For Immediate Release
Business coalition criticizes fed agencies on capital access efforts in underserved communities
December 13, 2022—Federal efforts to lift underserved and rural economies have largely failed says a coalition of business organizations, “Reform the SBA: BIGGER Mission, Authority and Resources”.
The coalition, formed in March of 2021, continues its call for the Small Business Administration to start making direct small-dollar loans to startups and microbusinesses in these struggling communities, loans that private and non-profit financial entities do not want to make.
Below are the comments the coalition submitted to a Request for Information from the Interagency Community Investment Committee composed of representatives from Department of the Treasury, Small Business Administration, Department of Commerce, Department of Transportation, Department of Housing and Urban Development, and Department of Agriculture.
“The economies of our underserved and rural communities will grow only if the entrepreneurs in these areas, especially entrepreneurs of color and women, have access to capital to start and grow businesses,” said Frank Knapp Jr., the coalition’s director and president/CEO of the South Carolina Small Business Chamber of Commerce. “Current federal programs are not getting the job done to grow these communities from the bottom up.”
December 9, 2022
Chief Program Officer
Office of Recovery Programs
U.S Department of Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Re: “Community Investment Request for Information Comments”
Thank you for the opportunity to provide comments on how the ICIC (Interagency Community Investment Committee) “can promote economic conditions and systems that reduce racial disparities and produce stronger economic outcomes for all communities”.
Specifically, the request is for public input on “effective approaches for supporting access to affordable capital and financial services in historically underserved communities, including communities of color, rural communities and Tribal communities.”
Two recent observations previously submitted to Federal agencies regarding the Community Reinvestment Act (CRA) are critical to this conversation.
The CRA’s “failure to address racial disparities in lending is inexcusable. The purpose of the CRA, and the worsening of the racial wealth gap since its inception, compel a re-centering of the CRA on its civil rights origins through the implementing regulations,” says the Pacific Community Ventures, the African American Alliance of CDFI CEOs and a host of other organizations in an August 4, 2022, joint proposal.
The CRA “has failed to rectify the impacts of redlining and other practices that have perpetuated the racial wealth and opportunity gap for generations. In fact, the Black-White wealth divide has worsened in recent decades, and according to economists, ‘in the absence of policy interventions or other forces leading to improvements in the relative wealth accumulation conditions of Black Americans, wealth convergence is not only a distant scenario, but an impossible one,’” says a group of organizations “dedicated to achieving inclusive and equitable economic growth” in an August 5, 2022, letter.
The above analysis and criticism specifically refer to the failure of the CRA to address the capital needs in underserved communities through traditional financial institutions in the private banking sector.
However, the analysis and criticism also apply to the shortcomings of other federal efforts, including nontraditional lending using the Community Development Financial Institutions Fund. The goal for lenders using this fund is “expanding economic opportunity in low-income communities by providing access to financial products and services for local residents and business.”
Our coalition of small business organizations, Reform the SBA: BIGGER Mission, Authority & Resources, was formed in March of 2021 to raise awareness and make recommendations regarding the 40-year low in new business startups, a crisis recognized in the U.S. Senate and House bi-partisan “Enhancing Entrepreneurship for the 21st Century Act” introduced in 2019.
While many have lauded the recent historic requests for Federal Employer Identification Numbers (EIN) during the pandemic as a surge in small business development, it remains to be seen how many of these new EIN holders will actually start a “Main Street” business and become part of the nation’s small business economy. Clearly, the dramatic increase in EIN requests was not due to better access to capital for entrepreneurs, particularly entrepreneurs of color and women in underserved and rural communities.
While federal regulations and programs have attempted to improve access to loans for small business startups and microbusinesses in our nation’s underserved and rural communities, the problem persists for two reasons.
First, much of the federal efforts focus on encouraging private money investment. The reality is that small business startup and microbusiness loans, particularly in underserved and rural communities and especially to entrepreneurs of color and women, are simply viewed as too risky and too small for traditional private sector lenders. This is not a criticism of these banks, credit unions and other private lenders. Their capital and human resources are limited and must be used efficiently to maximize return on investment. Even the CRA doesn’t require financial institutions to make risky loans that have a higher potential for being unsuccessful and thus a financial loss for private sector institutions.
Second, Community Development Financial Institutions (CDFIs) and other organizations (ex. SBA microloan organizations) responsible for deploying federal funds to underserved and rural communities are also risk averse and concerned about return on investment (ROI). Their federal funding resources are even more negatively impacted when loans fail. Even those CDFIs now using non-traditional credit-worthiness factors instead of credit scores to assess risk are still very concerned about the ROI. The CDFIs most often conclude that such small-dollar credit-worthy loans that will require significant technical assistance and administration do not deliver their ROI needs. To protect their federal lending capital and meet ROI goals, these institutions most often package their lending with private and foundation funds to make loans that are much larger than the average small business startup loan (approximately $10,000). Our unscientific national survey of CDFI loan funds found that only about 37% of all such funds make startup loans.
