Banks loan less to Detroit businesses in neighborhoods with more minorities

A study looking at business loans in metro Detroit confirmed the adage that banks lend money to people who don't need it.

It also found a pattern of lending that could be a result of discrimination.  

The 42-page report,  released today by the Woodstock Institute in Chicago, found wide disparities in lending in Detroit and nationwide when considering income and race.

"If you are not lending in neighborhoods, entrepreneurs there can't create jobs," the study's author, Spencer Cowan, said in a conference call. "They can't sustain businesses. They can't provide needed services for local residents. The neighborhood declines."

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The study, one in a series of reports that the research and policy group has published, looked at bank lending to businesses in Detroit and Richmond, Va., with the aim of determining whether small businesses were able to get the capital they needed.

It was paid for by foundations, banks and nonprofit organizations.

The study found businesses in low-income and high-minority areas proportionally received fewer loans.

Small business lending nationally grew rapidly between 2001 and 2007, dropped between 2007 and 2010, when faced with a recession and banking crisis, and then increased slowly through 2015, according to data reported under the Community Reinvestment Act.

Nationally, businesses in low-income census tracts made up an average of 9.3% of all businesses, but they received only 4.7% of bank loans under $100,000 and only 4.9% of the amount of those loans. 

If those businesses had received loans in proportion to their share of businesses overall, the study found, they would have received 687,600 more loans totaling $8.8 billion more than they actually received between 2012 and 2015.

In metro Detroit, the numbers were similar.

Businesses in low-income census tracts constituted an average of 10% of all businesses, but they received only 5% of bank loans under $100,000 and 5.4% of the total dollar amount of those loans.

Proportionally, they would have received nearly $135 million.

Businesses in metro Detroit's predominantly minority census tracts constituted an average of 15.4% of businesses, but they received only 7.8% of the loans under $100,000 and only 7% of the total dollar amount of those loans during that period. 

Again, proportionally, they would have received nearly $247 million.

To narrow the gap, the institute made some recommendations, including better reporting and tracking of loans so that they could be studied, more oversight and enforcement of fair-lending practices, incentives for loans to businesses in low-income and high-minority neighborhoods and consumer protections for small business loans.

"This report does not show proof of discrimination," Cowan said. "There's a correlation between the type of census tract a business is located in and the probability it's going to receive a loan."

There may be various reasons why. 

Among them, he said, is a sense that loans to businesses in these areas are riskier, banks earn more from making big loans to big businesses, and businesses in these areas might be reluctant to apply for bank loans.

"But," he added, "it does point out a disturbing pattern: Businesses in high-minority neighborhoods or businesses in low-income neighborhoods are not getting loans from the large financial institutions that report under the Community Reinvestment Act."

Contact Frank Witsil: 313-222-5022 or fwitsil@freepress.com.