Minority business owners with better credit scores face more scrutiny, study says
Black and Hispanic men seeking small business loans faced more scrutiny and worse treatment from bank officers than less qualified white men, according to a study released this week by the National Community Reinvestment Coalition.
The results demonstrate the challenges minority entrepreneurs face when trying to access additional capital to expand their businesses. The study also found declines in government-backed lending to black business owners, dropping from 8 percent to 3 percent of small business loans between 2008 and 2016.
The organization sent teams of white, black and Hispanic "mystery shoppers" who acted as prospective borrowers to evaluate customer service interactions with the banks' small business lending representative at 60 Los Angeles area banks. The testers had nearly identical business profiles and strong credit histories, with black and Hispanic testers possessing slightly better incomes, assets and credit scores than their white counterparts.
In almost every measure, white testers received superior customer service, the study found. Bank representatives asked white prospective borrowers fewer questions about eligibility and provided them more information about loan products.
"It's a cultural, civil rights and business problem that should be relegated to history, but instead it's still a factor in who gets access to capital," said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition. "This is exacerbating the nation's profound racial wealth divide."
Not a single white tester was asked to provide a personal W-2 form, which are not required for a small business loan -- although 16 percent of black and 11 percent of Hispanic testers were asked for the document.
Black testers were the only group asked about their education level. Hispanic testers were asked more often about the size of their credit card debt. Blacks and Hispanics were more frequently asked for their credit report and personal financial statements.
Bank representatives were also friendlier and more likely to introduce themselves to white testers. Loan officers were at least twice as likely to provide white testers with information about interest rates, loan fees and length of time for approval. And they more frequently offered white testers a business card and thanked them for coming in.
However, minority testers were twice as likely as their white counterparts to receive an offer to schedule an appointment to go over their application -- a finding that researchers said could be a sign of encouragement or an additional hurdle, depending on the interaction.
The differences overall illustrate how minorities are discouraged from even applying for a loan, Van Tol said. Business owners who are unable to establish relationships with loan officers are more likely to turn to more expensive lines of credit, he said.
Shutting minority entrepreneurs out of small business ownership hurts their ability to build wealth.
"Ensuring fair lending is a fundamental requirement for a just economy, and clearly, banks need better anti-racism policies and better training," Van Tol said, "and borrowers need the government to step up and enforce anti-discrimination laws."