On November 13, the Consumer Financial Protection Bureau released a “pilot study” on the small business lending market revealing “significant disparities” in how lenders treat black and white small business owners. As part of its study, the CFPB conducted matched-pair testing at 50 bank branches in New York and Virginia using actors who posed as small business owners. Black participants were provided slightly more favorable financial profiles compared to the white participants. In many tests, the black and white participant each met with the same bank representative.
The Bureau examined four key aspects of the loan inquiry process: encouragement or discouragement to apply for a loan; information provided about requested loan products and potential steering to other products; the overall quality of treatment or customer service; and the amount of business and credit information requested.
The study revealed two statistically significant disparities:
- Black participants received less encouragement to apply for a loan. The CFPB found that lenders expressed interest in applications from 40% of white participants, but only 23% of black participants. Additionally, the black participants consistently reported feeling less encouraged to apply for loans than their white counterparts.
- Lenders were more likely to suggest alternative credit products to black business owners. Lenders were significantly more likely to suggest alternative credit products to black participants, including personal credit cards and home equity loans. The Bureau noted that some of these alternative credit products can meet specific business needs. However, it added that, generally speaking, business credit cards are less favorable for the profiles that were presented because they often include lower credit limits than the loan amounts sought, typically charge higher interest rates on any revolving balance, and require quicker repayment to avoid higher interest rates. Moreover, personal credit products are often less favorable because they introduce risk to a borrower’s personal credit and assets through their business.
In its report, the Bureau encouraged “replication and extension” of its results, and noted that its work provides a framework for detecting differential treatment in commercial lending. The Bureau also identified several compliance management practices that may serve to mitigate the risk of a related ECOA violation for disparate treatment in a financial institution’s small business lending program, including active board and management oversight of the institution’s compliance management system framework, periodic review of relevant policies and procedures, and, regular monitoring and risk assessments. The report also encouraged institutions to do their own testing to assess if their policies and practices were ECOA compliant.
Putting It Into Practice: The report highlights the Bureau’s continued focus on ECOA-related compliance issues in the small business lending market. It also underscores how the enactment of the CFPB’s small business data collection rule will likely lead to more Bureau supervisory and enforcement actions in this arena.
