Banks More Likely to Lend to Small Business in Wealthy Areas, Activist Group Says
Banks are eight times as likely to make loans to small businesses in wealthy neighborhoods as in poor ones, according to a study released Tuesday by an activist group.
Banking industry representatives disputed the conclusions reached by the Assn. of Community Organizations for Reform Now, or ACORN, insisting that banks are evenhanded in lending to small businesses in different areas.
Using loan data for Los Angeles and other metropolitan areas compiled by the Federal Reserve Board, the group said it found that eight times as many loans were made to small enterprises in upper-income neighborhoods as in low-income areas and that nine times as much money went to small enterprises in wealthier districts.
When allowance was made for the fact that there are more affluent census tracts than poorer ones, the study found three times as many loans and 2 1/2 times as much money going to small businesses in wealthier neighborhoods.
ACORN said the study examined nearly 700,000 small-business loans totaling $42.2 billion in 1996.
“It is not just hopeful entrepreneurs who suffer from this. . . . The communities around them suffer as well,” said ACORN President Maude Hurd. “Lenders are priming a pump which is already a gusher of credit to affluent neighborhoods, while low-income areas go thirsty for loans.”
Fritz Elmendorf, a spokesman for the Consumer Bankers Assn., disagreed with the group’s findings. “Banks have been very successful in making small-business loans in low-income areas,” he said.
Elmendorf cited a recent study by the Federal Financial Institution Examination Council that showed low-income areas represent 4.9% of the U.S. population and receive 4.6% of new small-business loans and 5.6% of the money involved.
Mike terMaat, senior economist at the American Banking Assn., said small businesses often locate in more affluent areas because of proximity to customers, suppliers and amenities--factors unrelated to the availability of bank credit. He suggested it would be inappropriate to tell them to move to lower-income areas.
The banking industry should aggressively market its products in low-income areas, the study recommends, and banks should give a “second look” to rejected loan applications rather than sticking rigidly with credit scoring--the use of computer programs to analyze applicants.
The study analyzed data for Los Angeles; Oakland; San Jose; Albuquerque; Atlanta; Baltimore; Baton Rouge, La.; Boston; Bridgeport, Conn.; Chicago; Dallas; Denver; Des Moines; Detroit; Houston; Jersey City, N.J.; Kansas City, Mo.; Lake Charles, La.; Little Rock, Ark.; Miami; Milwaukee; Minneapolis-St. Paul; New Orleans; New York; Philadelphia; Pine Bluff, Ark.; Seattle; Shreveport, La.; St. Louis; and Washington.
