Activists: Banks Short-Change Small Businesses in Inner City

A community group is charging that banks make three times more loans to small business in wealthy urban areas than to those in low-income, inner-city census tracts.

"Inequities in the small-business lending market represent a substantial barrier to the development and economic vitality of low-income, inner-city neighborhoods," the Association of Community Organizations for Reform Now said in its study. "Clearly, lenders need to make a more proactive effort to reach out to low-income neighborhoods to ensure that credit flows to their entire service area."

Acorn reviewed 700,000 small-business loans in 17,600 urban census tracts in 30 major cities. It found that low-income communities received 5.1% of the loans, even though they represent 10.8% of the census tracts studied. Wealthy areas, which made up 26.7% of the sample, received 36.4% of the loans.

"If low-income census tracts received their proportion of small-business loans, more than 29,000 additional loans worth over $1.2 billion would have gone to low-income census tracts," Acorn said.

Industry officials questioned the study's validity. "The banking industry shares Acorn's interest in increasing the number of small-business loan borrowers in all census tracts," said Mike ter Maat, an economist at the American Bankers Association. "But the study does not describe why there are fewer small-business borrowers in urban, low-income census tracts."

For instance, the study does not address whether there are more small businesses in wealthier communities. If true, that could explain the disparity, he said.

Also, he said the study does not address whether small businesses in low-income areas either had a need for credit or qualified for loans.

Patrick Woodall, a policy analyst at Acorn, said his group would have preferred to include borrower data. But he said it is very expensive to get data on the number of small businesses by census tract. Also, regulators do not collect rejection rate data for small-business borrowers.

"We would love to see data similar to what we get on home mortgages," Mr. Woodall said. "That would give us a picture of demand."

The study was based on 1996 Community Reinvestment Act data released in September. A government analysis of the data found that low-income census tracts nationwide received 4.6% of small-business loans, a number roughly equivalent to the share of the population living in these areas.

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