On a recent evening in Detroit’s Mexicantown neighborhood, notes from a guitar played by a busker on the sidewalk reverberated off the walls of the mural-covered buildings. The smells of Mexican street food filled the air, and Valeria Lopez was bent over a clipboard at a booth inside Taqueria Lupita’s Authentic Mexican Restaurant. Regulars just call it Lupita’s.
Lopez runs the place now. She took over the business from her parents, who decided to retire when the pandemic hit. Her plan was to get a forgivable loan for small businesses from the federal government’s Paycheck Protection Program (PPP) to help pay her staff.
“I thought it would definitely come in handy especially with the labor shortage and everything,” said Lopez.
But Lopez says she was denied a PPP loan. The program requires that businesses had been in operation as of February, 2020 to be eligible. Since Lopez didn’t take over the restaurant until later that year, she didn’t qualify.
“And I'm just stuck here without help,” she said.
The federal government created the Paycheck Protection Program through the CARES Act of 2020. As the name suggests, it’s meant to help business owners keep staff on the payroll in the wake of the pandemic and state-ordered public health restrictions – a one-two punch that slashed many businesses’ revenue. Businesses have to apply to the program through a lender. PPP loans are designed to be forgivable and converted into grants, as long as the borrowing business meets all the program requirements.
PPP loan recipients can use the money to pay rent, utilities, and certain other expenses, but 60% of a loan is supposed to be spent on employee wages. The PPP is currently in its third round of funding. The application window closes May 31.
The Paycheck Protection Program awarded about $16 billion to 128,159 small businesses and nonprofits in Michigan in the first two rounds of PPP funding. But an analysis conducted in partnership with the Reveal Reporting Network indicates disparities in the way those loans were awarded – with winners and losers along racial lines.
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Disappointed but not surprised
Reveal, from the Center for Investigative Reporting, looked at 5 million PPP loans from the first two rounds. In many of the top 52 metro areas in the U.S., businesses in majority-white neighborhoods received loans at 1.5 to 2 times the rate of businesses in majority-Black and Latinx communities.
Those disparities showed up clearly in the Detroit-Warren-Dearborn metro area, which is defined as Lapeer, Livingston, Macomb, Oakland, St. Clair, and Wayne counties.
Reveal’s analysis estimated the number of businesses eligible for PPP loans, and looked how those loans were distributed according to the racial makeup of each census tract. The analysis shows disparities according to neighborhood demographics, but not by race of loan recipient - which is largely unknown.
Metro Detroit saw more than 59,000 loans worth $7.6 billion in the first two rounds of PPP funding.
Businesses in majority-white neighborhoods received loans at around 1.3 times the rate of majority-Black communities.
And the disparity is even wider for majority-Latinx neighborhoods, like Detroit’s Mexicantown. Eligible businesses in white areas received loans at a little over twice the rate of businesses in Latinx communities.
And some areas got a disproportionate number of loans compared to the estimate of eligible businesses there. For example, one census tract in Oakland County had nine eligible businesses, but 41 loans.
Felix Kabo, a researcher at the University of Michigan Institute for Social Research, says he's disappointed with the results, but not surprised.
“We know that when all entrepreneurs do well ... we all benefit as a nation, right? So it's in our best interest to make sure that our taxpayer dollars are being used to create a level playing field. And clearly, this shows that some of these programs, at best are doing nothing to level the playing field, but at worst, they're actually tilting it even further.”
One thing that would help, Kabo says, is requiring businesses to disclose their demographics in order to secure government aid like a PPP loan. In the first round of the program, no demographic information was collected. That changed in the second round, but the disclosure remains voluntary, leaving a huge chunk unanswered.
The U.S. Small Business Administration says lenders are prohibited from requiring borrowers to report demographic information “as the result of fair lending laws on the books for decades,” SBA spokesperson Andrea Roebker wrote in an email.
For Kabo, a full picture of the racial demographics would help zero in on inequalities so they can be addressed.
“This is a big problem – healthy Black-owned businesses are key to narrowing the racial wealth gap, which could cost the United States more than $1 trillion to $1.5 trillion per year by 2028,” Kabo and a team of researchers wrote in a report on the first round of PPP loans in late 2020.
