Christ Yoder
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Anemic PPP, lenders fail to cover small businesses battered by Covid-19; Need for a fairer program
By Deepak Lamba Nieves, Raúl Santiago Bartolomei, Malu Blázquez, Rosanna Torres, Nuria Ortiz and Sergio Marxuach
An analysis from the Center for a New Economy
At first glance, it would appear that the implementation of the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) in Puerto Rico was a success: according to the SBA, local lenders have approved 2,856 loans for a total amount of $ 658,573,638. The average loan size was $ 230,593, some $ 24,572 more, or 12%, than the average P3 loan amount of $ 206,021.
However, when we analyze Puerto Rico against other states, it appears that the performance of Puerto Rican lenders was weak. In 2019, the year relevant to the analysis, there were 44,422 businesses in Puerto Rico with less than 500 employees and around 120,000 people who were self-employed. Puerto Rico now has about 1% of the population of the United States, but has received only 0.17% of all loans in number and 0.19% in amount under the PPP. And, as the chart above shows, it ranks 52 out of 56 jurisdictions (the 50 states, DC, and the five territories) for the total amount loaned.
Additionally, small businesses in 21 jurisdictions with less population than Puerto Rico – Alaska, Arkansas, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont, West Virginia and Wyoming received a larger aggregate amount of PPP loans than Puerto Rico.
We can also analyze the performance of local lenders using a different metric. April 17, Bloomberg published a story of Zacharie Mider and Cedric Sam highlighting an analysis of the PPP carried out by Mr. Ernie Tedeschi, analyst at Evercore, a boutique investment bank. Mr. Tedeschi calculated the amount of approved PPP loans as a percentage of eligible payroll in order to compare states in relative terms. He calculated the average monthly payroll amount paid by companies with less than 500 employees and multiplied that number by 2.5, the product of which gives the maximum PPP amount allowed under the rules.
We reproduced the analysis for Puerto Rico using data from the Quarterly Census of Employment and Wages conducted by the Bureau of Labor Statistics, United States Department of Labor. According to our analysis, the amount of eligible payroll for Puerto Rico is around $ 2 billion, while the total amount loaned to Puerto Rico, as we previously reported, was $ 658 million. Thus, the total loan amount as a percentage of eligible payroll for Puerto Rico is 33%.
As the graph below shows, this puts Puerto Rico second-to-last behind District Columbia. This means that qualified employers in Puerto Rico received PPP loans in an aggregate amount covering only one-third of all eligible salary expenses, while companies in Nebraska, for example, received enough money to cover 82%. of the State’s eligible wage bill. Given these stats, it’s hard not to conclude that someone dropped the ball in Puerto Rico.
These results highlight the uneven distribution of PPP loans across the fifty states, the District of Columbia, and Puerto Rico. Mr. Tedeschi proposed a few theories to explain these disparities:
“One was that areas hit hard by the virus, or that experienced the first blockages, may have had more difficulty getting loans started. Another was that more companies in hard-hit states may not have applied because the program is not enough to make a difference for them. Tedeschi also raised the possibility that companies in some states would have better pre-existing relationships with community banks who were able to submit claims quickly. “
It is clear that more research is needed to determine the causes of the very uneven distribution of PPP loans. However, the authors of the Bloomberg story also noted an interesting trend in the data: 8 of the top 10 states that received the largest amount of PPP loans as a percentage of eligible payroll are reliably Republican states: Nebraska, North Dakota, Kansas, South Dakota, Iowa, Oklahoma, Mississippi and Montana. However, it is not possible to conclude, with the available data, of a political bias in the approval of PPP loans. But the model surely deserves further investigation and analysis.
General program faults
U.S. lawmakers expected PPP to provide temporary economic relief to small businesses and nonprofits suffering the economic fallout from Covid-19. But simple calculations show that the money was never going to be enough. Instead, its first-come, first-served structure created a mad race for eligible applicants.
It was clear that if each of the 30.2 million small businesses in the United States applied for the maximum loan amount (wage costs for 2.5 months), the $ 349 billion in upfront funding would not be enough to meet the needs of the people. other candidates. The money would eventually run out (and it is). Who would benefit the most? Who would be left out? These are the numbers that we are starting to see.
