Did the primary federal small business loan program become more inclusive during the pandemic?

The last time a major economic shock crippled the American economy, non-White small business owners got very little help from their government. The 2007-2008 financial crisis resulted in a collapse of Small Business Administration (SBA) lending to Black-owned businesses, falling from 8% of all SBA loans in 2008 to barely 2% by 2013. But early data on pandemic-era lending by the SBA suggests the agency may have chosen a different path from the one it took during the Great Recession.

SBA’s main-line loan program, known as 7(a), declined in overall volume during the pandemic. But the loans SBA did make in that period may have flowed more equitably than in previous time periods: Minority-owned businesses received almost 27 percent of SBA 7(a) loans in 2021, compared to less than 23 percent in 2012. Black and Hispanic business owners got almost 14 percent of all loans in 2021, compared to less than 10 percent a decade prior.

The news is not all good, however. At the same time that the lending share of non-White business owners ticked upward, the SBA saw a deluge of loans in which there was no reporting of race or ethnicity at all. The data show that more than one in five loans made under SBA 7(a) went to a business owner whose race and ethnicity are marked “undetermined.” No precise cause for this is readily apparent – but the trend has been increasing, and may indicate that pandemic-era small business lending lacked the transparency and accountability mechanisms essential for equitable lending.

SBA 7(a) lending increased from 10,961 loans in FY 2012 to 22,887 by FY 2018, dropping to 12,441 in FY 2021 as the impacts of the pandemic were felt in the American economy (Figure 1). The percentage of loans to minority business-owners during this period increased from 22.5% in FY 2012 to 26.0% in FY 2021. At the same time, the number and proportion of loans for which race/ethnicity were undetermined increased from 976 loans and 8.9% in FY 2012 to 2,691 and 21.6% in FY 2021. SBA lending for Black and Hispanic business owners increased during the period. Black business owners receive 299, or 2.7% of loans in FY 2012 and 631, or 5.1% in FY 2021. For Hispanic business owners FY 2012 lending resulted in 781, or 7.1% of loans, increasing to 1,075, or 8.6% of loans in FY 2021. (Source: SBA)

The U.S. Small Business Administration (SBA) offers several loan programs including microloans, disaster loans (EIDL program), real estate and equipment loans (504 program), in addition to the general small business loan, or 7(a) program. The SBA also offered the Paycheck Protection Program (PPP) in 2020 and 2021. All of these programs offer government-backed loans, with banks acting as the point of contact to collect the borrower’s application paperwork and initiate the loan. The SBA 7(a) loans were the most common type of loan, prior to the massive PPP effort which responded to the needs of businesses during the COVID-19 pandemic. Earlier, we reported on the substantial decline in lending to Black-owned businesses under the SBA 7(a) program since the financial crisis and Great Recession in 2008. Lending to Black-owned businesses declined from 8% in 2007 to less than 3% by 2009, remaining near that low level until 2017. How has the 7(a) program performed in lending to minority-owned businesses in the five years since?

Lending under the SBA 7(a) program increased substantially from FY 2012 to FY 2018, dropping off after that (Figure 1). In 2012, the US economy was still reeling from the effects of the Great Recession and only 10,961 SBA 7(a) loans were originated at that time. By FY 2018, the number of loans almost doubled from FY 2012 levels, to 22,887 loans. This dropped in FY 2019 and FY 2020, diminishing to only 12,441 loans by FY 2021 as the pandemic impacted the economy and the PPP and Economic Injury Disaster Loan (EIDL) programs became the primary sources of assistance and financing for small businesses.

SBA 7(a) lending to minorities increased as a percentage of all loans made between FY 2012 and FY 2021 (Figure 2). The overall increase in minority business owner share of 7(a) loans from 22.5% to 27.5% reflects specific increases in lending to Black-owned businesses (5.1% of all loans last year) and Hispanic-owned businesses (8.6%).

As of 2021, banks recorded the race or ethnicity of borrowers as “undetermined” on one-fifth of all SBA 7(a) loans they administered. The steady increase from 8.9% “undetermined” to 21.6% (Figure 3) is worrisome – and mirrors a trend among mortgage lenders which NCRC detected in our most recent analysis of HMDA reporting data. When banks render mortgages invisible to demographic analysis, we lose traction in our pursuit of equity and fairness in homeownership. In the case of 7(a) lending, meanwhile, the surge in “undetermined” lending makes it difficult to say if the falling percentage of loans to White business owners – from almost 70 percent a decade ago to just over 50 percent last year – is a reflection of a shift in capital toward historically marginalized communities, or simply of a glaring new gap in the data. The inability to accurately gauge demographic trends in mortgage and small business lending makes the success of changes in public policy difficult to assess.

The increase in the percentage of loans going to Black-owned businesses is a noticeable corrective measure after the drastic drop-off during the 2007-2008 financial crisis. The reduction of SBA 7(a) lending during the COVID-19 pandemic could be a result of either reduced demand during the crisis, or the availability of the PPP loan program, which provided payroll support that could be converted from a loan into a grant. With the sunset of the SBA administered PPP lending It remains to be seen whether lending numbers rebound to 2019 levels.

The increased reporting of “undetermined” race and ethnicity data on borrowers is a troubling trend which was also detected in our analysis of HMDA reporting by banks. This trend requires greater scrutiny, since lenders are given considerable leeway in recording demographic information in their reporting. Differences between banks in reporting demographic data probably reflects varying internal practices, which have developed due to relaxed guidelines and data standards of federal reporting.

Bruce C. Mitchell, PhD. is a Senior Analyst on NCRC's Research team.

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