The study looked at results of a nationwide survey from the University of Southern California. It found that Black business owners were about 30 times less likely to receive government aid for people or businesses affected by the pandemic.
When the pandemic hit, small business owners were figuring out how to do business in a dramatically changing world – with new safety requirements, supply chain interruptions and rising prices. Making money, paying staff, and abiding by public health orders got harder. Applying for a PPP loan, and winning forgiveness, is a relatively rigorous process. Some businesses – especially the smallest businesses and family-run shops – don’t have much spare time to learn the ins and outs of the federal loan program. Even if the money could get turned into a grant, it takes a lot of work to get it.
“For PPP, [businesses] definitely are going to need somebody who has an accounting background in order to help you make sure you’re uploading the right documents for [lenders] to consider,” says Theresa Zajac, Interim President and CEO of the Southwest Detroit Business Association.
“One of the things we certainly learned from our small business owners is that running their business is their priority,” Zajac said. “That’s their expertise. All this other stuff is not their expertise.”
Zajac says the SWDBA has been helping entrepreneurs get access to PPP and other programs over the past year. In racially diverse communities like southwest Detroit, there are even more obstacles that could keep businesses from getting their hands on PPP money.
Zajac says many entrepreneurs in the area speak English as a second language, and many Latinx and Middle-Eastern business owners in southwest Detroit are reluctant to take on debt. Some business owners were hesitant to get PPP at first because the “forgivable loan” seemed like too sweet a deal.
“Is it really going to be something you don’t have to pay back? Especially in the first round of PPP, there was a lot of that (concern)” from business owners worried they’d get stuck having to pay the loans back, Zajac said.
Paul Jones, executive director of Detroit’s branch of a Goldman Sachs’ investment program, 10,000 Small Businesses, said larger banks, in the past, have not done a great job of investing in Black and brown communities – and the PPP distribution was influenced by that history.
“If that (large banks) is your main instrument of deploying capital...there was just an inherent lean towards servicing the easier companies to service,” he said. “Those were the quicker turnarounds or the quick wins, and just having limited infrastructure to reach some of the communities that need the most. And I think that was certainly reflected in the numbers.”
Jones said that during round two of PPP funding, some institutions initially just prioritized the same people they gave money to in round one.
“So (that) just furthers the same outcomes,” he said. “The statistics and numbers were very painful to see, but it wasn’t necessarily surprising to us or many of our constituents.”
In metro Detroit, according to Reveal’s data, the top lenders were – as expected – commercial banks. And some gave to white neighborhoods at a higher rate than their Latinx or Black counterparts.
For example, JP Morgan Chase Bank issued the most loans: almost 7,500 deals worth $943 million. The bank gave loans to businesses in majority-white communities at 2.4 times the rate of Latinx neighborhoods, and 1.8 times the rate of majority-Black areas.
“Our goal has always been to help as many customers — and their employees — as possible. And as quickly as possible,” Anne Pace, a spokesperson for JP Morgan Chase said. “We proactively marketed the program specifically to minority-owned businesses, in English and in Spanish, to ensure awareness and how to apply.”
Pace said according to Chase’s internal data, more than 32% of its PPP loans in 2020 went to small businesses in communities of color, making them “one of the largest lenders” in those communities.
Comerica Bank, the second-largest lender, was comparatively more equitable across white, Latinx and Black communities.
PNC was the sixth-bigger lender, but stood out for giving to majority-white areas at a rate of almost 2.7 times what Black-majority neighborhoods got. In a statement, PNC spokesperson Marcy Zwiebel said:
“...PNC recognizes that small businesses operating in low- and moderate-income (LMI) communities face special challenges. That is why we took special care to identify PPP applications submitted by small businesses in LMI geographies and ensure that they were not left behind by providing technical assistance to guide them through the application process. PNC also conducted borrower outreach on applications with missing data/information to aid in application completion.
“As a result of these efforts, PNC has facilitated more than 25,000 PPP loans, aggregating more than $4.3 billion, to businesses in low- and moderate-income census tracts since the program began last year.”