For our coalition, addressing the critical issue of startup and microbusiness loans to entrepreneurs in underserved and rural communities also addresses the criticism of the two CRA criticisms mentioned above. Finding a solution to this problem is essential for economically lifting these Americans of color and their communities.
One of the principal recommendations of our coalition is for the SBA to begin making small business loans of under $20,000 directly to entrepreneurs and microbusinesses in underserved and rural communities.
Regardless of federal incentives, private sector traditional lenders do not want to make such loans because of the risk and cost. CDFIs also are reluctant to make such loans because they are also concerned about risk and cost.
The solution to this persistent problem is for the SBA to directly make these small-dollar business loans in underserved and rural communities and thus hold the risk and cost of these loans.
For these SBA direct loans, the SBA should contract with CDFIs that have demonstrated success in providing technical assistance before and during such small business loans. These CDFIs would also administer the SBA direct loans. Such an approach will utilize the expertise of CDFIs while providing them with needed funding to strengthen their organizations.
The criticisms of this recommended SBA direct lending proposal has been twofold.
First, critics claim that this would be the federal government competing with the private sector.
As already discussed, traditional lenders are not making such small dollar business loans in underserved and rural communities especially to entrepreneurs of color and women.
What the traditional lenders actually are concerned about is that such an SBA direct lending program would later be expanded to higher-dollar small business lending. The fact is that neither our coalition, the SBA, nor members of Congress want the SBA to compete with the private sector and would not support such an expanded program. The unwarranted concerns of the banking industry should not prevent a viable solution to the persistent problem of a lack of capital for startups and microbusinesses in underserved and rural communities particularly to entrepreneurs of color and women.
The second argument against this proposal is potential fraud.
Opponents point to fraud in the SBA’s Economic Injury Disaster Loan (EIDL), a program that is direct lending, as proof that the SBA’s “lack of oversight controls” puts taxpayer dollars at risk compared to loans from private lenders participating in the federal Paycheck Protection Program (PPP) and the traditional SBA7(a) loan guarantee program. Critics say that a better solution would be to expand the number of SBA 7(a) lenders by including more financial technology companies (fintechs).
The fact is that much of the recent fraud in EIDL was a result of Congressional failure in the CARES Act expansion of the program to not allow the SBA to verify applicant tax information with the Internal Revenue Service, the strongest check against fraud. Congress eventually corrected this self-inflicted fraud problem.
Regarding the PPP loans administered by private banking institutions, the Justice Department charged hundreds of individuals for fraudulent loan applications that went undetected by the submitting private financial institution.
Concerning adding more fintechs into the SBA 7(a) program as a solution, the report of the House Select Committee on the Coronavirus Crisis found that “many fintechs…took billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP.”
Preventing fraud in any government program should be a high priority. However, citing fraud in the SBA PPP lending program as being less and thus more acceptable than the fraud in the EIDL program to justify not initiating a completely different and critically needed SBA small business direct lending program is not good policymaking.
The proper response to fraud is to have better fraud prevention controls in all lending programs—private and public.
Our coalition’s recommendation for SBA direct small-dollar lending in underserved and rural communities is not competition for private lenders and reduces the potential for fraud while increasing access to capital for small business startups and microbusinesses. This is achieved through these provisions:
- Cap the new SBA direct loans at $20,000. This reduces the financial incentive for fraud.
- Require all SBA direct loan recipients to first receive technical assistance and training from SBA partner organizations before and during the loan. This removes the ability to commit fraud by submitting a loan application in the name of a fake business.
- Target the loans to small business startups and microbusiness.
- Prioritize loans to rural and underserved communities not utilizing credit scores but successful non-traditional underwriting criteria prioritizing community support, applicant’s character, demonstrated ability to repay, and business plan.
Our proposal will successfully address the 40-year low in new business startups and empower local entrepreneurs to improve their underserved and rural communities economically from the bottom up.
Thank you for the opportunity to provide input to the ICIC on this important issue.
Frank Knapp Jr.
Coalition Coordinator, Reform the SBA: BIGGER Mission, Authority and Resources
President & CEO, South Carolina Small Business Chamber of Commerce
Coalition Members Supporting this Proposal:
American Independent Business Alliance
American Sustainable Business Network
Gullah Geechee Chamber of Commerce
Latin American Chamber of Commerce—Charlotte
Latino Communications Community Development Corporation
Local First Arizona
North Carolina Business Council
Sumter Black Chamber of Commerce
South Carolina Hispanic Chamber of Commerce
South Carolina Small Business Chamber of Commerce
Triad Local First
U.S. Green Chamber of Commerce