Congressional scrutiny of PPP grows amid national focus on racism

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WASHINGTON — Lawmakers are sounding the alarm about the apparent inability of some minority-owned and other underserved businesses to gain access to small-business loans mandated by recent pandemic relief laws.

Independent data points to minority-owned businesses getting rejected or still waiting for coronavirus rescue funds. And, with the nation intensely focused on racial divisions after the killing of George Floyd, members of Congress from both parties continue to demand better demographic data from the government on recipients of Paycheck Protection Program loans.

Fears that minority-owned businesses lack access to loans and a focus on the lack of public data about PPP borrowers are emerging as additional trouble spots for the Small Business Administration program enacted in March in the Coronavirus Aid, Relief, and Economic Security Act. The PPP was met with earlier criticism that banks involved in distributing loans were prioritizing their wealthiest clients.

“My office was swamped by calls of local minority small businesses complaining about being summarily rejected from applying by big banks and having their local community bank unable to even assess the SBA platform," Rep. Greg Meeks, D-N.Y., said at a recent hearing of the House Financial Services Committee.

A recent survey of 500 black- and Latinx-owned businesses, released by Color of Change and UnidosUS, reported that over 40% received no assistance after applying for aid under the CARES Act and 21% were still waiting. Only 12% received the full assistance they had sought. (The survey was conducted from April 30-May 12.)

Businesses that were rejected during the initial round of PPP funds approved by the CARES Act may not have bothered to apply again after Congress approved a second round in a follow-up bill, according to some lawmakers.

“I heard from many small businesses in my district that they were having trouble accessing that first tranche of PPP funds,” Rep. Jennifer Wexton, D-Va., who recently wrote to the SBA requesting demographic data on PPP loans, said in an interview. “I think that is the case across America, but especially so with minority-owned businesses. And a lot of them I don’t think really necessarily even applied with the second tranche.”

Some note that the concerns about minority-owned businesses being left out is inconsistent with language in the CARES Act calling for financial institutions participating in the paycheck program to prioritize underserved businesses.

Scrutiny of which companies have received PPP aid, and which have not, is likely to grow in light of nationwide protests and calls for racial equity over Floyd's killing by a Minneapolis police officer, analysts said.

“There have been complaints or issues that some minority-owned businesses were supposed to get … some sort of priority and didn’t,” said Ian Katz, a director at Capital Alpha Partners. “Given the Floyd case and the protests, the importance of this issue and question is going to be heightened and probably get more attention.”

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Karen Petrou, managing partner at Federal Financial Analytics, said a national focus on racial inequality is adding to the pressure on the SBA to produce better data.

“I think lawmakers are raising the concerns about demographic data in the PPP program because America’s consciousness is paying attention to not just racial inequality but also economic inequality, and delivery of financial services is of course a critical part of that,” Petrou said.

Sens. Marco Rubio, R-Fla., and Ben Cardin, D-Md., the top Republican and Democrat on the Senate Small Business Committee, wrote to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza on June 3, urging them to publish demographic data on PPP loans.

The letter followed an inspector general report that underserved businesses may not have received funds because the SBA was not collecting demographic data in the PPP loan applications. Treasury did include a question on demographic data in the application for PPP loan forgiveness.

“We appreciate the inclusion of the voluntary collection of demographic data on the forgiveness form released on May 16, 2020,” Rubio and Cardin wrote. “We ask that the SBA publish this data weekly.”

But they were not the only members of Congress weighing in on the issue. On Friday, Sen. Kamala Harris, D-Calif., and Rep. Katie Porter, D-Calif., also wrote to the SBA and Treasury, urging them to comply with requests for data.

"As you know, there are significant, bipartisan concerns about documented instances of PPP forgivable loans being awarded to large firms instead of true mom-and-pop shops," the lawmakers wrote. "Experts also estimate that 90 percent of businesses owned by people of color were shut out of the first round of PPP funding. ... It is impossible to know the extent of the PPP’s problems — or its successes — without access to the data."

Every Democratic senator also signed on to a letter Friday urging the SBA and Treasury to simplify the 11-page application to apply for loan forgiveness, in order to make loan forgiveness more accessible to the smallest businesses. They requested that Treasury and SBA move the demographic data reporting section to “the first page” of the application “to provide much more clarity on whether PPP assistance has reached communities of color.” (That section is currently on the last page.)

To be sure, there have been success stories of banks using their access to PPP funds to provide credit to minority-owned businesses. For example, the North Carolina-based Uwharrie Bank made a point of reaching out to some of Charlotte's oldest African American communities this spring after hearing that several small businesses were in need of PPP loans.

Still, Amanda Fischer, policy director at the Washington Center for Equitable Growth and a former Democratic House and Senate staffer, said the bipartisan nature of the lawmakers’ concerns about demographic data is significant.

“I find it really interesting that Senators Cardin and Rubio have been demanding that the SBA produce this stuff, so it’s bipartisan and it’s the committee of jurisdiction, and the SBA appears to be dragging its feet in not doing it,” Fischer said.

She added that the SBA may not want to inconvenience banks in order to produce the demographic data.

