Archana Pokhrel, owner of Lenox Spa and Nails in Manhattan, doesn’t know when customers will return for the hands-on beauty treatments that stopped when the Covid-19 pandemic struck earlier this year.
Appointments at her four-year old salon dropped in February and her business took a severe downturn in March so she went straight to her bank, Santander, when the federal Paycheck Protection Program launched in April.
But after weeks of waiting without a response, Pokhrel, an immigrant from Nepal, turned to the Business Center for New Americans, a community development financial institution (CDFI) that gave her a loan in 2018 to help the salon. This time, the CDFI provided Pokhrel with a $27,000 Paycheck Protection Program loan.
The worry among CDFIs is whether they will be able to continue their mission of serving low-income and undeserved communities if their funds run dry as they rush to get stimulus loans into the hands of small businesses.
“There’s been nothing offered to directly support the CDFIs’ operations and our ability to protect our borrowers,” said Matt Josephs, senior vice president for policy at Local Initiatives Support Corporation (LISC), one of the largest CDFIs.
Josephs and others are asking Congress to approve $1 billion for the CDFI Fund, which provides grants and other public funding to finance their lending and operations. The amount would be a near four-fold increase from the $262 million appropriated in fiscal 2020.
Mission to Serve
Certified by the Treasury Department, the nation’s more than 1,000 CDFIs provide credit to underserved communities in urban and rural areas. They typically match the public dollars they receive with private funds, which can be as much as 12 times the government’s investment.
Without additional help from Congress, many CDFIs are worried about the stability of their balance sheets and their ability to ramp up financing to the communities and small businesses lawmakers themselves say need special attention in the pandemic.
But even as large companies received high-dollar loans in the early stages of the PPP, many CDFIs and other non-bank lenders that specifically serve minority and women-owned businesses waited on the sidelines to participate in the program.
“There’s clearly a lack of equal access and there needs to be accountability to help the most vulnerable population,” said Luz Urrutia, chief executive officer of Opportunity Fund, a CDFI based in San Jose, Calif.
Black and Latino enterprises have particularly struggled to obtain financing, according to a recent survey conducted on behalf of civil rights organizations Color of Change and UnidosUS. Only 12% of black and Latino borrowers had received PPP or other federal pandemic assistance they’ve applied for, the survey found, while another 21% are still waiting to hear whether they will receive any federal aid.
Just over half of the requests by the minority borrowers surveyed were seeking loans less than $20,000, a range at which many CDFIs are comfortable lending but challenging for many banks to do without taking a loss.
The Small Business Administration didn’t provide guidance to lenders about prioritizing borrowers in underserved markets, the agency’s inspector general said in April. Nor did the program collect applicant demographic data, making it difficult to know if women and minorities are receiving funds, the IG said.
The Treasury and the SBA, which administer the PPP, have tried to address concerns about equal access to funding. The agencies added demographic data entries to the PPP loan forgiveness applications and announced May 28 they would set aside $10 billion of the remaining PPP funds just for CDFIs to access.
While CDFIs welcomed that announcement, those funds won’t go to the institutions themselves. They also won’t do much to support their longer-term work, or other types of financing, advocates say.
“The PPP should not be the only answer, the only remedy that is offered to small business owners dealing with Covid-19 pandemic,” said Jennifer Vasiloff, chief external affairs officer at the Opportunity Finance Network.
Direct Funding Sought
OFN, a coalition of CDFIs, is one of several groups lobbying Congress to provide $1 billion to the CDFI Fund. Not every microbusiness, many of them sole proprietorships, will be able to meet the requirements of the PPP to obtain loan forgiveness, Vasiloff said.
“If CDFIs have more capital at their disposal, they’ll be able to meet those other types of needs,” Vasiloff said.
With many CDFIs unable turn to customer deposits as a source of lending capital, many are likely to see their available capital to lend diminish as PPP loan applications continue to flow in and they wait for the SBA to reimburse them.
Structuring the additional $1 billion as a formula grant, rather than requiring CDFIs to apply to the fund as they typically do, would also be “critical to getting money out quickly,” Josephs said.
House Democrats’ $3 trillion coronavirus response package (H.R. 6800), which passed May 15, 208–199, largely along party lines, included $1 billion for the CDFI Fund.
Senate Republicans have largely rejected the House bill but 37 senators, including two Republicans, sent a letter May 12 to leadership supporting the CDFI Fund appropriation.
The measure has a major advocate with the White House as well. Darrin Williams, chief executive officer of Arkansas-based Southern Bancorp, a depository CDFI, sits on the president’s Banking Economic Revival Industry Group, alongside the CEOs of megabanks like Bank of America, Goldman Sachs, JPMorgan Chase.
Expanding the CDFI Fund has been one of his primary advocacy points, Williams said. “If we don’t reach all sectors of the economy, including women and minority-owned businesses, low wealth communities, then it’s not a full recovery,” Williams said.