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Fed report: states with largest COVID-19 burdens get fewer PPP loans

The Hi-Pointe Theater in St. Louis is among hundreds of thousands of U.S. small businesses closed due to the COVID-19 pandemic. A Federal Reserve study on Monday indicates that states suffering the greatest economic burdens are not receiving a proportionate amount of federal small business loans. Photo by Bill Greenblatt/UPI
The Hi-Pointe Theater in St. Louis is among hundreds of thousands of U.S. small businesses closed due to the COVID-19 pandemic. A Federal Reserve study on Monday indicates that states suffering the greatest economic burdens are not receiving a proportionate amount of federal small business loans. Photo by Bill Greenblatt/UPI | License Photo

May 6 (UPI) -- States with the largest COVID-19 pandemic burdens received a smaller proportion of federal small business loans under the Paycheck Protection Program, a Federal Reserve report said Wednesday.

The program to provide emergency loans and grants to small businesses is a part of the $2 trillion CARES Act, passed in March. The program has faced widespread criticism over approval of loans to publicly traded companies, to the point that some large companies, notably Shake Shack, the Los Angeles Lakers basketball organization and hotelier Ashford Hospitality, returned their funds after complaints from smaller applicants.

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"Some of the hardest hit areas, such as New York, New Jersey, Michigan, and Pennsylvania, are getting fewer loans than some Mountain and Midwest states on a per-small-business basis," wrote Federal Reserve economists Haoyang Liu and Desi Volker. "In New York, the epicenter of the coronavirus in the United States, less than 20 percent of small businesses have been approved to receive PPP loans. In contrast, more than 55 percent of small businesses in Nebraska are expecting PPP funding."

The study used the number of coronavirus cases in a given state to track changes in the economic impact of the pandemic across the country, and compared the changes in economic impact across states to the percentage of businesses receiving PPP loans. It found no relationship between the impact of the pandemic in a state and the percentage of businesses approved for PPP loans in the loan program's first round.

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The study indicates the confirmation of earlier suggestions that businesses that had prior relationships with lenders were most likely to have funding available, and their applications approved. Additionally, critics have alleged that businesses in states with fewer COVID-19 cases have been approved for too many PPP loans. The study confirms that suggestion as well.

"The economic impact of COVID-19, both measured by the number of COVID-19 cases per capita and by the number of initial unemployment claims per capita, does not explain the geographical distribution of PPP loans," Liu and Volker concluded. "In contrast, we find that lenders' preference for borrowers with an existing relationship and the market share of community banks are the main factors explaining the geographical variation in PPP funding."

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