“It’s a real pain to release that data,” Fischer said. “There’s probably very legitimate [personally identifiable information] considerations that they have to navigate. The SBA and especially the Treasury doesn’t want to put the burdens on the banks. At the end of the day this is a bank-burden question. Small businesses are already providing the information in the application. This is burdening banks and I imagine the SBA doesn’t want to do that.”

Cardin raised concerns about the inspector general report at a Senate Small Business Committee hearing Wednesday, saying Congress intended for the SBA and Treasury to prioritize underserved small businesses in the CARES Act.

“The report found that the SBA's implementation of PPP did not fully align with congressional intent of the CARES Act because the SBA did not provide guidance on prioritizing underserved and rural markets,” Cardin said.

Sen. Jeanne Shaheen, D-N.H., also pressed the SBA and Treasury to collect the demographic data at the hearing, so that Congress can make changes to the PPP if necessary.

“I think all of us would like to feel like we are getting regular information so that as we are trying to perform not just our oversight mission but to look at what we need to do to make changes that we have that data in front of us and so I hope that that will be more forthcoming in the future than it has been in the past,” Shaheen said.

Some observers said without reliable data it is hard assess the performance of banks and the SBA in getting funds to the companies that need it most.

“We are seeing Congress really pushing to enforce this,” said Renee Johnson, senior government affairs manager at Main Street Alliance, a network of small-business owners. “And now more than ever we really do need these reporting requirements, with these banks and an agency that’s supposed to be bipartisan. … There’s no accountability or reporting as to how they are doing their loan program.”

After the Paycheck Protection Program was first rolled out, there were reports that banks’ larger, more profitable clients were being prioritized over smaller businesses.

Ashley Harrington, federal advocacy director at the Center for Responsible Lending, said the initial design of the program disadvantaged minority-owned businesses.

“If you are a bank, it makes more sense for you to prioritize bigger loans, bigger payrolls, for the larger businesses than the smaller businesses,” Harrington said. “So the incentive structure of the program did not incentivize lenders to work with really small businesses and people of color.”

Fischer added she fears that minority-owned businesses “threw in the towel” because larger businesses were receiving “concierge” treatment.

A spokesperson for the SBA said the agency “is committed to ensuring that PPP loans reach minority-owned firms.” The spokesperson also noted the SBA and Treasury announced that $10 billion of the PPP funding would be dedicated to community development financial institutions in order to better reach minority-owned businesses.

Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, said the set-aside was helpful but should have been included when the program was first launched.

“We were glad that they made that announcement,” Van Tol said. “That was a good step forward. I do think that something on that order should have been done at the beginning. I think CDFIs are smaller, mission-driven lenders, who would have been very helpful."

However, small-business advocates said the community development institutions may not be in the best position to handle PPP loans.

“The CDFIs, while they are good, many of them are underserved themselves,” said Renee Johnson, senior government affairs manager at Main Street Alliance, a network of small-business owners. “Many of them need broadband assistance especially in rural communities. Some people are 100 miles away from their local CDFI.”

Fischer agreed. "Most CDFIs don’t have a lot of staff; they don’t have technical staff or lawyers," she said.

Consumer and small-business advocates say the Consumer Financial Protection Bureau could also have addressed demographic data issues had Section 1071 of the Dodd-Frank Act been implemented. The provision requires lenders to compile and submit information to the CFPB on credit applications for women and minority-owned businesses.

“If we had that data and the CFPB had implemented 1071, then there could have been work done to see where the gaps were,” said Paulina Gonzalez-Brito, executive director of the California Reinvestment Coalition, which sued the CFPB to finalize the rule.

Wexton said her office will consider pressing the CFPB to collect the data, but that she has “not found the CFPB to be particularly accommodating when it comes to assisting historically disadvantaged communities, not under the current administration.”

A spokesperson for the CFPB said the agency hopes to finalize the minority lending data collection section of Dodd-Frank by September.

“Director [Kathy] Kraninger has been committed to finalizing the rulemaking required by Section 1071 of the Dodd-Frank Act, including putting the rule on the Bureau’s regulatory agenda formally,” the spokesperson said. “The bureau is on track to release an outline of proposals in September and to convene a [Small Business Regulatory Enforcement Fairness Act] panel in October. Through the SBREFA process, the Bureau will hear from small entities about the costs and benefits of the proposals before it issues a proposed rule for public comment.”

At the Senate hearing Wednesday, Carranza noted that roughly $130 billion in funds for PPP loans are still available.

But Fischer said minority-owned businesses may be hesitant to request these loans out of fear they may not be forgiven.

“This is all to say there is still a pot of money that hasn’t been lent out yet … and we need to figure out how to get that money to the businesses that need it most, but, unfortunately, we are now how many weeks into the lockdown?” Fischer said. “And most small businesses, according to the data I have, have already burned through their financial cushion, so do they even want to borrow this money with the strings attached to it?”

Petrou said the concerns about minority-owned business access to PPP funds could elevate the issue of racial inequality in the financial system.

“It is really time to evaluate the infrastructure of American finance, and identify why, not just lending, but sustainable, affordable lending is so hard for all lower- and moderate-income people, as well as very small businesses to come by,” Petrou said. “The United States financial system has become incredibly unequal in many ways.”

This article originally appeared in American Banker.
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Paycheck Protection Program CDFIs CARES Act Coronavirus SBA Treasury Department CFPB Racial Bias Women in Banking