Leveling the Playing Field: for small business loans

Gary O. Shelton, CEO. GOS Companies

Banks were twice as likely to offer white entrepreneurs help with their small business loan applications compared to black entrepreneurs, a new “mystery shopping” study found. The study, conducted by a team of researchers from the National Community Reinvestment Coalition, Utah State University, Brigham Young University, Rutgers University, and Lubin Research, also found that bankers were three times more likely to invite follow-up appointments with white borrowers than better-qualified black borrowers.

Overall, black entrepreneurs seeking loans for their businesses were subjected to far more scrutiny compared to their equal or less creditworthy white counterparts.

“This research provides us with a new lens through which to look at disparities faced by African-American business owners,” said Stella Adams, Chief of Equity and Inclusion at NCRC and one of the lead researchers in the study. “The study shows that it’s access, not assets, that serve as a barrier to the capital and credit necessary to grow a business.”

While discrimination experienced by minorities seeking home ownership has been studied and addressed in a variety of federal laws designed to prevent it, this new research focused on how discrimination impacts minorities seeking business loans, which has not been documented as thoroughly.

The study used a matched-paired mystery shopping methodology to document the difference in treatment between white and black entrepreneurs.

Researchers set up teams of black and white males who were matched with identical qualifications and characteristics, such as education, age, income, and attractiveness. They were also trained in the credit-seeking process. The pairs used identities designed by the researchers to apply for loans at 17 financial institutions in East Coast cities between May and July 2017.

"When banks discriminate on the basis of race, they violate our civil rights laws and threaten the foundation of a fair economy," said Vanita Gupta, the head of the Department of Justice's Civil Rights Division.

Unfortunately, wealth in this country is unequally distributed by race—and particularly between white and black households. African-American families have a fraction of the wealth of white families, leaving them more economically insecure and with far fewer opportunities for economic mobility. African-Americans have less wealth than whites. Less wealth translates into fewer opportunities for upward mobility and is compounded by lower income levels and fewer chances to build wealth or pass accumulated wealth down to future generations. “Black-American wealth has been stripped in so many ways and places,” said Dr. Claud Anderson, one of the best economic minds in Black America. “This is yet another industry where we are overdue for a change in practice. It is common sense, and dollars and cents.”

Emerging solution for black entrepreneurs: Online lending, because it's less intimidating than staring down a loan officer at the local branch, and it holds the promise of more objective credit analyses.

Indeed, the early evidence suggests that online applications and automated decisions are adding fairness to the process of granting small-business loans to black entrepreneurs.

GOS Companies’ affiliate Online portal SmartBiz analyzes Small Business Administration loan applications on its member banks' behalf and sends them the loans that best match their underwriting policies. Members approve 95% of the loans SmartBiz sends them.

So why are black business owners far more likely to obtain a loan by applying online to GOS Companies– which is simply embedding banks' underwriting policies in its platform –than by going into a branch and talking to a human?

It's all online, I can't speak to somebody going into a branch and what a loan officer would say in the branch, because we don't do that. These are borrowers who are coming online and there's no bias in the process.

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