The Bottom LineThe Bottom Line

Damning Report Details How the Paycheck Protection Program Was Designed to Fail

If you want to ensure a program intended to help the most vulnerable small businesses doesn’t actually do that, there’s three things you can do.

Treasury Secretary Steve Mnuchin testifies during the Senate's Committee on Banking, Housing, and Urban Affairs hearing examining the quarterly CARES Act report to Congress on Capitol Hill, Wednesday, Sept. 24, 2020, in Washington. (Toni L. Sandys/The Washington Post via AP, Pool)

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If you want to ensure a program intended to help the most vulnerable small businesses doesn’t actually do that, there’s three things you can do.

One, you can encourage banks to limit their services under the program to existing customers. Two, you can neglect to issue specific guidance to prioritize underserved markets. Three, you can allow banks to create two or even three tracks of applications, the fastest track reserved for their largest eligible “small business” clients.

That’s how the Paycheck Protection Program ended up failing to prioritize underserved markets, as the CARES Act legislation directed the program to do, according to a new report from the House Select Subcommittee on the Coronavirus Crisis.

Based on 30,000 pages of emails, memos, interview transcripts and other documents obtained or gathered by the subcommittee, the report contradicts much of what Treasury Department officials have told Congress during oversight hearings on coronavirus response efforts. It confirms what many small business groups and researchers have been raising alarms about since the rollout of the Paycheck Protection Program — that it was designed at the outset to leave out the most vulnerable small businesses.

Lenders asserted to the subcommittee that anti-money laundering and “know-your-customer” requirements meant it was already easier for them to work with existing customers over new customers. But in response to a letter from the subcommittee, U.S. Bank said it was able to secure Small Business Administration approval for non-customers on average within 15.33 days of application, compared to 16.68 days for existing customers.

And yet, as the report notes, “By limiting their PPP loan programs to existing customers, lenders shut out many minority-owned businesses that did not have pre-existing business banking relationships.”

As Next City has previously reported, the SBA’s data shows its existing private lender network has relatively weak ties to business owners of color and women business owners — those most likely to fail as a result of the economic fallout from COVID-19. In FY2018, just five percent of loans in the SBA’s main loan guarantee program went to black-owned businesses, and just 9 percent went to Hispanic-owned businesses. Only 18 percent went to businesses whose majority owners were women.

Recognizing those shortcomings, the SBA created its Community Advantage Pilot Program in 2011. The program provides SBA loan guarantees through community development financial institutions, or CDFIs, lenders that have a specific mission of serving underserved communities. But the report notes this subset of nonprofit SBA lenders were almost entirely locked out of the Paycheck Protection Program because they had not previously made at least $50 million in SBA-guaranteed loans. As the subcommittee report also notes, the same rule locked out many minority-depository institutions from the Paycheck Protection Program.

During the first round of the Paycheck Protection Program, which only lasted two weeks before the program ran out of funding, CDFIs and MDIs made just 65,000 out of 1,670,000 loans.

The SBA eventually lowered the $50 million threshold to $10 million, allowing many more CDFIs to participate in the program — but that didn’t happen until April 30, after the first round of the Paycheck Protection Program was exhausted and after an estimated 41 percent of Black-owned businesses had already shut down due to the pandemic. More recent polling suggests that nearly half of Black-owned businesses will never reopen.

Ultimately, CDFIs and MDIs processed $16.4 billion in Paycheck Protection Program loans, or 3.1 percent of the total amount of loans disbursed under the program.

The select subcommittee also obtained data showing that some of the largest banks processed Paycheck Protection Program loans much faster for larger clients. JPMorgan Chase processed loans above $5 million almost four times faster than loans under $1 million. PNC processed loans above $5 million more than twice as fast as loans under $1 million; it also processed loans for businesses with more than 100 employees at almost twice the speed of loans for smaller businesses.

Other large banks, like Wells Fargo and U.S. Bank, did not show significant differences between application processing times for larger versus smaller clients. Citi was the only large bank that did not provide data on average processing time, telling the subcommittee it did not collect that information.

Although the SBA does collect demographic data in its normal lending and loan guarantee programs, it decided not to collect that data for the Paycheck Protection Program loans, for the sake of “speed and simplicity” according to Treasury officials. The select subcommittee report recommends collecting that data going forward.

The report also recommends more direct consultation with and resources for CDFIs and MDIs, should Congress extend the Paycheck Protection Program.

As it has done almost every year since 1994, the U.S. Treasury recently awarded an annual round of funding to CDFIs across the country — some of which are also MDIs. This year, $204 million went to 397 CDFIs, which include loan funds, credit unions, banks and venture capital funds that have a primary mission of serving underserved communities and direct at least 60 percent of their lending and other services to those communities.

There could have been more — 588 organizations from across the country requested a total of $535.4 million from the CDFI Fund’s core program. But congressional appropriations for the CDFI Fund have been held steady for several years, despite the fact that every year more organizations are becoming eligible to apply for its funding. The HEROES Act, a follow to the CARES Act that the House of Representatives passed in May, appropriates $1 billion for the CDFI Fund.

The select subcommittee’s findings also come out at a moment when there is uncertainty looming even for those small businesses that did get access to a Paycheck Protection Program loan — uncertainty around the loan forgiveness process.

October 31 is the deadline given on the original loan forgiveness application forms, but officials just last week clarified that businesses actually have more than a year from receiving their loan to apply for loan forgiveness.

In a change from previous restrictions, the Small Business Administration also announced this month that, for loans up to $50,000, complete loan forgiveness would be granted regardless of how much of the loan was used to pay employees. According to the SBA, 3.57 million Paycheck Protection Program loans were for less than $50,000, including 1.71 million loans to small businesses with no employees besides the owner. Another proposal floating around in Congress, with the support of the banking industry, would increase that threshold to $150,000 and also make loan forgiveness automatic.

In the meantime, looking for more ways to meet small business credit needs during the pandemic, some cities are turning to local pension funds and others are pushing cities and states to leverage public deposits.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: covid-19banksminority-owned business

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