SBA and two DOJ offices investigating; forgiveness delayed across its $1.3B portfolio
Why it happened
Racing to scale PPP volume with weak fraud controls traded program integrity for market position.
The sale-time carve-out left the entity with all the regulatory exposure of PPP and none of the assets that made Kabbage valuable.
The lowest forgiveness rate of any major lender meant more loans stuck under investigation and more suspicious-loan flags.
Litigating on every front consumed the cash flow needed to service the remaining portfolio into extinction.
The lesson
Speed-for-reach in government programs is a bet that scrutiny comes later: controls you skip at origination become the bankruptcy you file to escape.
Aftermath
As of the October 5, 2022 report: KServicing was winding down operations in Chapter 11, using the process for a reprieve from constant investigations; the inquiries continued; borrowers' forgiveness remained delayed; KServicing 'vigorously disputes' the allegations while framing its speed as a national-emergency mandate.
FOLLOW THE EVIDENCE