Will low-income and communities of color again fall through the cracks of small-business relief?

ImpactAlpha Editor

Amy Cortese

ImpactAlpha, April 23 – Hopes were high in community finance circles that the fresh round of federal small business relief funding would carve out a chunk of the money for low-income and minority-owned businesses. 

The bill that passed the Senate on Tuesday did indeed set aside $60 billion for smaller lenders and “community financial institutions.” But it falls far short of what was hoped for and may not do much to plug the gap for relief funds in underserved communities. 

“We want all businesses to come out okay, but the places we know will be the hardest hit will be the low-income communities and communities of color,” Jeannine Jacokes of the Community Development Bankers Association, a trade group for banks recognized as community development financial institutions, or CDFIs.

The re-funding of the Paycheck Protection Program was a chance to fix some of the problems that arose with the first tranche of $349 billion in small-business relief, which quickly was exhausted earlier this month.

Community advocates and Democrats had called for as much as $125 billion to be channeled to “farmers, family, women, minority and veteran-owned small businesses and nonprofits in rural, tribal, suburban and urban communities” via the Paycheck Protection Program, which provides forgivable loans to businesses with fewer than 500 employees that retain their workers. 

Minority-owned businesses in low-income areas, already on fragile footing before the pandemic, are especially at risk from the nationwide shut-downs. 

And because many do not have banking relationships, they were largely locked out of the first tranche of funding, even as corporations like Ruth’s Chris Steakhouse, ShakeShack and real estate investment trust Ashford Hospitality Trust scored 8-figure loans. 

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The best way to reach these small businesses is through lenders such as CDFIs that serve predominantly low-income communities. But they, too, were mostly cut out of the PPP program.

“It’s more like a hunting license,” said Jacokes of the new bill. “Having CDFIs in the hunt will increase the prospects, but they’ll be competing with a lot of other folks that might not have the same orientation towards underserved communities.”

Fine print

The new bill allocates a fresh $310 for PPP.  Of that, $30 billion is earmarked for mid-sized banks, credit unions and insured depository institutions with between $10 billion and $50 billion. Another $30 billion will be channeled through “community financial institutions,” a catch-all category of financial institutions with less than $10 billion in assets. In addition to CDFIs, it includes banks, credit unions, minority-owned banks, community development financial institutions, micro SBA lenders and community development corps.  

All but 3% of banks have less than $10 billion in assets, as do nearly all credit unions. Just 140 of the more than 5,000 banks are CDFIs. Those organizations will have to compete with financial institutions that don’t have the same mandate to make loans in underserved communities. “Community banks will use most of these PPP resources,” predicts Jennifer Vasiloff of Opportunity Finance Network, which works with CDFIs.

CDFIs can be banks, credit unions or loan funds and must make at least 60% of their loans in low- or moderate income areas. The broader category of “community financial institutions” may reach into communities that big banks do not, but most do not have any particular mission to serve businesses owned by blacks, hispanics, Native Americans, women, veterans or low-income individuals, as CDFIs and some minority-owned banks and lenders do.

Darrin Williams, Southern Bancorp

One example: Denver-based Native American Bank, a $125 million CDFI, has made nearly $16 million of PPP loans to Alaska Native and Native American communities. In the first 13 days of the PPP program, the bank took processed as many loans as it typically sees in a year, says Native American Bank’s Tom Ogaard.

Limited access

The legislation also does not change the eligibility requirements that might allow more CDFIs to participate in PPP.  Initial lenders were limited to established Small Business Administration lenders. And new applicants had to meet a threshold of $50 million in annual business loans to be considered, ruling out most CDFI loan funds. 

Even the small number of non-bank CDFIs participating in the PPP are at a disadvantage: they’re not eligible to borrow funds from a Treasury program designed to provide liquidity to PPP lenders. That limits their ability to lend. Groups such as OFN have written to the Federal Reserve requesting changes, to no avail. 

It adds up to a missed opportunity to direct capital through established channels to help underserved communities. 

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The new PPP funding “is a band-aid on a flawed program,” says Small Business Majority’s John Arensmeyer. Even with the $30 billion set-aside, he said, it will do little to “satisfy the massive need of the smallest and underserved businesses – specifically businesses in communities of color and women-owned and rural businesses.”

The House of Representatives is expected to vote on the bill today. In addition to replenishing PPP funds, it includes $75 billion for hospitals and $25 billion for coronavirus testing, but no money for increasingly strained states and cities, as Democrats had pushed for.

PPP lenders have continued taking applications even after the initial program ran out of funds on April 16. Some. 1.6  million applications have been submitted since then, creating a massive backlog that will be unleashed when the program resumes as soon as Friday. The new $310 billion in funding is likely to be exhausted even faster than the first round – possibly in a matter of days.

Community advocates are now looking to the next round of relief to prioritize low-income communities and communities of color. “That’s what the next package needs to do,” says Jacokes.