I was on the SBA training for CDFIs Monday and posed the question together with a small CDFI serving immigrants – how can small CDFIs apply to become a lender when the SBA form for lenders excludes them?

The SBA official responded, “Apply Anyway.” So the small CDFI applied and no approval as yet. In the meantime the SBA reportedly states that the $30 billion dedicated to CDFIs and small financial institutions is done as of Tuesday afternoon.

Congress and the White House heralded the second round as fixing the problem with the first round with money going to the “Mom and Pop stores” – It did not happen in the first round and it is not happening in the second round.

To understand this failure let’s look at the Minnesota fund that paralleled the SBA funds but which tried to make it more inclusive. It did include the small CDFI who was at the SBA training and who serves entrepreneurs with language and other barriers. This CDFI has already got $500,000 in loan money out of the door and can easy disburse over a million. For some clients this small CDFI had to spend hours getting their paperwork together to apply for the loan. With social distancing this makes it even more difficult. Another CDFI serving the Asian American community reported the same challenges. It takes that level of effort and inclusion to reach businesses with the least power and access.

Tough for policy leaders and bureaucrats to understand unless you have your “boots on the ground.”

You see the system is set up to serve people with various levels of power where the ones with the least power get the crumbs or nothing.

Congress meant to fix that by clearly setting aside $30 billion that will be accessed by small community financial institutions. While mentioning the size for credit unions, the law did not specify a size for CDFIs and referred to the Riegle Act of 1994 for definitions.

I checked. The Riegle Act does not specify a size of a CDFI but states its role in serving underserved markets.

HF 266 specifies a dollar amount for all other community financial institutions identified in the legislation but does not mention a size for CDFIs. So in excluding small CDFIs, especially those serving minority and immigrant communities (that faced financial barriers even before the COVID crisis), the SBA and Treasury violated the intent of Congress.

Since the following argument has been offered please note the response: The 30 billion reportedly went to small financial institutions with assets less than $10 billion dollars. The average loan size is around $100,000.

Well, I believe this $10 billion criteria would cover most of our small lending institutions in Minnesota. Also try looking at a different metric – what percentage of dollars went to small and micro businesses and how many of them were minority businesses?

What is also missing in the argument is that HF 266 did not mention a dollar size for the separate category called, “community development financial institution.” By excluding these groups from the application process that defined a community lender by dollar amount, the SBA and Treasury violated the intent of Congress.

Hence SBA Administrator Carranza and Treasury Secretary Mnuchin should resign immediately.

Congress should intervene and have money dedicated to the small CDFIs immediately. Every second lost means the money is being allocated to someone else.

I raised this issue last week and tried to get the attention of the SBA and Treasury including sending a note directly to an Assistant Secretary at the Treasury who had initially sent a note to CDFIs to apply. Nothing happened.

I tried to get the attention of all the media outlets who wrote heart breaking stories of small businesses being left out of the first round – to help prevent the tragedy happening in the second round – nothing happened.

Some research coming out of the Becker Friedman Institute of the University of Chicago document the tragedy of the first round.

First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy smallbusiness loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations.”

The tragedy from a Mom and Pop store perspective is that the funds flowed through the financial institutions which have unequal power within them to begin with. Many of these financial institutions before the Covid crisis where leaving the funding of Mom and Pop stores to the CDFIs as the economic incentive to serve this tougher market was not present. So this market that small CDFIs served was already excluded from the established financial system through which the current Covid economic relief flows.

One would think the the leaders of the Treasury and the SBA would know this as they sit on top of the financial food chain.

That is why this voice calls for their resignation and that Congress immediately dedicates funds to small CDFIs that serves underrepresented groups especially minority and immigrants. Many of these businesses are rapidly sinking. An African American business owner told me yesterday (paraphrasing his words).

I am so frustrated. Who is looking out for businesses like me? Before Covid struck, my business was expanding rapidly. Now I am thousands of dollar out. Where is all the SBA PPP money going? I need grants not more debt.