Research Supports It: Community Finance Institutions Were PPP Heroes

A body of new research shows what CDFIs have always known: The lender matters when it comes to accessing fair, responsible financing. 

Read time: 6 minutes

Four years ago, COVID-19 nearly broke the backbone of the American economy: small businesses. The pandemic forced them to pivot operations and access new capital to stay afloat.  

Through the experience, many small business owners and entrepreneurs learned what CDFIs have long known: when it comes to capital, your lender matters.  

Among the pandemic’s many lessons about our nation’s inequities, we saw that mainstream finance isn’t designed to serve all. In the early round of the federal government’s landmark Paycheck Protection Program (PPP), which aimed to provide relief to small businesses, too many very small, minority- and women-owned businesses experienced severe difficulties in securing PPP loans from major banks.  

Although community finance institutions — including CDFIs and minority deposit institutions (MDIs) — specialize in serving these customers, they were not included in the program from the outset, which left out many communities PPP purported to serve.  

In the experience, policymakers recognized when you shut out the lender, you also shut out the lender’s customers.

Eventually, after concerted advocacy from CDFIs and others, community finance institutions were recognized for their specialized expertise and offered an expanded role in the program. And CDFIs and MDIs showed remarkable success, outperforming much larger and better-capitalized lenders. 

Since then, industry practitioners, partners, and investors have shared largely anecdotal stories of the outsized performance of CDFIs and MDIs in moving PPP loans to communities mainstream finance leaves behind.  

Now we can back up the anecdotes with research.

Three recently released papers find that the mission lending field not only succeeded in deploying PPP to Black-owned businesses and lower-income communities, but the program also helped the lenders themselves:  

• Bank Types, lnclusivity, and Payroll Protection Program Lending During COVID-19 analyzes the more than 11 million PPP loans made to small businesses to see how the differences among lenders shaped the flow of credit to poor and minority communities. (Authors: Mark K. Cassell, Kent State University; Michael Schwan, University of Cologne; Marc Schneiberg, Reed College) 

• Minority Depository Institutions Paycheck Protection Program (PPP) Lending Insights looks at the performance of MDIs during PPP. (Authors: Anthony Barr and Carl Romer, National Bankers Association Foundation) 

• A View of PPP from the Inside: Financing, Financial Performance, and Operations of CDFI Paycheck Protection Program Lenders examines how PPP affected the boots-on-the-ground lenders that deployed loans — especially smaller mission lenders. (Authors: Brent Howell, Alexander Carther, and Adrienne Smith, Opportunity Finance Network) 

As a body, the research underscores that the lender makes all the difference when trying to reach low-wealth, low-income communities — and mission lenders reach these communities best.  

The papers’ authors discussed the findings during a recent OFN webinar, Community Lenders and PPP: Research and Implications. Here is a brief takeaway of the findings shared in the papers and on the webinar and why they matter for mission lenders, policymakers, and others focused on building an equitable economy.  

Key findings 

• CDFIs champion inclusivity. CDFIs and fintech stood out as inclusive lenders that actively sought to lend in poor and minority, particularly Black and Brown, communities.  Primarily because of CDFIs, PPP evolved from one of the most unequal programs in U.S. history to one of the more inclusive ones. (Bank Types, lnclusivity, and Payroll Protection Program Lending During COVID-19) 

• MDIs responded, and then some. Among depository institutions, MDIs outperformed non-MDI banks in deploying PPP loans and loan dollars to minority and low-wealth communities. (Minority Depository Institutions Paycheck Protection Program (PPP) Lending Insights) 

• CDFIs flexed to meet the moment. OFN members serving as PPP lenders acted quickly and efficiently to implement the program. They scaled up and worked hard to deploy the capital. It was good for the small businesses they helped and good for the CDFIs themselves, which saw an increase in self-sufficiency and net assets.  (A View of PPP from the Inside) 

Why these findings matter  

• Lender is key. Different financial institutions perform differently, and responsiveness to minority and poverty communities varies among bank types. CDFIs were critical to PPP and the inclusivity of the program, scaling up quickly and efficaciously. Mission lenders are a vital part of the financial ecosystem.  

• Policy design matters and CDFIs must stay at the table. As an emergency response program, PPP was atypical in size, scope, design, and pace. PPP lenders had to adjust their standard operating procedures and strategies quickly and efficiently to meet the program’s goals. 
  
  CDFIs’ performance with PPP, from standing up the program during crisis to getting money out the door, demonstrates that CDFIs are a potent tool for responding to the country’s most pressing economic challenges and crisis moments.
  
  Policymakers should explicitly design future fiscal responses to include CDFIs, MDIs, and all mission-driven financial institutions. 
  
  For example, non-depository CDFIs were initially locked out of the Federal Reserve’s PPP liquidity facility, preventing access to critically needed liquidity for CDFIs extending PPP loans. When the Federal Reserve opened the facility to non-depository institutions and loan funds, it enabled the lenders to make low-cost loans to more small businesses and exponentially increase their reach and impact.  
  
  Supportive policies and practices like these should be the norm for the field so that CDFIs, MDIs, and other mission lenders can routinely serve the nation’s smallest and most underinvested businesses and communities. 
  
  
• Potential for long-term benefits. PPP affected OFN members’ performance and operations in FY 2021. The substantial change in unrestricted net assets means that PPP lenders have increased flexibility to lend more or leverage additional capital — all of which is good for mission impact and sustainability. In the short term, PPP provided an essential economic lifeline. In the midterm and long term, it may also enhance the enduring ability of CDFIs to advance their mission. 

• More capital means more impact. More investment into mission lenders will enable CDFIs and MDIs to allocate more dollars where they’re most needed, helping to close the wealth gap and advance economic equity.   

While the need for PPP has abated, the experience demonstrates that mission lenders are pivotal to an inclusive economy.  

Future economic crises loom as climate change and wealth disparities threaten communities with natural, manmade, and other disasters. Mission lenders will remain vital financial first responders in crisis and capillaries of the financial system reaching deep into underserved communities all the time.  

OFN looks forward to seeing more research on the long-term effects of PPP and to engaging in future collaborations with stakeholders and others interested in the efficacy of mission lenders.  

Next, OFN’s research team plans to analyze our PPP lending members’ financing activity, performance, and operations before and after the pandemic. What we learn will help shape our policy advocacy efforts and build knowledge the industry can use to learn, grow, and continue our fight for finance justice.   

Learn More

Hear from the authors: 
Community Lenders and PPP: Research and Implications 

Read the research:  
– Bank Types, lnclusivity, and Payroll Protection Program Lending During COVID-19   
– Minority Depository Institutions Paycheck Protection Program (PPP) Lending Insights   
– A View of PPP from the Inside: Financing, Financial Performance, and Operations of CDFI Paycheck Protection Program Lenders   

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Tags: COVID-19, Paycheck Protection Program (PPP), Research