aron betru is managing director of the Milken Institute’s Center for Financial Markets. ragini chawla is an associate at the Center.
Published June 29, 2020
By the end of May, more than 40 million American workers had filed for unemployment as businesses shed workers to slow the hemorrhage of cash. Of that total, at least 6.4 million jobs were lost in enterprises with fewer than 49 employees — organizations disproportionately vulnerable to economic shocks. And while many analysts claim to have spotted a light at the end of the proverbial tunnel, there’s no doubt that the economy remains desperately dependent on federal financial support — and, in particular, on the Paycheck Protection Program, which represents 30 percent of all CARES Act funding.
The PPP offers loans guaranteed by the Small Business Administration that can be 100 percent forgiven, provided employees are kept on the job for 24 weeks and loan proceeds go principally toward payroll and other approved expenses. But with more than 4 million loans totaling $511.5 billion approved as of June 8, what do we know about the impact?
Do we know that the targeted small businesses are, in fact, being reached? Do we know how the firms fare after receiving PPP stimulus funds?
These are not easy questions to answer. Frustrations with the program come from a variety of directions. According to Census data, over half of small businesses are likely to run out of working capital in June, and it’s an open question what portion of the $511 billion will reach them in time to keep the doors open. Banks, for their part, have struggled to meet PPP loan demand in timely fashion, being forced to deal with, among other problems, technological glitches in uploading applications. And with lenders overwhelmed by a host of checks designed to prevent fraudulent use of the cash, the path of least resistance has been to prioritize customers whom they already know over new account holders — who may well be the most in need of rapid relief.
Banks including Wells Fargo, Bank of America and JP Morgan Chase have been sued by applicants who were relegated to the back of the line. Meanwhile, enterprises with ready access to capital, including the publicly traded Shake Shack restaurant chain and Ashford hospitality asset management company, ultimately rejected the loans they technically qualified for through a carve-out for the especially hard-hit industry. Accepting funds from a program marketed for mom-and-pop shops was too great a public relations challenge.
There are a number of factors with unknown impact on the success of the program and small businesses themselves. And, with a second tranche of PPP funding, plus the potential for a more severe wave of Covid-19 in the fall, the largely evidence-free controversy will continue.
Should we create a carbon copy of the current PPP for the possible PPP 2.0 if we don’t have solid evidence of what the loans have accomplished? There is a need to evaluate results from the first road of loans quickly to find out whether they hit the targets. And the next time around, Washington will not have the excuse of lack of foresight.
So, back to the questions: what do we know about PPP effectiveness, and what can be made to ensure it achieves its original intent?
While the necessary rush to repair America’s frayed safety net excuses a multitude of sins in conceptualizing, drafting and administering the programs, we cannot afford to lock in old errors in a second round of funding.
Start with an ancillary reality: U.S. efforts are unlike those of other developed countries, including Singapore, the United Kingdom and Canada, which structured their relief measures to be delivered directly to affected populations rather than via banks. Are banks really the right conduit? The evidence to date is inadequate to judge.
But the core issue is really: what have we accomplished in deploying more than half a trillion dollars? The CARES Act that funded the PPP established the Pandemic Response Accountability Committee (PRAC), whose responsibilities include keeping businesses that take PPP loans on the straight and narrow. But the PRAC, like the Recovery Accountability and Transparency Board that oversaw nearly $800 billion in stimulus spending after the 2008 financial crisis, is focused on anti-fraud efforts; it lacks a mandate to assess the greater question of whether the program is succeeding in preserving small businesses — and the livelihoods of their workers — that would otherwise have sunk.
Thinking ahead to the next round of PPP loans, one potential pitfall is well understood: the Equal Credit Opportunity Act passed decades ago (1974) prohibits data collection for consumer and commercial credit on the basis of race, color, national origin, religion, sex, marital status and age. Banks are using this prohibition as a rationale for limiting data collection on loan applications, thereby potentially reinforcing unconscious bias that perpetuates past discrimination. Adding to these woes, plans to meet data-collection requirements for small businesses under Section 1071 of the Dodd-Frank Act (2010) have been delayed by a number of issues including the perceived cost of data collection requirements for community lending institutions, not to mention the more than 40 conflating definitions of small business that may apply.
Putting the Pieces Together
After reviewing a series of established reporting requirements, we have put together a detailed framework for monitoring the impact of the PPP that can only be summarized here. Note that, while this framework aims to understand outcomes, there are plainly other factors that influence the health of small businesses, such as the way the reopening of the economy is being phased in, the incentives employees face in choosing work over unemployment compensation and the timing of the disbursement between the two rounds of funding under the PPP. But this is a start.
At the bank level, data collected should include the amount and value of PPP loans, the time gap between applications and disbursements, the size of lenders and the percentage of PPP loans forgiven. At the borrower level, data indicators collected should include the following: borrower and lender relationship, geographic detail of borrowers, sector/industry and age of the small business, number of full-time staff, business cash position, credit options, revenue, proportion of loan used for payroll, racial and gender demographics of small business leadership and borrower engagement with other CARES Act programs like Main Street and Economic Disaster Injury loans.
A potential impact-metric framework can be applied in a few ways. First, these data can be culled by banks during the loan forgiveness process; this nullifies the issue of fair lending as well as defining “small business” since it is determined by the PPP definition. The Loan Forgiveness application for borrowers to be completed by October 31 was released by the SBA and Treasury on May 15, with only four of our framework’s indicators required. Demographic data are in the form, however, the Secretary of Treasury noted he recommended that provision of demographic data be optional.
This is a missed opportunity. The forgiveness procedure, to be completed just months from now, could have been a great time to collect this information. That said, the forgiveness application does require the borrower to “understand, acknowledge, and agree that SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan and for loan forgiveness.” And the Treasury has repeatedly noted that the SBA reserves the right to review a PPP loan at any time at the agency’s discretion. So perhaps there is still a way.
A second mode of data collection that would cut the cost to banks might make sense here. A third-party entity could certify the borrower-specific data, and once a borrower’s loan receives this certification, the loan could be evaluated by the SBA. The third party could work directly with the SBA to compile and evaluate the information.
Playing for Keeps
The very fact that a bitterly divided Congress was able to write and pass the multi-trillion dollar CARES Act in a few weeks reflects the seriousness of the crisis. But while the necessary rush to repair America’s frayed safety net excuses a multitude of sins in conceptualizing, drafting and administering the programs, we cannot afford to lock in old errors in a second round of funding. The pace of the recovery and both the reality and perception of the fairness of the aid effort — not to mention the political stability of the republic — may all turn on our success in learning from the past.