The Treasury Department privately encouraged banks to give priority to existing customers in implementing the federal government's paycheck protection program, which provided small businesses with coronavirus relief, according to a report by a House oversight body on Friday.
The Trump administration's instruction to give preference to existing customers in PPP lending decisions has disproportionately harmed minority and women-owned companies, the Democratically-led Select subcommittee on coronavirus crisis said in its report.
"As a result, small businesses that really needed financial support during the economic downturn often faced longer waiting times and more barriers to obtaining PPP funding than larger, wealthier firms," a congressional committee statement said.
Congress set up the PPP as part of the CARES bill, which aims to provide unsuccessful loans to small businesses and nonprofits to help them weather the Covid-19 pandemic and save jobs. The Small Business Administration relied on banks and other private lenders to process the funds.
Subcommittee records indicated that the Treasury Department told banks to "go to their existing customer base" when lending, according to an email from American Bankers Association CEO Rob Nichols to the group's board of directors on March 28 .
"The Treasury Department agreed early on that banks would work with existing customers," said Jennifer Roberts, senior banker at JPMorgan Chase & Co, the report told the subcommittee in July.
Nichols said in a statement Friday that the House panel report missed an important context in its assessment of banks' involvement in the PPP program.
"Banks of all sizes were urged by the administration at the start of the PPP program to process loans for both new and existing customers. They were also urged to process loans as quickly as possible to help support the deteriorating economy." wrote Nichols.
"To achieve this goal, many banks processed existing borrower applications first, as they already had the necessary borrower information to meet regulatory requirements, including the rules for knowing your customers."
However, the congressional body found that seven of the eight banks involved in its investigation were restricting PPP lending to existing customers.
These tactics hurt underserved groups, the House Panel found. Research shows that minority- and women-owned companies are less likely to have existing relationships with lenders.
An August report by the Federal Reserve Bank of New York found that 41% of black-owned businesses closed between February and April 2020 – more than any other demographic. The New York Fed noted "racial disparities in access to government aid", including "large gaps in PPP coverage."
In the CARES Act, Congress specified: "The administrator should issue guidelines to lenders and agents to ensure that small businesses and businesses in underserved and rural markets are prioritized in the processing and disbursement of covered loans."
The report concluded that neither the Treasury Department nor the SBA had provided "meaningful" guidelines for lenders to prioritize underserved groups, according to the financial institutions surveyed by the subcommittee.
The congressional panel also found that in their investigation, several banks processed PPP funds for larger commercial customers faster than smaller loans and offered different channels and levels of customer support depending on the type of customer.
"JPMorgan processed loans over $ 5 million nearly four times faster than loans under $ 1 million," the report said. "PNC processed loans over $ 5 million more than twice as fast as loans under $ 1 million."
Treasury and ABA did not immediately respond to CNBC's requests for comment.
A spokesman for the SBA said in a statement: "PPP loans have been … widely distributed, with about 27 percent of funds going to low- and middle-income communities, relative to their percentage of the population."
A republican selection subcommittee spokesman said in a statement, "PPP has helped support more than 51 million jobs across the country, including tens of millions of jobs in minority and rural communities. Spokesman Pelosi and House Democrats have harmed small businesses and underserved minority populations an extension of PPP is blocked almost 40 times on the floor of the house. "
The report comes as efforts to pass a new coronavirus stimulus package continue, with President Donald Trump, Treasury Secretary Steve Mnuchin and Senate leaders at odds.