ByMichael C. Eggleston
In April 2020, the Federal Reserve created the Paycheck Protection Program Liquidity Facility (PPPLF), one of several emergency facilities created in response to COVID-19, to provide balance sheet relief to lenders making Paycheck Protection Program (PPP) loans to small businesses.
In return for extending credit to PPP lenders, the Fed charges a fee of 35 basis pointsA basis point is 1/100th of a percent, or .01%. and takes the PPP loans as collateral. While the PPPLF is well known, the facility represents the first time that non-depository institutions have obtained access to the Fed’s discount window.
Community development financial institutions (CDFIs), which are certified by the U.S. Department of the Treasury’s CDFI Fund, are mission-driven lenders focused on increasing economic opportunity in low-wealth areas. There are currently around 1,100 CDFIs that provide financing to individuals, nonprofit organizations and small businesses that have typically been unable to access credit through mainstream financial institutions. CDFIs are composed of depository institutions (50%) and non-depository institutions (50%), with the vast majority being loan funds.CDFI Fund.
Both CDFI depositories and loan funds utilized the PPPLF in a substantial proportion compared to the size of their industries. By Sept. 30, 2020, the total asset size of the CDFI industry was estimated to be $222 billionOpportunity Finance Network. “About CDFIs.” and CDFIs received over $2.1 billion in liquidity from the PPPLF.Federal Reserve Policy Tools The majority of CDFI utilization of the facility—over $1.8 billion—came from financial institutions and credit unions. (See the figure below.)
The three CDFI depositories that utilized the facility the most by loan volume were Quontic Bank of New York, Sunrise Banks of Minnesota and Savoy Bank of New York. The institutions collectively received over $1.2 billion in liquidity.
CDFI Utilization of Paycheck Protection Program Liquidity Facility
While CDFI depositories have had access to the Fed’s discount window, the PPPLF marks the first time that CDFI loan funds have been granted the same access. Around half (26) of all CDFI loan funds that made PPP loans utilized the PPPLF and collectively received over $300 million in liquidity.
In Part 1 of this interview recorded on Jan. 26, 2021, Sam Walls III, president of Arkansas Capital Corporation, speaks about the CFDI’s initial struggle to find necessary funding during the early stages of the pandemic.
Sam Walls: Historically, we haven’t had—it’s always a challenge for CDFIs. Access to capital is the running story; ask any CDFI, certainly, again, a non-depository CDFI. And so, when a year ago—or a little less than a year ago, when all this started, we had to ask hard questions. Our cost to capital is significantly more expensive than a depository institution. And so—but we’re mission driven, so for us the question was: We put money out, candidly, there was the fee on the front end, but we were underwater on our cost to capital, not knowing how long we were going to keep those loans out. You know, it was a big issue. We elected—it’s like, look, we’ve got to step up in the moment; we’ll figure that out later. So when this came along, it wasn’t expected, and it was really appreciated.
In June 2020, there was a sharp rise in liquidity provided to CDFI loan funds. (See the figure below.) The rise in loan funds was attributed to existing demand by CDFIs that previously experienced challenges with accessing the facility. CDFI loan funds struggled to obtain a correspondent banking relationship, which is necessary for a non-depository institution to access the discount window. Depository institutions with master accounts with the Fed expressed concerns with providing correspondent services due to perceived risk, operational complexities, capacity and internal approval processes. Ultimately, a few large banks, in addition to CDFIs, agreed to be correspondent lenders to CDFI loan funds.
2020 CDFI Loan Fund PPPLF Utilization over Time
Since obtaining access to the PPPLF, Arkansas Capital Corporation (ACC) of Little Rock, Ark., has received over $54 million in liquidity—the second most of any CDFI loan fund in the country. Although ACC is an experienced Small Business Association lender with several banking relationships, they initially struggled to secure corresponding banking services.
In Part 2 of this interview recorded on Jan. 26, 2021, Sam Walls III, president of Arkansas Capital Corporation, speaks about his experiences navigating relationship building with other financial institutions.
Sam Walls: The process—the biggest challenge at that point was one, again, just from lack of experience kind of in this box, was the correspondent bank relationship. And so I went—we have great relationships with banks in our market, so I went to a few here that, on paper, would have been really in good position to serve as that role, but, again, you’re asking people to do new things on the fly, and they were at times uncomfortable in that speed that I needed them to give me an answer, understanding the risk that they were taking on, if any, and getting comfortable with that. Ultimately, however, I was fortunate, we’ve had a long-term relationship with U.S. Bank, and they had served in that role in other respects. So from a risk profile, they understood more how that process would work, and the fact that I had a long relationship with them, as well as the fact that we’ve been doing SBA lending for 30 years, so we were very comfortable in the SBA world, they were very comfortable with us working through them on that one.
Among their peers, Grow America Fund of New York, Montana Community Development Corporation and Trenton Business Assistance Corporation utilized the facility the most by loan volume. The organizations collectively received over $165 million in liquidity.
At a time when CDFIs played an active role in supporting small businesses by making PPP loans, the Federal Reserve provided over $2 billion in balance sheet relief to these mission-driven financial institutions.