Has the Community Reinvestment Act increased loan availability among small businesses operating in minority neighbourhoods?

Abstract

The 1977 Community Reinvestment Act (CRA) established a bold agenda requiring financial institutions in the USA to serve the credit needs of low-and moderate-income areas, including traditionally excluded minority residential areas. Initially opposed by both bankers and the federal regulatory authorities responsible for enforcement, the CRA has been contentious for decades. This study explores CRA impacts by investigating whether small businesses located in minority neighbourhoods have the same degree of bank-loan access as equally creditworthy firms located in other environs. We analysed both the unmet credit needs of small firms and the outcomes of their loan applications. We found that equality in loan access has been attained in some respects, indicating the CRA has had positive effects on loan availability. Inequality nonetheless persists. Regarding unmet credit needs, firms are penalised if their owners are African American, Latino or Asian American. Since roughly half of owners in minority communities are minorities, our challenge was to disentangle the effects on loan access of small-business geographic location versus owner race. Causal factors underlying our findings were investigated. Did bank regulators take the initiative in lessening traditional discriminatory lending practices? Alternatively, were activist community groups responsible? While the agenda advocated by activist groups coincides closely with actual gains, the overlapping but differing stated objectives of regulators did not.

Impacts of Owner Race and Geographic Context on Access to Small-Business Financing

“…Alternative specifications of Table 3's regression model generate results consistent with the findings discussed here; see Bates and Robb (2015). A "business," by definition, was created by one or more people and includes purchasing an existing business or a franchise.…”

“…Logistic regression analysis revealed that MBEs located in minority neighborhoods were actually more likely to have their applications approved by banks than minority businesses located elsewhere in urban America (Bates & Robb, 2015). Logistic regression analysis revealed that MBEs located in minority neighborhoods were actually more likely to have their applications approved by banks than minority businesses located elsewhere in urban America (Bates & Robb, 2015).…”

“…Although serious CRA enforcement by regulatory authorities began only in the 1990s, these actions did ultimately pressure banks to reexamine their lending policies, leading gradually to greater loan availability for minority neighborhood small businesses (Bates & Robb, 2015;Immergluck, 2004). The CRA sought to make banks responsive to the credit needs of the communities in which they operate.…”

“…Effective regulation under the CRA was often instigated by neighborhood associations, civil rights groups, community development corporations, and coalitions of these groups (Bates & Robb, 2015;Immergluck, 2004). Small banks in urban America were often displaced by branches of these huge institutions.…”

Entrepreneurship and the Racial Wealth Gap: The Impact of Entrepreneurial Success or Failure on the Wealth Mobility of Black and White Families

“…Statistical analyses find that race remains a negative predictor of loan acceptance and loan quality, even after controlling for salient economic characteristics (Asiedu et al, 2012 ; Blanchard et al, 2008 ; Blanchflower et al, 2003 ). Other work has confirmed that these disparities are not merely due to location-based “redlining” but are primarily a function of the entrepreneur’s own race (Bates & Robb, 2015 , 2016 ). This discrimination can be clearly observed in “mystery shopper” studies that document severe disparities in the way bank employees treat equally qualified Black and white entrepreneurs asking for identical loans (Bone et al, 2014 , 2017 ; Lubin, 2011 ; Turner et al, 2002 ).…”