Cross River is the regulated bank behind a slew of fintech startups, ranging from online lenders to cryptocurrency sites. As tech companies attracted borrowers, Cross River originated loans that generated about $1 billion in gross fees for handling US aid.
Two years later, the company’s growth has helped it earn a valuation of over $3 billion in a recent funding round. Meanwhile, some of these US-backed loans are showing signs of trouble. Debt forgiveness rates are exceptionally low, which could indicate that online borrowers may have abused the program and not bothered to go through the paperwork to get debts forgiven. Banks such as Cross River that the United States encouraged to rush pandemic aid have not been accused of wrongdoing.
This is one of the few concerns that have arisen in recent years around the closed company providing a wide range of consumer finance, which is also packaged for sale to Wall Street investors. Since its founding on the brink of the financial crisis in mid-2008, Cross River has forged partnerships with a who’s who of tech-powered companies that challenge traditional banks – such as crypto giant Coinbase Global Inc., payments heavyweight Stripe Inc. and funding platforms Upstart Holdings Inc., Kabbage Inc. and Affirm Holdings Inc.
Now, Cross River plans to use its pandemic-era profits and subsequent capital injection to expand. As fintech companies mature, they look to add services — moving from apps that perform one or two functions to something more like diversified financial services companies. Cross River intends to help them diversify.
“A market lender wants to become a payment company, and vice versa, payment companies want to become lenders,” said Gilles Gade, CEO of Cross River. “We want to be there for both of them.”
Some of Cross River’s activities angered state authorities. He was part of a group of companies that struck a deal with Colorado in 2020 after the state accused a pair of non-bank lenders of teaming up with national banks such as Cross River to make loans with interest rates that local laws deemed too high.
Disagreements over which company is the “real lender” in such situations, and which laws apply, have simmered in recent years. At the time of the agreement, Cross River praised the Colorado attorney general for creating a framework to address the issue. But the broader debate continues. When Moody’s Investors Service analysts reviewed a $196 million issue of consumer loan-backed securities from Cross River and another bank in June, they said investors should consider the possibility that regulators reconsider the question of the true lender.
“The social risk of this transaction is high,” wrote the report’s authors, Selven Veeraragoo and Pedro Sancholuz Ruda. “Marketplace lenders have attracted increased regulatory attention at the state and federal levels,” and it is still possible that some of the loans will be deemed void or unenforceable, they said.
Cross River’s rise presents an irony: One of America’s fastest-growing banks is embracing the idea of it being a utility, a label despised by many traditional lenders who have tried to present themselves as technological platforms.
The bank focuses on structural problems in the financial system that Gade blames for neglecting some potential customers. The name Cross River even references this mission, invoking the Jewish principle of tikkun olam: providing service to fix the world. “We are trying to cross the spiritual river of banking by not trying to offer something that got stuck in antiquity,” he said.
Another irony: the big banks continue to accidentally help the upstart.
The business started weeks before the collapse of Lehman Brothers Holdings Inc. triggered a global credit crunch. Big banks were groaning under the weight of their troubled loans, and as they retreated from consumer credit, it created a vacuum and an opportunity for online lending platforms. Many of these financial startups needed a commercial bank they could connect to to secure their loans.
Over the years, Cross River has grown rapidly. And when the pandemic hit in 2020, traditional banks again gave up an edge. The larger ones were slow to get loans at first, as they built systems to automate the process, leaving legions of smaller businesses clamoring for funds. Some branch staff have started telling customers to try online lending platforms. These loan applicants were routed through Cross River. In 2020, it ranked among the top three loan providers.
Before the pandemic, Cross River earned just a few million dollars a year on fees and interest from commercial and industrial loans, according to data filed with federal regulators. This changed quickly once PPP aid started to arrive. Between the second quarter of 2020 and the end of June, the bank earned well over half a billion dollars in revenue from commercial loans, the data showed.
By the end of the relief program, Cross River had issued nearly 480,000 Small Business Administration Paycheck Protection Program loans, a tally second only to Bank of America Corp., the nation’s second-largest lender. The program allows loans to be canceled if borrowers later show that they have used the money to cover eligible costs.
Yet the forgiveness rates for loans issued by Cross River lag behind the debts created by many competitors. This is a worrying sign, as legitimate borrowers are more likely to file paperwork to avoid repayment.
“Pending loan forgiveness applications are a potential indicator of fraud,” said a February report from the office of SBA Inspector General Hannibal “Mike” Ware. “Borrowers who have obtained a PPP loan fraudulently are unlikely to seek loan forgiveness.”
Of Cross River’s PPP loans in 2020, 16.4% were defaulted in July, compared to 5% of program-wide loans that year. Cross River’s loan forgiveness rates in 2021 also followed the broader landscape.
Cross River points out that such indicators reported by watchdogs are not the same as actual evidence that borrowers have engaged in fraud. Indeed, there are a variety of reasons borrowers may decide not to seek forgiveness, including the fact that they may not have spent money in a way that qualifies for this stage of the program. Or they may simply not follow the paperwork.
Cross River notes that the hastily created U.S. program has been successful in keeping businesses afloat. He also cites research showing that fintech lenders were more effective in helping Black and Hispanic business owners.
The government has become alarmed at the number of loans the wider scheme has given to people who lied on applications, often using stolen identities. The SBA watchdog said in May it detected 70,000 potentially fraudulent loans totaling more than $4.6 billion. This month, President Joe Biden signed legislation establishing a 10-year statute of limitations for fraud related to both the PPP program and the SBA’s Covid-19 economic disaster loan programs.
Yet lenders are generally immune to recriminations. The SBA offered explicit guidance early in the pandemic that it was only responsible for performing “a good faith review” of calculations and documents submitted by borrowers – a high bar for imposing accountability.
“When it comes to lenders, I think the only really egregious cases will be where the government is really going after people,” said Elisha Kobre, a partner at law firm Bradley Arant Boult Cummings.
It’s unclear to what extent Cross River’s growth in recent years has benefited executives and founders with stakes in the company. A filing said the CEO held a fully diluted stake of approximately 7.9% at the end of 2016. But the private company does not disclose his compensation, which in many banks includes stock, nor does it specify the dilutive impact of its fundraising.
Gade declined to comment on his net worth. “God runs my checkbook,” he said in an interview.
But after the last round of funding, he said, institutional investors own about 30% of the company, with the rest in the hands of “incumbent” private investors.
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