Treasury encouraged banks to prioritize PPP loans for existing clients, hurting minority and women-owned small businesses, House report says – CNBC

The Treasury Department privately encouraged banks to prioritize existing clients when implementing the federal government’s Paycheck Protection Program, which provided coronavirus relief to small businesses, according to a report Friday from a House oversight panel.

The Trump administration’s directive to favor existing clients in PPP lending decisions disproportionately hurt minority- and women-owned business, the Democratic-led Select Subcommittee on the Coronavirus Crisis said in its report.

“As a result, small businesses that were truly in need of financial support during the economic crisis often faced longer waits and more obstacles to receiving PPP funding than larger, wealthier companies,” the congressional panel said in a statement. 

Congress established the PPP as a part of the CARES Act, designed to provide forgivable loans to small businesses and nonprofit organizations to help them weather the Covid-19 pandemic and preserve jobs. The Small Business Administration relied on banks and other private lenders to process the funds.

Documents obtained by the subcommittee revealed that the Treasury told banks to “go to their existing customer base” when issuing loans, according to an email sent by the CEO of the American Bankers Association, Rob Nichols, to the group’s board of directors on March 28.

“From early on there was an understanding from Treasury that banks were working with existing clients,” Jennifer Roberts, a senior banker at JPMorgan Chase & Co, told the subcommittee in July, according to the report.

Nichols said in a statement Friday that the House panel’s report missed key context in its assessment of banks’ involvement in the PPP program.

“Banks of all sizes were always encouraged by the administration to process loans for both new and existing customers at the onset of the PPP program. They were also encouraged to start processing loans as quickly as possible to support the deteriorating economy,” Nichols wrote.

“To achieve that goal, many banks processed applications from existing borrowers first since they already had the necessary borrower information needed to meet regulatory requirements, including Know Your Customer rules.”

The congressional panel found, however, that seven of the eight banks involved in its investigation limited PPP lending to existing clients.

This tactic hurt underserved groups, the House panel found. Research shows minority- and women-owned businesses are less likely to have existing relationships with lenders.

An August report by the Federal Reserve Bank of New York found that 41% of Black-owned businesses closed between February and April 2020 — higher than any other demographic group. The New York Fed pointed to “racial disparities in access to federal relief funds,” including “stark PPP coverage gaps.”

In the CARES Act, Congress specified “the Administrator should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets.”

The report concluded neither the Treasury nor SBA offered “meaningful” directives for lenders to prioritize underserved groups, according to financial institutions interviewed by the subcommittee.

The congressional panel also found that several banks in its investigation processed PPP funds for larger commercial clients at a faster rate than smaller loans, offering different channels and levels of assistance for customers depending on the type of customer.

“JPMorgan processed loans above $5 million almost four times faster than loans under $1 million,” the report detailed. “PNC processed loans above $5 million more than twice as fast as loans under $1 million.”

Treasury and the ABA did not immediately respond to CNBC’s requests for comment.

A spokesperson for the SBA said in a statement, “PPP loans have … been broadly distributed, with about 27 percent of the funds going to low and moderate income communities, which is in proportion to their percentage of the population.”

A Republican Select Subcommittee spokesperson said in a statement, “PPP helped support more than 51 million jobs across the country, including tens of millions of jobs in minority and rural communities. Speaker Pelosi and House Democrats have harmed minority-owned small businesses and underserved populations by blocking an extension of PPP nearly 40 times on the House floor.”

The report comes as efforts to pass a new coronavirus stimulus package continue, with President Donald Trump, Treasury Secretary Steve Mnuchin and Senate leaders at odds.