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Economics in Brief: Small Businesses Happy With PPP Loans from CDFIs

Also: Study says it’s harder to modify a small-business loan as a minority business owner, and payday lenders got in on the PPP game. 

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Small Businesses Happy With PPP Loans from CDFIs

Small businesses that received Paycheck Protection Program loans from community development financial institutions graded those lenders well for customer satisfaction in a new Federal Reserve survey of 15,000 businesses, American Banker reports.

Among the small businesses that rated their PPP loan experience as “satisfied:”

  • 70 percent applied through a CDFI;
  • 61 percent applied through a small bank;
  • 48 percent worked with a credit union;
  • 41 percent obtained their loan through a large bank; and
  • Only 18 percent of applicants who used a fintech company for their loan were satisfied.

The survey also found that fintech companies were less likely to approve loan applications, or they approved smaller amounts than what the businesses requested. Less than half (47 percent) of those who applied for a PPP loan through an online lender got the full amount they requested.

Alarm Raised Over Racial Disparities in How Loans Are Modified for Small-Business Owners

White small business owners that contacted a bank or financial institution about modifying a small business loan or business credit card were more likely to receive a modification than Black or Latino small business owners who initiated the same process, the National Community Reinvestment Coalition found.

In addition, the survey of nearly 1,000 business owners found that many business owners — of all races, but especially Black business owners — did not know that asking to modify their loan terms was even possible.

The NCRC recommended that banks “not wait for consumers to initiate contact, as not all consumers know what options are available.” They also suggested reviewing their records on loan modifications to ensure that their modification policies and practices were not violating fair lending rules.

About four million small businesses closed permanently in 2020, according to Inc.

Payday Lenders Got Millions in PPP Loans

Oh, the irony: Companies that charge annualized rates of up to 600% on short-term loans got $45 million in federal pandemic relief loans at interest rates of 1-3 percent, KERA News reports.

The consumer watchdog group Texas Appleseed, which only focused on companies with locations in Texas, found the evidence, KERA said.

“The CARES Act was not adopted to subsidize predatory lending businesses. It was adopted to help families and small businesses weather this incredible financial crisis,” Ann Baddour, director of Texas Appleseed’s Fair Financial Services Project, told the news outlet.

Fifteen companies that operate in Texas borrowed $20 million under the Paycheck Protection Program last year, the report said; those loans carry an interest rate of 1 percent, or are fully forgivable as long as the companies kept employees on the payroll for a few months after receiving the loan.

And one Georgia-based title loan company received a $25 million Main Street Lending Program loan, which carries an interest rate of 3 percent.

“Why should taxpayers…subsidize these businesses that are lending at exorbitant prices, and that so often undermine the financial well-being of families?” Baddour told KERA.

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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Tags: covid-19cdfispayday loansfintech

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