ImpactAlpha, April 9 – When President Trump gathered bankers for a video conference about financial relief for small businesses, CEOs of Goldman Sachs, Bank of America, Citigroup, Wells Fargo and other big banks skirted responsibility for the slow start of the federal stimulus package’s Paycheck Protection Plan, or PPP.
A less familiar face, Southern Bancorp’s Darrin Williams, told the president that while bigger banks were still waiting for details, his bankers had processed $16 million in Paycheck Protection Program loan applications on Friday, the program’s first day. Bank of America’s average PPP loan size was roughly $180,000; over the weekend, Williams and his team processed an $8,000 loan for an African American-owned radio station and a request for less than $2,000 from a small photography studio in northeast Arkansas.
“That may seem very small to you,” Williams told the president. “But it’s a lifeline for the employees of that small business.”
With $1.5 billion in assets and 43 branches in Arkansas, Mississippi and other southern states, Little Rock-based Southern Bancorp is demonstrating the critical role of community development financial institutions, or CDFIs, in getting relief to the most vulnerable small businesses that big banks and federal aid programs are struggling to reach. These organizations can be banks, credit unions or loan funds that make at least 60% of their loans in low-income markets.
Williams and a growing chorus of advocates are calling for a carve-out for CDFIs in the next relief package, which could be put to a Congressional vote as soon as this week.
“Big banks don’t do well in providing capital in underserved communities” that are disproportionately affected by the health and economic ravages of the coronavirus, Williams told ImpactAlpha. “I’m pushing for communities of color, rural communities, markets without Internet access.”
The value of the nationwide network of CDFIs is becoming increasingly apparent as the Small Business Administration and other agencies race to rescue the chaotic rollout. Nearly all participating lenders have been swamped with applications in the program’s first few days. By Monday morning, lenders had already processed 124,000 loans totaling $36 billion.
Treasury Secretary Steven Mnuchin has called for another $250 billion in small business assistance.
“The expertise and experience of CDFIs will be crucial,” Goldman’s David Solomon told the White House. “They provide the reach that is needed – to rural areas and big cities, underserved areas, and importantly, to the many businesses who don’t have a relationship with the traditional banking system.”
That the PPP is off to a rocky start is not surprising given the urgent scramble to launch it. “The SBA did $30 billion in guarantees in all of 2019,” says Williams, “and we’re trying to jam through $350 billion in a few months.”
Eligible CDFIs were ready to move quickly. Weeks before the federal government cobbled together a relief package, CDFIs and other community-based lenders had quickly moved to support local businesses with emergency loans and deferrals on existing loans. The work of these “financial first responders” has been “heroic,” says Jennifer Vasiloff of Opportunity Finance Network, which represents 280 CDFIs across the country.
Solomon urged the SBA “to provide a designated tranche” of the next small business relief for CDFIs and other mission driven lenders. Goldman itself has committed $500 million for CDFIs. Bank of America is offering $250 million in capital and $10 million in philanthropic grants to CDFIs. Separately, Google is partnering with Opportunity Finance Network to provide $125 million of debt capital from its corporate treasury and $5 million in grants to CDFIs.
Local funds able to reach businesses outside the mainstream banking system also are seeing huge demand. AltCap, a CDFI in Kansas City, fielded more than 600 loan requests totaling $30 million in 72 hours for its $5 million COVID relief fund.
Chicago’s $100 million Small Business Resiliency Loan Fund, reports the Nowak Metro Finance Lab, received applications for more than $215 million in the first four days after launching on March 31st. Local funds in Indianapolis and Birmingham are each oversubscribed by more than two hundred percent.
The network of locally-focused government, financial, philanthropic, and business entities have become what the Finance Lab’s Bruce Katz has called a “parallel system” for addressing the urgent needs of underserved small businesses. Katz and his team are calling for a $50 billion Main Street Emergency Act “to augment local relief funds with federal resources and open up an additional tool in small business relief.”