TCF Bank, which is headquartered in Detroit, was the seventh-largest lender at 3,037 loans. It issued loans to eligible businesses in white neighborhoods at more than three times those in Latinx areas. Majority-white neighborhoods also got 1.5 times the number of loans as majority-Black neighborhoods.
TCF Bank said it did “not have the information to be able to verify the data provided to Michigan Public Radio (sic) and so cannot comment directly on it.” But it does note in its internal data, TCF's rate was higher in states with a “higher concentrations of Hispanic communities” than Southeast Michigan.
Bank of America was the fourth-largest lender in metro Detroit, and gave to majority-white neighborhoods at around three times the rate of Latinx-majority areas.
Bill Halldin, a Bank of America spokesperson, said according to its internal data, nearly 40% of its loans went to businesses located in majority-minority neighborhoods.
On the flip side, some small lenders – like Cross River Bank and Celtic Bank – issued loans in Black-majority neighborhoods at higher rates compared to top lenders.
But for most small lenders, the number of loans issued are relatively very small.
Online lenders were a big source of loans for small businesses with no paid employees in Black-majority neighborhoods. In metro Detroit, Kabbage (which was acquired by American Express before the second round of PPP loans) did very well with Black-majority neighborhoods, and issued the third-highest count loans to Black businesses. Online lenders were not made eligible to issue PPP loans until April 14, just before funds were depleted for the first round of loans.
On the ground
There are efforts underway to close some of these lending and equity gaps. Community development financial institutions are organizations that specialize in lending for low-income neighborhoods.
“I think it's much easier to just disburse the funds through the huge banks because they have all these mechanisms and a huge national reach, right?” U of M researcher Felix Kabo said. “But easy is not what we need. We need sort of more thoughtful approaches to disbursing these funds.”
In metro Detroit, the Community Reinvestment Fund is a CDFI that gave out 234 loans during the first two rounds of PPP funding, totaling more than $14 million dollars. CRF is supported by banks like Goldman Sach’s 10,000 Small Business program.
Keith Rachey, CRF’s senior vice president, said they worked with Detroit and other local organizations like the Detroit Economic Growth Corporation to ensure alternative services or support for small businesses. CRF works with organizations that may not have lending relationships with a bank already, making sure each business has someone from CRF working with them.
“We have a very particular focus on helping those that are underserved get access to programs like PPP,” he said.
When it comes to loan disparities, Rachey sees it every day.
“It was nothing new. It’s the work that we do, right? We're trying to change that,” he said.
Rachey said his group helped applicants with document preparation, translation, and promoting the program.
Jones, from Goldman Sachs’ small business program, said there is an important underlying story here: Small businesses are a “wealth vehicle” for many in underserved markets.
“We saw in the last economic crisis 10-plus years ago, how many people who were on the pathway to homeownership had equity stripped away,” Jones said. “Entrepreneurship is under attack at the community level … they’re more likely to hire in the community, to provide opportunity, and sometimes opportunities for people who don’t have advanced degrees. For people who don’t have access to transportation, which is a big problem in Detroit.”
In southwest Detroit, Ali Beydoun is one example of a PPP success story. Beydoun owns Sicily’s Pizzeria, and says his loan has helped him keep his core team on the payroll through the pandemic so far.
“It was a lifesaver for us,” Beydoun said on a recent evening, his royal blue apron covered in flour. “For the first three months, when the pandemic hit, we were bleeding so bad until people recovered and started ordering again. And then for that period we sunk so deep behind in expenses and payroll. It really came in very handy.”
Meanwhile, a few blocks away, Valeria Lopez is working double shifts at Taqeria Lupitas with a medical boot over her broken foot. The recent influx of business from indoor sit-down customers has been a boon, she says, and has helped her avoid paying staff out of her own pocket. That's something she had to do over the winter.
“I was pretty close to closing,” Lopez said. “[Now] it’s getting better thankfully… As long as my workers are getting paid, I don’t care about the rest.”
This story was completed with information from Reveal’s Reporting Networks. revealnews.org/network. This analysis uses the same methodology at Reveal, which you can read here.