Citing fraud, Bronx, N.Y.-based Ponce Financial Group Inc. said its first-quarter earnings suffered after it put back $17.0 million in loans originated by the financial technology startup company Grain Technologies Inc.

The company's results included a net loss of $8.1 million resulting from a $6.3 million write-off and $1.7 million in additional reserves relating to the lending relationship between Grain and Ponce Financial subsidiary Ponce Bank, the company said in an earnings news release.

Under the terms of an agreement with Grain, Ponce Bank is the lender for microloans, originated by Grain, with credit lines up to $1,000, as well as the depository for related security deposits where applicable. Ponce has paid Grain $1.9 million in origination and servicing fees since the agreement began in 2020 and has directly invested $1.0 million in the microlender.

Ponce said in a May 5 filing that Grain "has been victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with FinTechs."

As of March 31, Ponce Bank had 54,247 microloans outstanding, net of put backs, with an aggregate balance totaling $31.0 million. From the 2020 start of the lending agreement through March, 24,719 microloans amounting to $17.0 million have been deemed to be fraudulent and put back to Grain.

Of the $17.0 million in fraudulent microloans, $11.8 million remain outstanding as of March 31. Ponce Financial assessed the collectability of the $11.8 million and decided to write off roughly $6.3 million and provide for an additional reserve of $1.7 million after applying a $1.6 million security deposit set-off, leaving a net balance of $2.2 million at March 31.

Grain agreed to apply at least 85% of origination and servicing fees received from Ponce Bank as payment toward the $11.8 million, and to pay all amounts due upon the completion of a series A financing, but Ponce said in the filing that further capital raises "may not materialize" because Grain "remains a pre-profit startup highly dependent on earnings from its relationship" with Ponce.

Ponce Financial said it continues to closely monitor its portfolio of Grain-originated consumer loans and the fintech company's refinement of solutions for detecting and preventing cyber fraud in the application for microloans. Grain agreed to Ponce Financial's request that no new microloans be originated until further notice, and that further extensions of credit to an existing microloan borrower only be made after confirming that such borrower is not fraudulent.