Survey Suggests Need for Reform in Inner-City Lending

Three-quarters of minority-owned firms surveyed in South-Central Los Angeles and Santa Ana do not bother to apply for business loans or lines of credit, believing erroneously that banks cannot serve their needs or will discriminate against them, the San Francisco-based Greenlining Institute said Wednesday.

Officials at the Greenlining Institute, a nonprofit community rights group, point to their study of predominantly established and stable businesses as evidence that banks should be allowed to track business loan applicants by ethnicity and gender--a practice prohibited under the Federal Reserve’s Regulation B and now under review.

Established in 1977 to prohibit discrimination, the regulation is now viewed by many minority business advocates as a barrier to fair lending. The Greenlining Institute this year stepped up an aggressive campaign to reform the regulation, with the backing of many major California banks.

The Greenlining Institute set out to examine how often and why inner-city businesses are rebuffed in their efforts to access capital. To the researchers’ surprise, however, the findings showed that minority business owners are so certain that banks have little to offer them, they aren’t even walking in the door.

“Those perceptions will never change unless the banks alter their outreach and marketing strategies, but the banks are not going to waste money altering them unless they can tell if they’re successful,” said Robert Gnaizda, the Greenlining Institute’s policy director.

The findings add to a growing body of research showing that capital is available but not making its way to inner-city businesses. It also underscores that mainstream financial institutions are falling short in their efforts to tap vast markets of stable inner-city business owners--many of them immigrants who have long operated in a cash-based economy because of a mistrust of banks.

In addition to calling for reform of Regulation B, the report recommends that financial institutions launch extensive outreach and marketing efforts in minority communities to alter misconceptions about their lending criteria. It also asks that the Federal Reserve Bank in San Francisco conduct a comprehensive survey on the causes of under-service to minority-owned businesses.

The study polled 700 minority-owned firms about their borrowing habits in 1995 and 1996--a period when commercial banks sharply stepped up small-business lending efforts.

Of the Los Angeles firms, 77% did not seek loans or lines of credit, and 75% of those said they didn’t bother trying because they believed their requests would be denied. Of the Orange County firms, 95% said they did not seek loans or lines of credit, and 87% of those said they believed there were no loans available to them.

The businesses surveyed were not start-ups or fly-by-night operations: Ninety-three percent of the Los Angeles firms had been in business three years or more and 75% reported annual sales of $100,000 or more. In Orange County, 91% of those surveyed had been in business three years or more and half reported annual sales of $100,000 or more.

The Greenlining report called South-Central and Santa Ana “two of the most capital-starved regions in the state of California.”

The surveys were conducted by Operation Hope Inc. and the Minority Business Council of Orange County, under the supervision of the Greenlining Institute.

In Los Angeles, 42% of respondents were African American, 24% were Asian American, 22% were Latino, and 12% declined to say. In Orange County, 51% were Asian American and 49% Latino.

Copies of the report, titled “Our Paths Rarely Cross: Why Minority Businesses Say No to Banks,” were filed with the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp. and a number of state agencies Wednesday.

The report was also sent to Atty. Gen. Janet Reno, who has supported reform of Regulation B. The Justice Department two years ago urged the Fed to change the regulation but was rebuffed. Last May, however, the Federal Reserve opened the matter to public comment; a report is expected soon. A portion of Regulation B was changed by Congress in 1990 to allow banks to track by race and ethnicity for home lending, but the practice is still forbidden for business lending.

All the major California banks back reform, Gnaizda said.

“We do support the change of [Regulation] B, more than anything because we believe that everybody always does better at anything when you keep score,” said Doug Sawyer, executive vice president of BankAmerica Corp.’s small-business lending in Southern California. “Facts are always beneficial. . . . If people are not applying for loans, if they see a targeted marketing approach which has facts in it, they are going to be more likely to apply.”

Nitin Bhatt, interim executive director of USC’s Business Expansion Network, said the poor perception of banks by inner-city business owners is likely due in part to a rash of bank closures in recent years.

An analysis of bank financing in Los Angeles between 1990 and 1995 showed that there were more bank branches in the highest 40% income tracts than in the lowest 60%, even though the population of the latter was 1 1/2 times that of the former, Bhatt said. The analysis also showed that 58% of bank branches in the lowest 20% income tracts closed during that period.

“That’s the poorest of the poor,” Bhatt said. “Bank branches are moving into areas where there are high-end customers. People in the inner city are seeing bank branches move away, so there’s some credence to their perceptions.”