Lessons Learned from the Paycheck Protection Program: A Way Forward for an Equitable COVID Recovery

Chateau Marmont (Source: Facebook)

The Paycheck Protection Program (PPP) was established in the CARES Act of 2020 to provide emergency relief to small businesses struggling to retain employees at the start of the COVID-19 pandemic. The program was supposed to be an innovative emergency lending program that would not only help small businesses but also ensure public dollars went to the workers most in need of support, but it didn’t live up to its promise. Instead, it was exploited by major corporations like McDonalds and luxury hotels like the Chateau Marmont. 

• Report: Lessons Learned from the Paycheck Protection Program: A Way Forward for an Equitable COVID Recovery

The COVID Oversight Coalition, a set of civil society groups that joined forces to monitor the response to the COVID crisis through emergency relief programs like the PPP, monitored PPP from its inception. Seven partners from the coalition developed a comprehensive assessment of this critical program, combining insights from government accountability and policy advocacy groups, labor unions, research experts, and financial reform advocates. 

In addition to calling for key reforms to future emergency programs, the Coalition calls on the SBA to use its statutory power to claw back improperly issued or misused loans, including cases where PPP loan recipients failed to spend at least 60% of their loan proceeds on employee wages, and cases where recipients used the money to issue stockholder dividends, buy back stock, or award executive bonuses.

The report shows how systemic problems in the program meant that businesses and workers in need lost out while businesses not in need cashed in. The program’s reliance on big banks as preferred lenders was disadvantageous to small businesses that did not hold those banking relationships. High rates of fraud in the program, an estimated 15% of PPP loans, went to fraudulent borrowers, which were overwhelmingly serviced by online financial technology, or fintech, firms. Of the $800 billion in disbursed PPP funds, at most, only 23% to 34% went directly to workers who would have otherwise lost jobs. Well-resourced industries used PPP funds as a low-cost or even free loan to benefit business owners and pay non-payroll business expenses at the expense of helping average workers make it through the pandemic. 

The PPP also provided cash windfalls to larger businesses and industries that could have survived the pandemic without taxpayer funds. The program did so in part by allowing businesses normally ineligible to receive SBA loans to obtain substantial PPP funds. The SBA also minimally enforced its own rules on company affiliations to larger entities, such as companies backed by deep pocketed private equity funds, enabling the PPP to become a cash grab opportunity for well-resourced industries and companies.

The paper’s four case studies demonstrate how the PPP was exploited by key industries at the expense of workers and small businesses in need. 

• PPP helped the hotel industry recover, but hotels left workers behind: Hotels terminated or furloughed more than one million workers in 2020 and 2021 combined and have since enjoyed billions in PPP relief without publicly disclosing whether funds were spent on payroll costs.
• The PPP redefined the small business, paying out millions in loans to a global tire manufacturer: Giti Tire Manufacturing (USA), a South Carolina tire manufacturer, and its California-based sister company, Giti Tire (USA), together received more than $9.8 million in PPP funds in April 2020 because the SBA did not enforce its own affiliation rules, its litmus test for what defines a small business. 
• Fast-food companies took millions in PPP as workers reported rampant workplace violations: In California, 99% of franchised McDonald’s locations (approximately 1,195 out of 1,202 locations) are operated by franchisees that received PPP funds. In the first 15 months of the pandemic, McDonald’s franchisees in California received at least $246.4 million in PPP loans, and 95% of all fast-food franchises in California where workers filed health and safety complaints received PPP loans. 
• Private equity companies used lobbying and political contributions to win PPP access for their portfolio companies: At least 28 private equity (PE) firms whose holdings received PPP money either directly lobbied the federal government on COVID issues or did so through their portfolio companies. These PE firms’ portfolio companies received at least $344 million in PPP funds despite collectively having access to $554 billion in reserves – sometimes referred to as “dry powder” – during the course of 2020. 

The report offers six recommendations to improve PPP outcomes and ensure the improved operation of any future emergency lending program:

1. Imposing more robust loan guardrails upfront to screen borrowers more carefully;
2. Improving the selection of lenders to ensure a more equitable distribution of loans;
3. Conducting better loan audits to prevent waste, fraud, and abuse;
4. Establishing stricter standards for loan forgiveness, particularly over $150,000;
5. Increasing public loan data to enable more program transparency; and
6. Including more funding to conduct needed loan oversight.

Read the full report.