Rodney Foxworth of Common Future said many nonprofit business support providers that directly help communities and entrepreneurs are excluded from the federal relief programs because they are outside both the banking and CDFI networks.
“While the big banks have a role to play in small business recovery, they cannot be the only partners,” Foxworth told ImpactAlpha. “Government needs to invest directly into the regionalized and localized networks of community development financial institutions, community lenders, small business technical assistance providers, and entrepreneur support organizations with a strong track record and history of prioritizing and serving communities of color.”
These community-proximate organizations are critical for reaching vulnerable communities of color already on the wrong side of the racial wealth divide. “People of color were already living in the margins of our economy and COVID-19 is amplifying racialized disparities at an even more alarming rate,” Foxworth says.
The CDFI program was designed to mitigate such inequalities, but only a relative few such institutions are able to participate in PPP. The program, the centerpiece of the CARES Act, aims to allocate $350 billion in small businesses loans guaranteed by the Small Business Administration and dispersed via private sector lenders. (The lenders only receive the money if, and when, the borrower’s loan is forgiven). To get funds flowing quickly, the program leans on lenders who are already part of the SBA’s 7(a) lending program. That tends to be traditional banks and credit unions, only a few of which are CDFIs like Southern Bancorp.
In addition, a handful of nonprofit loan fund CDFIs, such as Community First Fund in Pennsylvania, Community Reinvestment Fund in Minnesota and Local Initiatives Support Corp. in New York, also are 7(a) lenders and eligible to participate. But the vast majority of small CDFIs – often the only financial link in their communities – do not currently qualify for the PPP program.
That means one of the strongest channels to reach businesses owned by people of color, and particularly African Americans, can’t participate in the COVID relief program. Last year, just 32% of SBA 7(a) loans went to businesses owned by people of color; just 3% went to African Americans.
The SBA has tried in recent years to expand the reach of its 7(a) lending program into underserved communities with a pilot program called Community Advantage that included 80 or so CDFIs. However, many have reported issues in getting greenlighted for the PPP program in its first week.
That could change with a new relief package being drawn up in Congress that could be voted on as soon as this week. Democrats are calling for half of the $250 billion in small business assistance to be channeled through CDFIs that serve “farmers, family, women, minority and veteran-owned small businesses and nonprofits in rural, tribal, suburban and urban communities.”
“We see a role we can play in getting PPP to those who don’t have a relationship with banks,” says AltCap’s Ruben Alonso. “We’re trying to fill those gaps.”
While CDFIs are helping businesses, many also are worried about their own survival. They lend in predominantly low-income areas to the types of service-oriented businesses that have seen their revenues evaporate overnight. Many CDFIs – which are themselves small businesses – tried to access the PPP program themselves. The rules are unclear: while nonprofits are eligible, lenders are barred via a separate SBA rule.
CDFIs are funded primarily through low-cost loans and the occasional grant made by banks looking to fulfill their Community Reinvestment Act requirements, as well as philanthropic contributions. The Treasury Department allocates capital each year through the CDFI Fund. The allocations have hovered around $230 million or so over the past five years – despite the Trump administration’s repeated attempts to cut the funding altogether. Opportunity Finance Network has called for a supplemental emergency grant allocation of $1 billion to shore up CDFIs own balance sheets to enable them to continue to serve at-risk populations.
Another option being considered: a Treasury facility that would buy up small business loans in order to create liquidity for CDFIs and other small business lenders and free up more capital to make loans.
The new stimulus package underway offers an opportunity to fix some of the flaws in the PPP’s hastily drawn design, and to expand its coverage to individuals and businesses not eligible by the initial round. It’s also a chance to broaden the range of business support providers that can participate.
“This is an opportunity to leverage the relationship and the trust that institutions like Runway Project, Mortar Cincinnati, Boston Ujima Fund, Boston Impact Initiative and others in our network have built,” Foxworth says. “If we really want to have a racial equity approach, we need to include those organizations.”