On November 13, the Consumer Financial Protection Bureau (CFPB) published a report on matched-pair testing in small business lending, highlighting potential racial discrimination. The study reveals that black small business owners may face less favorable treatment compared to their white counterparts when seeking credit.
Background
In 2023, the CFPB and the U.S. Department of Justice (DOJ) partnered to conduct matched-pair testing to analyze differential treatment between black and white small business owners. The study involved recruiting 50 pairs of raters to visit 25 bank branches in Fairfax County, Virginia, and 25 in Nassau County, New York. Each pair of raters consisted of one black participant and one white participant. In total 100 visits were made.
Evaluators were instructed to approach each branch with a prepared small business profile and request information about available business financing options. Each interaction was audio recorded and evaluators completed a post-visit survey to document their experience, which provided the data analyzed in the report.
The test results examined four metrics: (1) encouragement or discouragement from applying for a loan; (2) information provided about the credit products requested and possible guidance towards other products; (3) the overall quality of customer treatment or service; and (4) the amount of business and credit information requested.
Statistical analysis and results.
The study found that black evaluators received less favorable treatment than matched white evaluators on two of the four metrics analyzed. In both metrics, differential treatment was statistically significant.
First, black testers received less favorable treatment in terms of incentive measures to apply for funding. Although raters tended to receive favorable levels of encouragement/discouragement regardless of their race, white raters reportedly received more favorable treatment than their black counterparts. This pattern was consistent both in an objective index of potentially encouraging/discouraging behaviors and in raters’ subjective rating of their experience.
Second, Black reviewers were allegedly more likely to be offered unsolicited credit products, such as business credit cards or loans secured by real estate. Although bank representatives were equally likely to discuss the loan products that the raters requested as part of their research, these bank representatives were more likely to discuss unsolicited products with the Black raters. In fact, according to the study, bank representatives discussed unsolicited products with 59% of black testers, but only 39% of white testers.
Implications for financial institutions
The Equal Credit Opportunity Act (ECOA) prohibits racial discrimination in credit transactions for both consumer and business purposes. Accordingly, the CFPB recommends implementing several compliance management practices to mitigate the risk of an ECOA violation within a financial institution’s small business lending program. These practices include: (1) active oversight by the board of directors and management of the institution’s compliance management system framework; (2) comprehensive risk-focused policies and procedures for small business lending; (3) periodic reviews of existing policies and procedures to address the risk of a violation of the ECOA; and (4) small business loan monitoring programs and risk assessments.
Due to the limited nature of the study, the CFPB advises against generalizing the report’s findings to the total U.S. small business lending market or to any specific financial institution. However, the CFPB report purports to reveal evidence of less favorable treatment of black small business owners compared to white small business owners at large banks in two counties. As such, the CFPB study can be used to provide a “framework” for detecting such differential treatment within other financial institutions.
What does this mean to you?
Commercial purpose lenders must be alert to fair credit risk. In fact, with the advent of data collection and reporting requirements for small business lenders under Section 1071 of the Dodd-Frank Act, regulators, plaintiffs, and the media will have access to the kind of data which can be used to distinguish prima facie disparate ones. impact claims under the Equal Credit Opportunity Act. The CFPB study, with its associated “framework” for detecting disparities in the credit market, reads as an invitation for certain stakeholders to examine the data for actionable disparities.
Contact us
If you have any questions about this study or other consumer financial topics, please contact Chris Friedman or your local Husch Blackwell attorney.