Banking Relationships Were Important in Getting Federal Loans

Finding success in the federal Paycheck Protection Plan (PPP) from the Small Business Administration (SBA) seemingly had a lot to do with where businesses were located, and the relationship they had with their bank – particularly a bank more tied to the community.

With the second round of the PPP now underway, several researchers from Massachusetts Institute of Technology (MIT) have been looking closely at who received the funding and why they got it.

A group of researchers, some from MIT, found interesting results particularly when it came to banking relationships and big vs. small banks. They published their findings in a paper on April 25 that came out late last week.

Researchers Christos Makridis said they found nationwide that funds tended to flow to areas less hard hit, and they found that loans were not made by bigger bands with the same frequency. The paper reported the top four banks that normally account for 36 percent of pre-PPP SBA loans only dispersed about 3 percent of all PPP loans.

“Areas that were significantly more exposed to low-PPP banks received much lower loan allocations,” read an abstract of the paper. “As data become available, we will study employment and establishment responses to the program and the impact of PPP support on the economic recovery.”

Makridis said they found the relationship with banks helped those seeking loans for their businesses, and perhaps smaller banks were better at that.

“While many businesses had a prior relationship with a bank, the quality of that relationship means a lot,” he said. “If you’re frequently going to the bank for loans or doing a lot of business with a bank, that matters…In other words, if you’re in an area that tends to have local banking relationships, then you were more likely to benefit from that. You could be a small business that doesn’t use that bank often, but if you’re located near one of those banks, you could benefit as a consequence of that.”

He said big banks might not have had the infrastructure set up to be able scale their business to that level, setting up the infrastructure to reach out and get loans processed for small businesses.

Daniel Forte, president of the Mass Bankers Association, said they have found in Massachusetts – where a good many loans were given out – that all banks kind of struggled with the program.

“Anecdotally, I’ve heard big banks and small banks struggled with this,” he said. “Community banks specialize in small business lending though. Big banks do it, but small banks claim to fame is serving small business. When you had a good customer that knew the rules and the bank knew them, it was easier. It’s not favoritism but it’s only natural for customers of banks who know them already will have the wherewithal to get information in there and get it processed at the front of the line and get the money out.”

That said, there are no definite statistics in the state that big or small banks did better, he said, unlike in other parts of the country. About 60 percent of the loans came from the banks with under $10 billion in assets and 40 percent came from banks over $10 billion.

That, he said, speaks to the fact that Massachusetts banks worked very hard for their customers, and came in as one of the top 10 states for lending – even though the second part of the program is still going.

So far, in the second round of PPP, the state has seen 49,000 loans for a total of $4.4 billion. In Round 1 of PPP, there were 47,000 loans for a total of $10.4 billion.

The average loan nationwide was $79,000, which Forte said he interprets as meaning most of the money went into the right hands – small businesses.

But getting in those hands was the meat of the story.

When the first round of the program ran out of money, Forte said Massachusetts banks had $1 billion of PPP loans still sitting on desks without an answer – in the queue. He said the SBA created a major headache for banks by cutting off applications until Congress passed the second round.

“They should have allowed banks to keep taking applications, time and date stamp them, gave them loan numbers and continue on with the first come, first served and get them ready for processing when round two was approved,” he said. “Everyone knew they were going to approve the second round. They shouldn’t have cut off the application process.”

That decision, he said, let the many bank officials saying Monday, April 27, was the worst day of their banking career. When the floodgates opened at 10 a.m. per the SBA order, it was a catastrophe for bankers – many of whom had brought in full staffs to try to get ahead.

There was none of that, and little worked well.

“It was like the Oklahoma land rush,” he said. “The pistol was shot and half of the contestants ran over each other and only a few got in.”

However, he said the SBA was, and has been, good at making changes and tweaks to get the PPP program on track when there are hitches. That harkens back to his original message weeks ago to be patient.

“In essence they processed 19 years of small business loans in 18 calendar days,” he said. “That’s amazing. SBA started adapting and culled the batch applications. By Tuesday late afternoon banks were moving along at 50 percent capacity.”

By last Friday at the close of business, there were $176 billion out of the $310 billion used in the program. Forte said as long as there is money, he still encourages small business to apply.

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