Student blog: Addressing Disparities in Access to PPP Loans

By Maddy Scannell
Research Intern
McNair Center for Entrepreneurship and Economic Growth

With over $130 billion in the Paycheck Protection Program (PPP) still unclaimed, policymakers are moving to extend program deadlines, lift requirements, and target struggling small businesses.^[1] While federal legislators work to adapt, many are asking why money remains unallocated when small businesses are still in need, particularly businesses owned by underserved populations. Though the SBA did not require collection of demographic data, various structural features of the PPP and the lending process indicate less-established businesses that racial minorities and rural populations were left in the cold.

Problems with the PPP

First and foremost, the PPP application process is complex and daunting.^[2] A report from the Center for Responsible Lending found that approximately 90 percent of businesses owned by racial minorities “stand close to no chance of receiving a PPP loan through a mainstream bank or credit union” for reasons such as a lack of digital or English fluency, a distrust of government, or being unbanked. Research has found that Black and Latino people are less likely to have a relationship with a lending institution than white people, and areas with higher proportions of Black people are less likely to have branches of major banks (even when controlling for income).^[3]^,[4] Further, many community bankers — upon whom racial minorities disproportionately rely — were initially unable to access the SBA’s E-Tran system used for PPP disbursement.^[5]

Additionally, journalists have found that banks screened out some applicants and gave preferred treatment to wealthier and more established applicants. Banks like Wells Fargo, Bank of America, and JPMorgan Chase have limited applications to existing customers or expedited their requests.^[6] Sources also indicate that banks’ wealthier customers received “concierge treatment” to secure PPP funding, with added assistance and priority.^[7]

Broadly, PPP lays bare the financial barriers many small businesses owners face. A 2017 study from the Federal Reserve Banks of Atlanta and Cleveland found that small businesses with Black owners apply for funds 10 percent more frequently than firms with white owners, but their approval rates are nearly 20 percent lower; this disparity persists even for firms with revenues over $1 million. Minority-owned businesses receive the full amount of funds they request 28 percent less frequently than nonminority-owned firms. The same study found that 40 percent of Black business owners are so pessimistic of their odds of loan approval that they do not even apply.^[8]

Indeed, the SBA inspector general released a review of PPP implementation, finding that the SBA failed to adequately prioritize underserved and rural businesses.^[9] §1102 of the CARES Act states that the SBA should ensure lenders and agents prioritize small businesses “in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals (as defined in section 8(d)(3)(C)), women, and businesses in operation for less than two years.”^[10]

Proposed Solutions

To resolve the gap between established and underserved small businesses, the inspector general recommends that the SBA issue guidance to lenders to prioritize the demographics listed in the CARES Act. Further, the SBA should revise the borrower application to collect optional demographic information, and include optional demographic questions on forms for loan forgiveness.

Even further, the incentive structure for lending institutions should adjust to avoid prioritizing larger firms. Lending institutions are currently compensated by collecting a 1 percent interest rate charged on the loan, and banks prefer to originate one loan for $10 million than to provide many loans for smaller amounts. In response, some analysts have suggested implementing a flat fee structure to compensate banks for each transaction.^[11] Applicants could also be connected with banks via independent clearinghouses to avoid shutting out businesses without existing banking relationships.

In the meantime, local and state governments are working to fill the gaps of the PPP. Here in Texas, local governments have invested millions of taxpayer dollars into various loan and grant programs. Local governments tend to use a more streamlined approach than the federal PPP; applicants do not have to show proof of payroll and there are no restrictions on how the money is used (so long as it’s business-related). Harris County received over 7,000 applications in just 28 hours this April; applicants requested $150 million, though only $10 million was available. Now, due to high demand, local governments are allocating some federal COVID-19 relief for additional grants to small businesses.^[12]

Recommendation

Policymakers should consider which businesses are benefiting from relief programs and which businesses are excluded. As Congress works to update and modify programs like the PPP, lawmakers can draw from the lessons learned at the state and local levels about accessibility, follow the recommendations of the SBA and reflect on how color-blind policies can still exacerbate disparities.