Finally, the intention of Congress was for the allocated money to flow quickly to small businesses, so that the application process should be, at least in theory, flexible and expedited, requiring only basic, really minimal checks. credit and history. In exchange for this, and by completing certain papers, the lenders were allowed to charge a fee of up to 5% of the loan amount. The fee percentage was to drop if the loan amount exceeded certain thresholds.
The deployment of PPP had some problems. The Treasury Department was slow to release the guidelines and rules for the program. It took some time for banks to understand the new rules, put in place internal systems for receiving and processing requests, as well as disbursing funds in accordance with PPP rules. In many cases, borrowers were unfamiliar with the requirements or had problems submitting applications to their banks. According to some press accounts many borrowers never heard from their lenders until it was too late, and it seems thousands of requests were never even properly vetted.
Large companies, favored states
Despite the problems with implementing the PPP, the estimated $ 350 billion in program funding was used up in less than two weeks, which is good considering the state of the economy. It also highlights one of the structural problems of PPP: it was severely underfunded from the start and demand far exceeded supply.
According to data released by the SBA, as of April 16, 2020, some 4,975 lenders had approved 1,661,367 loans for a total amount of $ 342,277,999,103. The average loan amount was $ 206,021. Seventy-four percent of all loans approved by number were in the amount of $ 150,000 and under; while about 45 percent of loans, in terms of amount, exceeded $ 1,000,000. This means, as shown in the table below, that only 4% of all loans were about half of the total amount of loans approved.
Which brings us to the second structural flaw in the program: there were no safeguards to prevent banks from favoring relatively larger firms within the small firm pool, firms that likely already had other loans. current with these same lenders.
In terms of geographic distribution, as the graph above shows, the results were basically as expected. The bulk of the dollars went to the larger states, with small businesses in California, Texas, Florida, and Illinois receiving the largest amount approved.
Conclusion and recommendations
In the case of Puerto Rico, it is pretty obvious that we have not benefited to the fullest extent possible from a significant federal aid program. The question is why. To answer this question, we will need more information: how many businesses have applied for loans; how many requests were refused; what is the breakdown of rejected businesses by number of employees and income; what is the breakdown of the 2,856 loans that have been approved, by number, loan size and economic sector; and how many beneficiaries had pre-existing loan relationships with the PPP loan lender.
Until then, we need only conclude that the local financial sector has failed miserably in Puerto Rico’s time of need. Keep in mind that local lenders have to make up to $ 33 million in fees basically for doing minimal credit analysis, pushing papers, and making a risk-free loan. What is very ironic, given that the mainstream rhetoric in Puerto Rico is that the government cannot do anything right. This time around, it was a key part of the private sector that caused thousands of small businesses to fail.
In view of all of the above, we make the following recommendations:
- Congress should extend PPP funding, perhaps by an additional $ 500 billion, as has been suggested by Raphael Bostic, chairman of the Federal Reserve Bank of Atlanta;
- PPP should be modified to better target needy communities, perhaps setting aside a flow of funding for minority-owned businesses;
- the delivery platform needs more safeguards to deter lender shenanigans and favor their favorite customers;
- Congress should demand more transparency from lenders when they receive and process claims; and
- Congress should subpoena documents from the SBA and lenders and possibly hold oversight hearings, particularly the House Small Business Committee chaired by Representative Nydia Velazquez; the House Committee on Financial Services, chaired by Representative Maxine Waters; and the House Committee on Natural Resources, chaired by Representative Raul Grijalva, in the case of Puerto Rico.
The Center for a New Economy (CNE) is an independent, non-partisan, non-profit think tank that advocates for the development of a new economy for Puerto Rico. It has been recognized as one of the top think tanks to watch by the University of Pennsylvania’s Global Think Tank Report. CNE’s analyzes are commissioned by the private and public sectors of Puerto Rico as well as officials from the US Treasury, the Federal Reserve Bank of New York, the White House, and the US Congress.
Read the full CNE analysis here.
