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A new carve-out in the $285 billion federal PPP package signed into law last month includes $15 billion in funds for CDFIs to access.

But problems loom because of the way CDFI business models are structured. Many do not have the requisite capital on hand to lend to their clients. Unlike larger banks, CDFIs must raise capital from outside sources before they can lend. If a CDFI doesn’t have the money, it can’t tap the new PPP loan pool.

“There’s a misconception that because we’re a PPP lender that the government has given us money to lend. It doesn’t work that way at all,” Lee said. “We have to raise our own capital first, then lend it and then ask for forgiveness to get the capital back.”

As community lenders explain, because the first two rounds of PPP funding required CDFIs to do so much lending—millions more than they normally do—an entirely new round of fundraising must commence just to start the process again.

“Where do I get the money? I had to raise $6 million the first time I did it,” Quintero explained. “I haven’t gotten it forgiven, and I have to get another $6 million now.”

There are now fears among CDFI executives that while $15 billion has now been carved out, the money could languish along with the hopes of minority business owners as a result of the capitalization crisis.

“I need capital to deploy. Without that, my effectiveness is limited,” said James Bason, president of TruFund Financial Services Inc., a CDFI that works with the Brooklyn Chamber of Commerce.

Because of the complex forgiveness provisions for PPP loans set by the Small Business Administration and the Treasury Department—some of which weren’t even made final until October 2020—many CDFIs have been left holding the bag on millions in debt that is still being processed by the SBA.

“We put out $14.9 million in borrowed capital and because of the current forgiveness process we have not been able to repay the debt we borrowed to achieve that,” Bason said.

To understand the dire state of forgiveness, as of Nov. 22, 2020, lenders have made 55,144 forgiveness submissions for the amount of $83.2 billion, according to the SBA's figures. But more than $669 billion in PPP was allocated into law by Congress.

“The SBA was relatively slow to turn these applications around,” said Tom McHale, president of Pursuit Lending. “The volume of forgiveness applications they’ve seen has been tremendous.”

The Federal Reserve initiated a massive lending window aimed under its PPP Liquidity Facility for nondepository institutions, one that ostensibly would be used to facilitate more loans to smaller banks and lenders.

But according to CDFI leaders, the Fed’s window is largely useless because CDFIs need to raise the money before the Fed backstops it.

“It still requires us to put up the capital first,” Lee said. “We make the loan, then we take the loan and give it to the Fed as collateral, and then they give us money back.”

Other CDFI executives don't see as much doom and gloom.

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