Federal Reserve Bank of Cleveland Sees Unequal Distribution of Payroll Protection Loans in LMI Regions

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Loans made through the Small Business Administration Payroll protection program did not infiltrate low- and middle-income communities in the same way as higher-income areas, according to new research this week. from the Federal Reserve Bank of Cleveland

Equal participation in the program to stimulate job protection among LMI regions and minorities, which tend to be more prevalent in LMI communities, has long been a problem for pro-lending advocates, as Crane investigated. in this article last summer.

The Fed uses geocoded data associated with census districts in its study examining PPP loans in regions dominated by blacks, Hispanics, Asian Indians, American Indians, or Alaska Natives. In particular, it focuses on small businesses with fewer than 50 employees, the “vast majority” of small businesses by volume, the report said.

Based on this information, the researchers found “significant unevenness in coverage” in the program.

Part of the problem with truly defining the extent to which minority groups and businesses in LMI regions have participated in PPPs stems from the lack of data collected by the SBA. For example, the applicant is not required to indicate their race or gender.

In a sense, this can be considered a good idea: if someone indicates their ethnicity, they may fear to be at greater risk of racial discrimination while processing their application. At the same time, however, the lack of such data makes it impossible to truly measure the participation of minority groups.

“Unfortunately, it is difficult to assess the scope of the program because the data on PPP loans does not contain the necessary statistics, including the size of the firm or financial position of the owner, race or ethnicity,” the report says. “This makes it difficult to compare across income groups or by race or ethnicity of business owners.”

Yasmin Farahi, Senior Policy Advisor Responsible Lending CenterCrain’s said last year that collecting such information should be required by law, similar to how racial demographics are collected in neighborhoods through the Housing Mortgage Disclosure Act.

The authors of the Fed report say that the fact that not all of this data was collected is “not surprising” because the SBA tried to withdraw funds as quickly as possible using simplified requests.

The Fed also notes that PPPs had better coverage rates in LMI communities than conventional small business loans.

However, the researchers report the following: We found that PPP loans reached businesses in the United States in communities of all income levels, but were unevenly distributed. Regions with a high level of income received significantly more loans. This even applies to the number of businesses in communities with different income levels.

SBA Regional Representative Andrea Rocker noted that the SBA has made several changes to PPPs in response to concerns about fair access, including: allowing a 14-day application period from February to March for businesses and nonprofits with fewer than 20 employees; revising the PPP financing formula to provide better support to sole proprietors, independent contractors and eligible self-employed persons; removal of some restrictions on the participation of persons with a specific criminal record; allowing those who delay federal student loan payments to apply for a PPP loan; clarification that individual taxpayer identification numbers can be used as an identifier for the business owner.

She noted that the SBA has committed $ 1 billion to non-employee businesses in LMI areas, which often include cleaning services, home renovation contractors, independent retailers, and personal care businesses. The SBA also worked with community partners to expand stakeholder engagement, she said.

However, the SBA did not immediately understand why there seems to still be an unequal distribution of PPP loans in the LMI communities, as reported by the Fed, despite these various efforts.

“Census sites with a majority of Blacks, Hispanics, Native Americans or Alaska Natives received fewer PPP loans on average,” the Fed report concludes. “The uneven coverage of this key program points to the need for other ways of supporting these communities to support equity in federal assistance to entrepreneurs during and after the pandemic.”

You can find the full report titled “How well did PPP loans reach low and middle income communities?” – here.

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