Washington, DC – Last night Congresswoman Yvette D. Clarke (NY-09) led a letter to House Leadership urging Paycheck Protection Program (PPP)-reform to better direct funds to the small businesses most acutely impacted by the coronavirus pandemic. The letter states: “This crisis has created an unprecedented economic crisis with over 30 million Americans losing their jobs in just over a month erasing all job gains from the recovery.1 In a period of historically low interest rates, large corporations with access to bank loans and the capital markets have optionality in their battle to stay afloat. Small businesses, on the other hand, do not have such flexibility as they operate on smaller margins that cannot similarly accommodate unexpected disruptions in business.”

After two rounds of PPP funding, the evidence suggests that large financial institutions have failed to equitably distribute loans to the businesses most in need. Instead, they have continued to lend primarily to their largest, most lucrative clients. Large financial institutions have a vested interest not to lend to local small businesses when they have more lucrative alternatives. Writing a single $10 million check to a large national food chain generates the same volume as 100 loans to small local restaurants with the added benefit of fostering a relationship with a valuable client. As long as this is true, in the absence of further regulation the large banks will continue to lend heavily to their concierge clients regardless of whether or not that crowds out lending to smaller borrowers.

The letter urges Leadership to include language in forthcoming stimulus legislation requiring:

• A carve out of funds for loans exclusively for businesses with less than $1 million in annual revenue;
• A carve out of funds for loans exclusively for businesses with fewer than 50 employees; and
• Streamlining the application process for small businesses that do not have the logistical capacity to compete with better resourced large businesses that had millions of applications prepared before the second round of funds were released crowding out their smaller competitors.

The scant reporting made available by the SBA shows the urgent need for this regulatory reform. While over 70% of approved loans have been for amounts under $50,000, these loans only account for approximately 16% of distributed PPP funds. However, over 45% of PPP funds went to loans over $1 million accounting for a select 0.07% of borrowers. Put another way, the banks provided more federally-backed credit to their largest 7,500 clients than they did to over 1.5 million small businesses teetering on the edge of collapse. We must take decisive action now to ensure that the big banks cannot similarly siphon off the next tranche of PPP funds solely to their most lucrative clients.

Clarke said: “As we do all that we can to respond to this unprecedented crisis, we cannot allow the urgency of the moment to distract us from what is happening on the ground. Congress designed the Paycheck Protection Program to give small businesses across the country the opportunity to keep their employees on staff and stay above water throughout the crisis. Instead of providing the assistance the public requires to stay afloat, large financial institutions have used the program as a veritable printing press for free money with no consideration for those in need. We must restructure the program to both give large financial institutions an explicit mandate to lend to small businesses as well as streamline the process to give local businesses a fighting chance to survive.”

The letter was also signed by Representatives André Carson (IN-07), Gil Cisneros (CA-39), Angie Craig (MN-02), Eliot Engel (NY-16), Adriano Espaillat (NY-13), Eleanor Holmes Norton (DC-AL), Hakeem Jeffries (NY-08), Carolyn Maloney (NY-12), Grace Meng (NY-06), Alexandria Ocasio-Cortez (NY-14), Jamie Raskin (MD-08), Jan Schakowsky (IL-09), Darren Soto (FL-09), Adam Smith (WA-09) and Jackie Speier (CA-14).

The full letter is available here and below:

May 12, 2020

Dear Speaker Pelosi and Leader McCarthy:

We write to urge you to include language in any upcoming stimulus legislation establishing additional protections leveling the playing field for small businesses with respect to the Paycheck Protection Program (PPP). The current structure of the loan program can be improved to ensure lending to the small businesses most at risk of financial ruin as a result of the COVID-19 pandemic, and not just those with existing lending relationships at major financial institutions. We applaud recent efforts from leadership to leverage the lending capabilities of community lenders to best target small businesses in areas historically neglected by the large banks. Legislative initiatives like this will promote a more equitable distribution of federal funds, but large banks will not fundamentally alter their business model in the absence of a more explicit directive from the federal government. Small businesses will only have an opportunity to access PPP loans if we couple lender-based requirements with analogous borrower-based requirements to guide private lender decisions. To do so, the next iteration of PPP should specifically allocate funds for borrowers with less than $1 million in annual revenue, as well as borrowers with fewer than 50 employees.

