A “pilot study” shows those in the small business lending market face “significant” racial differences in how lenders treat Black and White owners. A bank discriminating against customers based on color or race would violate federal and possibly state laws.
As part of its study, the federal Consumer Financial Protection Bureau (CFPB) conducted matched-pair testing at 50 bank branches in Nassau County, New York, and Fairfax County, Virginia, using actors who posed as small business owners. Black testers had slightly more positive financial profiles compared to the white participants. The Black and White testers often met with the same bank employee. The study was released in November.
What The CFPB Study Considered And What They Found
As a mergers and acquisitions lawyer can share, the CFPB looked at the following aspects of the loan inquiry process:
- Encouragement or discouragement to apply for a loan
- Information the bank provided about loan products the testers sought and the potential steering to other products
- The quality of customer service or treatment
- The amount of credit and business information sought
The CFPB stated they found two statistically significant differences:
- Banks gave less encouragement to Black participants to apply for a loan. Lenders stated their interest in getting applications from 40% of White participants but only 23% of Black testers. Black participants reported consistently that they felt less encouraged to apply for loans than white testers
- Black participants were more likely to receive suggestions they apply for alternative credit products, including home equity loans and personal credit cards. Though some of these products may meet specific business needs, generally, business credit cards are less favorable due to lower credit limits than loan amounts being sought, usually charge higher interest rates on revolving balances, and mandate faster repayment to prevent higher interest rates
The CFPB encouraged other organizations to perform similar studies to see if their results can be replicated and to determine the extent, if any, of the problem.
CFPB Offers Suggestions To Business Loan Industry
The Board also had suggestions for lending institutions, including the following:
- Active board and management oversight of an institution’s compliance management system
- Periodic reviews of policies and procedures
- Regular monitoring of the institution’s interactions with customers, including doing their own testing
If a bank corrects problems before they impact customers, it could avoid potential government actions and lawsuits by individuals as our friends at Focus Law LA can explain.
Federal Banking Law And Discrimination
The CFPB states that it’s illegal under the federal Equal Credit Opportunity Act for a creditor to discriminate in a credit transaction based on the following:
- Race
- Color
- Religion
- National origin
- Sex (including gender identity and sexual orientation)
- Marital status
- Age
- Receiving public assistance
- Exercising in good faith your Consumer Credit Protection Act rights
Illegal actions can include the following:
- Refuse to offer you credit if you qualify for it
- Discourage you from applying for credit
- Offer you credit on terms that are less favorable than others similarly qualified
- Close your account
States may also have laws banning similar discrimination. If you feel discriminated against in banking services, contact your attorney to discuss the situation and your potential options.