New report finds disparities by race and income in lending to businesses

Lack of access to credit could limit economic opportunity in disinvested communities

CHICAGO—There are significant disparities with respect to both race and neighborhood income in access to credit for businesses in the Chicago six county region, a new report from Woodstock Institute found. From 2008 to 2012, the business loan gap (that is, the difference between the total amount of loans made and proportional distribution of loans) in majority minority communities was estimated to be nearly $1.5 billion, and the gap in low-income communities exceeded an estimated $817 million.

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“Businesses need affordable capital in order to grow, create jobs, and generate economic activity,” said Spencer Cowan, Vice President of Research at Woodstock Institute. “This research clearly shows that businesses in low-income and majority minority communities do not have the same opportunities to expand as businesses in high-income, majority white neighborhoods, potentially exacerbating the wealth gap and stifling entrepreneurship that could help rebuild distressed neighborhoods.”

The report, “Dis-Credited: Disparate Access to Credit for Businesses in the Chicago Region,” analyzed data from the Federal Financial Institutions Examination Council, US Department of Housing and Urban Development, and the U.S. Census in the Chicago six county region between 2008 and 2012 and found that:

  • The lower the income level of the tract, the less likely businesses were to receive loans. Businesses in low-income tracts were less than half as likely, and businesses in moderate-income tracts were less than two-thirds as likely, to have received loans as the average for all businesses.
  • The higher the percentage of minority residents in the tract, the less likely businesses were to receive loans. In the Chicago region, businesses in tracts that were 80 percent or more minority constituted 8.0 percent of businesses, but they received only 3.8 percent of loans by both number and dollar volume.
  • Businesses in majority white tracts were more likely to receive loans than businesses in majority minority tracts of the same income level. For example, only about one in three businesses in moderate-income, majority minority tracts received loans, compared with nearly half of businesses in moderate-income, majority white tracts.
  • Businesses in lower-income tracts were less likely to receive loans than businesses in higher-income tracts, regardless of whether the tract is majority white or majority minority. Only about two in seven businesses in low-income, majority minority tracts received loans, compared with nearly three of five businesses in upper-income, majority minority tracts. About two in five businesses in low-income majority white tracts received loans, compared with three in four businesses in upper-income majority white tracts.

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“Regulators must hold banks’ feet to the fire to ensure that banks are responsibly meeting the credit needs of businesses in all communities,” Cowan said.

The report concludes with policy recommendations to address business lending disparities:

  • Examiners of bank performance under the Community Reinvestment Act (CRA) should analyze lending performance in low- and moderate-income tracts more stringently to provide banks more incentive to meet business credit needs.
  • Local governments should use responsible banking ordinances that link government bank deposits to community reinvestment performance to encourage banks to make more small loans to businesses in low- and moderate-income neighborhoods.
  • Congress should increase funding for Community Development Financial Institutions and the New Markets Tax Credit program.
  • Prudential regulators should expand business loan data reported under CRA to more accurately show the level of demand and how well CRA-reporting institutions are meeting the demand.
  • The Consumer Financial Protection Bureau should require reporting of detailed business lending data and expand the number of reporting institutions to include lenders with assets below $1 billion.

For more information, contact Spencer Cowan at scowan@woodstockinst.org or 312-368-0310.