CNE: SBA Emergency Loan Program Shortchanges Puerto Rico
Anemic PPP, Lenders Largely Fail to Cover Covid-19-Battered Small Businesses; More Equitable Program Needed
By Deepak Lamba Nieves, Raúl Santiago Bartolomei, Malu Blázquez, Rosanna Torres, Nuria Ortiz, and Sergio Marxuach
At first glance it would appear 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 approved 2,856 loans in an aggregate amount of $658,573,638. The average loan amount was $230,593, some $24,572 higher, or 12 percent, than the PPP average loan amount of $206,021.
However, when we analyze Puerto Rico relative to other states, it appears the performance of Puerto Rican lenders was deficient. In 2019, the relevant year for analysis, there were 44,422 businesses in Puerto Rico with less than 500 employees and approximately 120,000 persons who were self-employed. Puerto Rico today has approximately 1 percent of the population of the United States, yet it received only 0.17 percent of all loans by count and 0.19 percent by amount under the PPP. And, as shown in the graph above, it ranked 52 out of 56 jurisdictions (the 50 states, D.C. and the five territories) in total amount lent.
Furthermore 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. On April 17, Bloomberg published a story by Zachary Mider and Cedric Sam highlighting an analysis of the PPP done by Mr. Ernie Tedeschi, an analyst at Evercore, a boutique investment bank. Mr. Tedeschi calculated the amount of PPP loans approved as a percentage of eligible payroll in order to compare states in relative terms. He calculated the average monthly payroll amount paid by firms with less than 500 employees and multiplied that number by 2.5, the product of which yields the maximum PPP amount allowable under the rules.
We replicated the analysis for Puerto Rico using data from the Quarterly Census of Employment and Wages carried out by the Bureau of Labor Statistics of the U.S. Labor Department. According to our analysis, the eligible payroll amount for Puerto Rico is approximately $2 billion, while the total amount lent in Puerto Rico, as we stated before, was $658 million. Thus, the aggregate loan amount as a percentage of eligible payroll for Puerto Rico is 33 percent.
As shown in the graph below, that puts Puerto Rico second to last behind the District Columbia. This means that qualified employers in Puerto Rico received PPP loans in an aggregate amount to cover only one-third of all eligible payroll expenses, while firms in Nebraska, for example, received enough cash to cover 82 percent of the state’s eligible payroll. Given those statistics it is hard not conclude that someone dropped the ball in Puerto Rico.
These findings highlight the uneven distribution of PPP loans throughout the fifty states, the District of Columbia and Puerto Rico. Mr. Tedeschi offered some theories to explain those disparities:
“One was that regions hit harder by the virus, or that had the earliest lockdowns, may have had more trouble getting lending started. Another was that more businesses in hard-hit states may not have applied because the program isn’t enough to make a difference for them. Tedeschi also floated the possibility that businesses in some states had better pre-existing relationships with community banks that were able to get applications submitted quickly.”
Clearly further research is necessary to determine the causes of the highly uneven distribution of PPP loans. However, the authors of the Bloomberg story also noted an interesting pattern 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. Now, it is not possible to conclude, with the data available, that there was a political bias in the approval of PPP loans. But the pattern surely deserves further investigation and analysis.
Overall program flaws
U.S. lawmakers expected PPP to provide temporary economic relief to small businesses and nonprofit organizations suffering from the economic fallout due to Covid-19. But simple math demonstrates the money was never going to be enough. Instead, its first-come, first-served structure created a rat 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 (payroll costs for 2.5 months) the $349 billion in initial funding would not be enough to satisfy the needs of other applicants. Money would eventually run out (and it has). Who would benefit most? Who would be left out? Those are the numbers we are beginning to see.
Finally, the Congressional intent was for the appropriated money to flow quickly to small businesses, so the application process was to be, at least in theory, flexible and expedited, requiring only basic, really minimal, credit and background checks. In exchange for that, and filling out some papers, lenders were authorized to charge fees of up to 5 percent of the loan amount. The fee percentage was set to decline if loan amount increased above certain thresholds.
The rollout of the PPP had some glitches. The Treasury Department was late in issuing the guidelines and rules for the program. It took banks some time to understand the new rules, implement internal systems for receiving and processing applications, as well as to disburse the funds in compliance with the PPP rules. Borrowers in many instances were not familiar with the requirements or faced problems submitting applications to their banks. According to some press accounts many borrowers never heard back from their lenders until it was too late and it appears thousands of applications were never even properly considered.
Large businesses, states favored
Notwithstanding the implementation problems with the PPP, the approximately $350 billion in funding for the program was exhausted in less than two weeks, which is good, given the state of the economy. It also underscores one of the structural problems with PPP: it was severely underfunded from the start and demand far outstripped supply.
According to data published by the SBA, as of April 16, 2020, some 4,975 lenders had approved 1,661,367 loans in an aggregate amount of $342,277,999,103. The average loan amount was $206,021. Seventy-four percent of all approved loans by count were in an amount of $150,000 and under; while approximately 45 percent of loans by amount were in excess of $1,000,000. This means, as shown in the table below, that only 4 percent of all loans accounted for approximately half of the total loan amount approved.
Which leads us to the second structural flaw in the program: there were no guardrails to prevent banks from favoring relatively larger businesses within the small business pool, enterprises that in all probability already had other outstanding loans with those same lenders.
In terms of geographical distribution, as shown in the graphic above, 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 of dollars approved.
Conclusion and recommendations
In the case of Puerto Rico, it is fairly obvious we failed to take advantage of an important federal relief program to the full extent possible. The question is why. To answer that question we will need more information: how many firms applied for loans; how many applications were denied; what is the distribution of the firms that were rejected by number of employees and revenues; what is the distribution of the 2,856 loans that were approved, by count, loan amount and economic sector; and how many of the beneficiaries had pre-existing lending relationships with the lender of the PPP loan.
Until then we just have to conclude the local financial sector failed miserably in Puerto Rico’s hour of need. Keep in mind that local lenders stand to make up to $33 million in fees essentially for conducting a minimal credit analysis, pushing papers, and making a risk-free loan. Which is highly ironic, given that the prevailing discourse in Puerto Rico is that government can’t get anything right. This time around it was a key part of the private sector that failed thousands of small businesses.
Given all of the above we make the following recommendations:
- Congress should extend funding for the PPP, perhaps by an additional $500 billion as has been suggested by Raphael Bostic, president of the Federal Reserve Bank of Atlanta;
- the PPP should be modified to target it better to needy communities, perhaps by setting aside a funding stream for minority-owned businesses;
- the delivery platform needs more guardrails to discourage lender shenanigans to favor their preferred clients;
- Congress should require more transparency from lenders as they receive and process applications; and
- Congress should subpoena documents from SBA and lenders and eventually hold oversight hearings, specifically the House Committee on Small Business Chaired by Rep. Nydia Velazquez; the House Committee on Financial Services, chaired by Rep. Maxine Waters; and the House Committee on Natural Resources, chaired by Rep. 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 Global Think Tank Report of the University of Pennsylvania. CNE’s analyses are sought out by the private and public sectors in Puerto Rico as well as officials in the U.S. Treasury, the Federal Reserve Bank of New York, the White House, and the U.S. Congress.