Tracking the money: Bid to make business rescue more inclusive undercut by lack of data

President Joe Biden is making sweeping changes to Washington's biggest relief program for small businesses to help ensure that it reaches people of color and others hit hardest by the pandemic. Trouble is, he'll never really know how much his efforts made a difference.

The Small Business Administration, which runs the Paycheck Protection Program, is facing massive data gaps in how more than $660 billion in loans have been distributed because it does not require business owners to report demographic information when they apply for aid. It only began asking new applicants to voluntarily report the data in January, nine months after the program was launched.

That has proven to be an impediment for administration officials and lawmakers trying to assess the effectiveness of one of the government’s largest coronavirus rescue programs. They've been forced to find other ways to analyze the data including the use of proxies, such as geographic indicators and business size.

“The data gap for PPP loans has been a persistent problem since Congress created the program nearly a year ago," House Small Business Chair Nydia Velázquez (D-N.Y.) told POLITICO. "The lack of demographic data hinders our ability to ensure that money reaches underserved businesses that were initially locked out of the program."

The absence of data on PPP borrowers is one of the major challenges the administration faces in overhauling the program, which is hugely popular because the loans can be forgiven if employers maintain payroll but has been hit with complaints about inequitable access, opaque rules and fraud. Under the assumption that the PPP hasn’t reached enough underserved businesses, Biden is revamping the program to expand access and target the tiniest employers. Congress also set aside funds dedicated to the smallest businesses and to PPP lenders that target low- and moderate-income communities.

The SBA says it lacks the authority to force PPP borrowers to disclose demographic information. Agency officials point to the December economic relief law that directs it to allow borrowers to report demographic information at their discretion, as well as fair lending rules designed to discourage banks from discriminating against customers. Private lenders are responsible for distributing the loans.

The Trump administration only began asking PPP applicants to report the demographic information on a voluntary basis when the program restarted this year. The Biden administration made the questions a more prominent part of the application process. But most businesses still aren't revealing the details, even when asked. One challenge cited by lenders is that borrowers fear discrimination if they provide the data.

About 75 percent of PPP recipients this year did not report their ethnicity and 58 percent didn't reveal their gender, according to SBA data. Sixty-five percent did not disclose whether they were veterans.

The SBA's inspector general, who first raised concerns last May, said in a January report that without complete data, the agency's efforts to reach underserved markets "may never be fully known."

“We need more information about these loans so we can assess the effectiveness of the programs and know where to better target future relief,” said Senate Banking Chair Sherrod Brown (D-Ohio). “We must make sure that these programs are working for all businesses, including minority and women-owned businesses.”

The data is important to hold the government and lenders accountable for the success of a program that has doled out more than 7 million government-backed loans via private banks. The information is also crucial as officials try to recalibrate the PPP so it reaches more Americans before expiring at the end of March.

When the Trump administration hurriedly launched the PPP last year, the SBA was criticized for not doing enough to ensure that the smallest businesses had access to the program. Those concerns were fueled by news that large corporations, such as Shake Shack and Ruth's Chris, were among the first to receive loans. The worries grew after the program's initial funding was exhausted in less than two weeks, before Congress replenished it.

The fears about access were just one set of controversies around the program, which the SBA and Treasury Department rushed to launch to rescue an economy in free fall that was hurting minorities the most.

A Federal Reserve survey released in February found that 79 percent of Asian-owned small businesses and 77 percent of Black-owned small businesses reported their financial condition as "fair" or "poor," compared to 57 percent of firms overall. A survey released by Facebook and the Small Business Roundtable found that the closure rate for small businesses in majority-minority neighborhoods was 36 percent, compared to 22 percent for businesses in non-minority neighborhoods.

“There’s a lot of damage that was done at the beginning of the program in terms of equitable access," said Michael Roth, who joined the leadership of the SBA in January as a senior adviser, in an interview "You unfortunately have fewer minority-owned businesses today than you had in March [2020]. We’re going to have to make sure that as we continue to build programs going forward we center equity in them.”

Though last year's iteration of the PPP continued lending until early August, the Trump administration didn't include a demographic questionnaire on loan applications until it relaunched in January with more than $284 billion in funding. In May, it began to include optional demographic questions in the application that businesses must fill out to have the loan forgiven after they have spent the funds.

"If you're being generous, maybe they just didn't think about it," said Jeannine Jacokes, chief executive of the Community Development Bankers Association, which represents lenders focused on low-income communities. "Or one could say maybe they didn't care, if it's just about getting the money out quickly."

Biden administration officials, who came to power with promises to address inequities in the economy, say they are trying to improve the SBA's data collection and analysis for PPP loans as they revamp the program to target underserved businesses. One administration official described the data challenges at the start of this year as "terrible."

Out of data available on just over 6 million loans as of Feb. 7, only 726,000 have reporting on race, according to New York University assistant professor of finance Sabrina Howell, who is researching how minority-owned businesses fared across different types of PPP lenders. She and other researchers working on the project have used borrower names to help predict the race of business owners.

Among the steps the SBA has taken in recent days is to put demographic questions on the first page of the PPP loan application. In addition, the agency has started to release more detailed analysis of where the money is going. In new weekly reports, the agency acknowledges that demographic data is limited. The reports offer metrics on money going to low- and moderate-income neighborhoods and rural areas to help provide a fuller picture.

According to SBA data through Feb. 25, 92 percent of PPP loans this year have gone to businesses with 20 or fewer employees. Nearly 25 percent of approved PPP funds have gone to low- and moderate-income neighborhoods and 17 percent have gone to rural areas.

The administration says the share of funding going to businesses with fewer than 10 employees during the first month of the PPP's relaunch this year was up by 60 percent compared to the program's first month last year. The average loan size — one of the administration's benchmarks for success — was down by 42 percent over the same period. But the SBA says the share of aid going to low- and moderate-income areas has remained "stagnant" compared to the initial round of PPP.

“If you look at the last round and you look at it on a time series, it almost looks like the largest businesses and businesses in high-income neighborhoods received money first and smaller businesses and businesses in low-income neighborhoods received money last,” the SBA’s Roth said. "So we’re trying to reverse that. The only way you can reverse those things is by understanding the metrics behind it and to have real goals around them.”