Summary
The Paycheck Protection Program (PPP) was the largest component of the U.S. economic response to the COVID-19 pandemic, providing nearly $800 billion in emergency relief to small businesses. The program aimed to provide emergency economic relief to businesses and help them keep employees on payroll. As the program was administered, major concerns arose about its potential to exacerbate racial and spatial inequalities by providing economic relief in a manner that mirrored existing inequalities in the ability for businesses to access capital across race and space.
In this analysis, we analyzed PPP lending patterns and found that majority Black and Latinx neighborhoods received disproportionately fewer loans than White and Asian neighborhoods in the first two phases of the program. However, policy changes in the third phase improved targeting to lower-income areas and minority borrowers, particularly in Black neighborhoods, though this improvement was not seen in Latinx neighborhoods.
The research revealed that minority-owned businesses faced barriers to accessing PPP loans, with capital flowing to Black and Latinx neighborhoods in a pattern that mostly followed existing capital flows, resulting in fewer economic relief reaching communities of color controlling for the number of potentially eligible businesses and self-employed borrowers.
Conclusion and Policy Implications
Emergency relief programs relying on existing financial institutions are likely to exacerbate racial and spatial inequalities unless intentionally designed to target disadvantaged communities from the outset, as the changes in Phase 3 attempted to do. Better data on discrimination in small business lending is also needed.
Overall Impact
- The Paycheck Protection Program (PPP) largely adhered to existing capital flow mechanisms, resulting in fewer resources reaching communities of color and low-income neighborhoods.
- During the first two phases, majority Black and Latinx neighborhoods received disproportionately fewer loans and loan dollars, despite having potentially eligible businesses.
- Economically disadvantaged areas, indicated by high poverty concentrations, consistently received fewer resources across all phases.
Notable Shifts in Phase 3
- In Phase 3, there was a noticeable improvement in loan distribution to Black neighborhoods. This suggests that policy changes, such as early access to SBA-approved Community Financial Development Institutions and specialized loan pools for first-time borrowers and very small businesses, were effective.
- However, these changes did not significantly benefit majority Latinx areas, warranting further investigation, particularly in cities like Chicago, which showed a distinct spatial shift in lending patterns from Phases 1 and 2 to Phase 3.
Comparison with Pre-Pandemic Lending Patterns
- PPP lending patterns closely mirrored pre-pandemic residential mortgage lending patterns, with a strong correlation between a tract’s rank in receiving mortgage capital and PPP loans.
- Regions with high levels of spatially segregated economic opportunity and a history of racial segregation showed the highest correlation in lending patterns.
- The documented shifts suggest that policy changes can impact historical patterns of institutional racism and disinvestment.
Limitations
- Direct observation of racial discrimination in the PPP program was not possible due to the manner in which borrower race data was collected. Spatial and economic conditions at the census tract level were used as proxies.
- Inconsistencies in identifying specific lenders across data sets prevented systematic assessment of lending patterns by individual institutions.
- Lack of access to borrowers’ or firms’ creditworthiness data (e.g., credit scores) limited the ability to directly prove lending discrimination.
- Potential selection bias remains in the analysis, even after normalizing for the number of potential businesses and self-employed individuals.
Policy Recommendations
Targeted Credit Access:
Future emergency relief programs should include incentives to target communities of color and minority-owned businesses in the initial phase.Early Inclusion of Diverse Lenders:
The increased lender pool in Phase 3, including Fintech and nonbank lenders with a history of improving capital access in underserved communities, should be utilized from the onset of the program.Better Data Collection:
The Federal government should collect and disseminate better loan-level data on small business lending decisions, similar to HMDA data, to allow for more precise equity assessments and better transparency in lending operations.