Small business lending and the racial wealth divide

In January 2019, the Institute for Policy Studies released a report titled “Dreams Deferred” that highlights how racial wealth inequality was increasing over the last 33 years. In 2016, white median wealth was $146,984, Latino median wealth was $6,591 and black wealth was at a low $3,557. There is growing recognition that wealth is a central indicator of the economic well-being and stability of households and that such low levels of wealth among blacks and Hispanics are a significant indicator of continuing deep racial economic inequality.  

Professor Edward Wolff’s 2017 paper, “Deconstructing Household Wealth Trends in the United States, 1983-2016,” notes that throughout the last 33 years unincorporated business equity has consistently been the second-largest percent of gross assets only behind principal residence. Business equity is a foundational part of wealth development in this country, making small business development a central aspect of strengthening financial well-being for many Americans. 

The National Community Reinvestment Coalition (NCRC) recently released a white paper examining the reality and the practices of bank investing in small businesses. This white paper includes a two-part study to evaluate differences in small business ownership and lending opportunities. In one section, there is an analysis of small business ownership and lending at the national and metropolitan levels in seven cities (Atlanta, Houston, Los Angeles, Milwaukee, New York City, Philadelphia and Washington, D.C.), using data from the federal government. The other section of the paper is a review of a series of “mystery shopping” tests of banks to evaluate the customer service experience of prospective borrowers of different races and ethnicities in the Los Angeles metropolitan area.

The title of our paper: “Disinvestment, Discouragement and Inequity in Small Business Lending” speaks to much of what we found in our research. 

Our paper highlights:

  1. There are tremendous gaps in black and Hispanic business ownership relative to their population size. Although 12.6% of the U.S. population is black, only 9.5% of African Americans are business owners, and only 2.1% of businesses with employees are black-owned. Hispanics are 16.9% of the population but only own 5.6% of small businesses with employees.
  2. There is also a lack of access to capital through the traditional banking market, especially for black business owners who have seen a steep decline in SBA 7 lending from 8% of loans to 3% of loans.
  3. NCRC’s mystery shopping tests indicate sub-standard customer service, including inadequate presentation of loan information for all testers regardless of race.
  4. It is also true that white testers received superior customer service by being asked fewer questions about eligibility and obtaining more information about the loan product than were their black and Hispanic counterparts.

One of the barriers that NCRC’s research team found when analyzing the lending data in the small business arena is the lack of publicly available data. It is imperative Section 1071 of the Dodd-Frank Act be implemented. Section 1071 would require lending institutions to submit data on small business loans made to minority and women-owned businesses. The non-implementation of Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act inhibits the ability to understand whether capital is allocated in an equitable way to women and minority-owned small businesses. 

The racial disparities in entrepreneurship reflect the deep racial wealth divide in society. Overcoming these challenges requires a focused effort to bridge the disparities that maintain racial economic inequality in the 21st century and a commitment to collecting and analyzing data that helps us understand the extent of racial inequality in today’s America.

This OpEd is based on NCRC’s Chief of Race, Wealth and Community Dedrick Asante-Muhammad’s verbal testimony to the House Financial Services Subcommittee on Oversight and Investigations on financial inclusion, September 4, in Houston, Texas.

Photo of urban small business by Christian Koch on Unsplash

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