The coronavirus pandemic and the necessary social distancing policies have pushed smaller businesses to the brink of financial ruin. This crisis has created an unprecedented economic crisis with over 30 million Americans losing their jobs in just over a month erasing all job gains from the recovery. In a period of historically low interest rates, large corporations with access to bank loans and the capital markets have optionality in their battle to stay afloat. Small businesses, on the other hand, do not have such flexibility as they operate on smaller margins that cannot similarly accommodate unexpected disruptions in business. Nearly a quarter of all small businesses have already shut down operations temporarily with an additional 40% saying they are likely to do so in the next two weeks. One survey of small business owners and entrepreneurs reported two-thirds of small businesses may close their doors permanently if the coronavirus pandemic continues over the next several months. With experts saying social distancing protocols may need to remain in place through May and potentially even longer, this could mean as many as 7.5 million small businesses risk closing permanently due to the financial trauma caused by the virus. Rather than allowing large banks to cater to the select number of businesses they have the most lucrative relationships with, we must use all tools at our disposal to direct money to historically underbanked communities.

Unfortunately, the small businesses most in need of federal funds have faced a number of unnecessary obstacles to receiving them. Large lenders have largely failed to do their part to promote the equitable distribution of PPP funds by using discriminatory lending practices. Many of the large banks only extended credit to businesses with preexisting relationships with the lender. The lack of clarity around the program coupled with the understandable haste of the rollout placed smaller businesses with fewer resources available at an even greater structural disadvantage to their larger counterparts. Sole-proprietors and other 1099 filers were unable to apply for PPP-loans until April 10^th only days before the first tranche of funds were exhausted. Going into the second round of funding, the five largest banks in the country had over a million applications prepared effectively crowding out smaller lenders. Considering the limited number of funds available for the program, small businesses without an established relationship with a large bank likely have no substantive opportunity to take access PPP loans. Coupled the divestment of large financial institutions from low-income communities, this means the small businesses in communities most acutely impacted by the coronavirus pandemic have been disproportionately excluded from the program. Such an uneven distribution of federal funds will only work to further entrench preexisting socioeconomic inequality by providing aid to those that have the resources to afford it and doom underbanked small businesses already teetering on the precipice.

Explicitly setting aside funds for some kinds of small businesses will mandate large banks lend to those most in need. Large financial institutions will always have a vested interest in directing government guaranteed loans to their largest clients. Directing these loans to large financial institutions has the dual benefit of lending to clients that can take on larger, more lucrative lines of credit while simultaneously providing these clients with access to capital at a lower rate than they could in the private market. Public information shows that over 300 publicly traded companies accessed over $1 billion in PPP funds with nearly half of all funds going to loans over $1 million largely crowding out local small businesses without access to concierge banking services. Evidence suggests that while CDFIs have excelled at lending to historically underbanked communities, large lenders have largely disengaged entirely from these populations creating a dearth of opportunity to access credit. Leadership has already taken the critical step of setting aside $60 billion dollars for small lenders such as these, which will help better distribute funds to small businesses. Similarly allocating funds for lenders to extend credit to small businesses based on revenue or size will help direct funds to the mom and pop small businesses that make up the backbone of our economy.

With this in mind, we implore you to include the following provisions in any upcoming stimulus package that amends the Paycheck Protection Program:

1. Allocate funds for lending to small businesses with less than $1 million in annual income;

2. Allocate funds for lending to small businesses with fewer than 50 employees;

3. Streamline the application process to facilitate the application process for small businesses in financial jeopardy by easing requirements such as lowering the administrative burden by easing certain documentation requirements – such as by allowing small businesses who have not yet prepared 2019 financial statements in light of the deadline extension to apply with their 2018 tax filing and allowing freelancers to apply for loans with personal banking relationships rather than solely business banking relationships.

We can only guarantee that lenders will extend credit to the small businesses most in need by legislatively mandating that they do so. As a matter of first principles, even though the funds will flow through private lenders, the lending must serve the general public – not only the most lucrative clients for the largest banks. Failing to take the necessary steps to hold private lenders accountable will not only allow them to take advantage of the system, but it will also undermine the effectiveness of the CARES Act in responding to our current financial crisis. By creating dedicated PPP funding allocations for small businesses with revenue under $1 million or less than 50 employees in upcoming stimulus legislation, we can ensure the most vulnerable enterprises, which lack the lending relationships or capabilities of larger small businesses, are not left behind by the Program.

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Yvette D. Clarke has been in Congress since 2007. She represents New York’s Ninth Congressional District, which includes Central and South Brooklyn. Clarke is Vice Chair of the Energy and Commerce Committee and is a member of the Homeland Security Committee.