Lender bias taints credit market

Credit refusals for black-owned businesses linked to discrimination

Published November 17, 2003; Category: ARTS & SCIENCES

All things being equal, economist David Blanchflower believes that market forces level the playing field for businesses competing in the same industry. However, new research by Blanchflower and colleagues at Wellesley and Williams Colleges argues that discrimination by credit lenders prevents many African-American business owners from even getting into the stadium.

"We've got anecdotal and statistical evidence that the biggest problem for minority business owners is discrimination by lenders," says Blanchflower. "And if they can't get credit, they can't enter the marketplace."

The study, published in the November issue of the Review of Economics and Statistics, found that black-owned small businesses are roughly twice as likely to be denied credit as white business owners, even after controlling for differences in credit-worthiness and other factors. And when their loans were approved, black business owners were usually charged significantly higher interest rates than other borrowers.

People of Asian or Pacific Island descent also face higher denial rates, but to a much lesser extent than blacks do. Other minority groups, including women, were not found to face such disparity.

The researchers compared the business credit data to other types of credit, including home mortgages and business credit cards. While blacks were denied for mortgages at a higher rate than other Americans, the differences were much less extreme than with business credit. And when it came to applying for a business credit card - instances in which the lender usually doesn't know the race of applicants - blacks were approved at the same rate as members of any other group.

"The most likely reason behind these differences is discrimination," said Blanchflower, who noted that factors affecting creditworthiness were controlled for in the analysis. He said the absence of a "highly sophisticated secondary market" for business credit accounted for part of the difference in mortgage lending rates versus business credit.

"Also, there are special programs and regulatory incentives to encourage banks and others to increase their mortgage lending to minorities, which gives these groups some advantages in obtaining a home loan," he added.

The study's statistical data reflected with great accuracy the results of anecdotal surveys with black business owners. The difficulty of getting credit was consistently cited as the biggest hurdle by the firms. In fact, some business owners reported that they were reluctant to apply for credit for fear of being denied because of their race, Blanchflower said.

"This study confirms what many black business owners have suspected all along: that they are being treated differently by banks and other lenders because of their race," Blanchflower said. This data, as well as related research that Blanchflower is working on (see "Lawsuits advance local affirmative action programs," at left), already holds the potential to greatly influence the nation's affirmative action debate.

By TAMARA STEINERT