{"id":71991,"date":"2020-02-14T18:46:46","date_gmt":"2020-02-14T23:46:46","guid":{"rendered":"https:\/\/ncrc.org\/?page_id=71991"},"modified":"2020-02-19T12:01:54","modified_gmt":"2020-02-19T17:01:54","slug":"mystery_shopping","status":"publish","type":"page","link":"https:\/\/ncrc.org\/mystery_shopping\/","title":{"rendered":"Racial and Gender Mystery Shopping for Entrepreneurial Loans:\u00a0Preliminary Overview"},"content":{"rendered":"\t\t
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Anneliese Lederer<\/strong>, Director of Fair Lending & Consumer Protection, NCRC
<\/i>Dedrick Asante-Muhammad,<\/strong> Chief of Race, Wealth and Community,\u00a0<\/i><\/i><\/p>

In cooperation with:
<\/i>Jerome Williams<\/strong>, Rutgers University; <\/i>Sterling Bone<\/strong>, Utah State University; <\/i>Glenn Christensen<\/strong>, Brigham Young University<\/i><\/p>

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Executive Summary<\/b><\/h2>

The number of businesses owned by women is on the rise,[1]<\/sup><\/a>\u00a0but female entrepreneurs still face\u00a0more obstacles<\/span>\u00a0than men in obtaining small business loans. This study found that Black women business owners face the most difficulty getting loans from banks. The National Community Reinvestment Coalition (NCRC) evaluated 120 matched-pair tests involving a mix of gender and race combinations at 90 bank branches belonging to 54 different financial institutions in the Atlanta, Georgia, and Washington, D.C., metropolitan statistical areas (MSA). NCRC found that while all testers received inadequate treatment from banking personnel, women and people of color reported the worst experiences.<\/p>

The results add to previous NCRC studies, released in September\u00a02019<\/a>\u00a0and\u00a02017<\/a>, that found stark differences in the treatment of Black and Hispanic business owners who applied for small business loans compared to White applicants. The earlier matched-pair tests focused on race but did not examine gender differences. This study found that women in general faced a tougher loan application process than men – and Black women faced the toughest of all.<\/p>

The Equal Credit Opportunity Act (ECOA) requires the financial industry to lend without discrimination on the basis of race or gender (as well as\u00a0religion, national origin, marital status, age or because you get public assistance). Discouragement in the pre-application process is included under ECOA. Evidence of discrimination by a lender can be\u00a0grounds<\/span>\u00a0for ECOA enforcement actions by federal agencies and private organizations.<\/p>

NCRC’s matched-pair test findings suggest that financial institutions need better training and internal controls so their employees have a better understanding of borrower expectations and anti-discrimination laws. But training is only as effective as a financial institution’s compliance program. A strong compliance program should include audits and matched-pair mystery shopping. Banks can also limit biases by hiring a more diverse staff.<\/p>

Financial institutions can\u2019t do this alone. The Consumer Financial Protection Bureau (CFPB) needs to implement section 1071 of the Dodd-Frank Act, which required banks to collect data on their lending practices. This information would help\u00a0lenders,<\/span>\u00a0small business owners, advocates and the government enforce ECOA and better understand growing wealth disparities.<\/p>

Women and Entrepreneurship<\/b><\/h2>

There has been a 6%[2]<\/sup><\/a>\u00a0growth in women-owned businesses from 2017-2018, resulting in 40%[3]<\/sup><\/a>\u00a0of all businesses in the U.S. owned by a woman. As the total number of women entrepreneurs has increased, so too, has the number of women entrepreneurs of color.\u00a0About 5,824,300[4]<\/sup><\/a>\u00a0businesses in 2018 were owned by minority women, representing about 47%[5]<\/sup><\/a>\u00a0of all women-owned businesses<\/span>.<\/p>

Congress has even taken notice. The U.S. House of Representatives passed a bill that doubled the amount that the Small Business Administration Women’s Business Centers[6]<\/sup><\/a>\u00a0could receive to $300,000.[7]<\/sup><\/a>\u00a0These resource centers provide education on promising practices, technical assistance, encouragement and connection to entrepreneurial support systems including financing for free or significantly discounted rates so women can successfully run and expand their small business. This increase in funding is important but is not enough to help even a third of the 12.3 million[8]<\/sup><\/a>\u00a0women-owned businesses across the country that qualify.<\/p>

An important piece to the entrepreneurial puzzle is access to capital. This foundational piece is too often missing for small business entrepreneurs, particularly women of color. Currently, there does not exist a cohesive, comprehensive, publicly available database that breaks down all the small business lending by type of loan product, amount requested, amount received, type of business, length of time in business and other pertinent information. This type of database would provide the public with a clear understanding of the small\u00a0business lending<\/span>\u00a0arena. A comprehensive database like this would provide insight and understanding into who is making small business loans and who is receiving them. Under section 1071 of the Dodd-Frank Act of 2010, Congress delegated this responsibility to the Consumer Financial Protection Bureau (CFPB). The CFPB has still not fulfilled this\u00a0Congressionally-mandated<\/span>\u00a0directive.<\/p>

The only publicly available data is Small Business Administration (SBA) loans and Community Reinvestment Act (CRA) accredited loans. However, these loans make up a tiny percentage of total small business lending. SBA loans only make up between 3%-7%[9]<\/sup><\/a>\u00a0of the total $1.4 trillion small business loan market.[10]<\/sup><\/a>\u00a0From this limited publicly available data, we know that about 4%[11]<\/sup><\/a>\u00a0of commercial loans and 18%[12]<\/sup><\/a>\u00a0of SBA loans go to women-owned businesses. The CRA small business lending data does not contain any indications of the gender or racial\/ethnic background of borrowers.<\/p>

Small Business owners who are unable to find funding from traditional sources will turn towards alternative credit providers, such as Fintechs, which are online providers of capital. One Fintech, Fundera, published a report on their small business lending data,The State of Online Small Business Lending: Spotlight on Women Entrepreneurs<\/i><\/a>.<\/a>\u00a0They found that there are significant disparities between lending to women and male entrepreneurs. On average, women asked for $35,000 less than men when they made their initial funding request. Women also received smaller loan amounts compared to men in every type of loan product that Fundera offers (e.g., SBA loan, Medium-term loan, line of credit, etc.). Additionally, women took out more expensive loans compared to men, which affects business development, as it shrinks the amount of total capital women have to grow their business. The report noted that about 30% of women took out short-term loans, which have higher interest rates and lower eligibility standards, compared to 20% of men. About 31% of men took out medium-term, more affordable loans, compared to 26% of women.<\/p>

Wealth and Entrepreneurship<\/b><\/h2>

In January 2019, the Institute for Policy Studies released\u00a0the\u00a0report, \u00a0<\/span>\u201cDreams Deferred,\u201d<\/a>\u00a0that highlighted\u00a0how racial wealth inequality\u00a0has\u00a0increased\u00a0over the last 33 years. In 2016, White median wealth was $146,984, Latino median wealth was $6,591 and Black wealth was at a low $3,557. Dr. Mariko Chang\u00a0found in,\u00a0\u201c<\/a>Women and Wealth: Insight for Grantmakers<\/a>,<\/a>\u201d<\/a>\u00a0that single African American women between the ages of 18-64 have a median wealth of $200, for Latina\u2019s it is $100 and White women have $15,640. For single men in the same age bracket, the median wealth for Black men is $300, for Latino\u2019s $950 and for White men $28,900. There is growing recognition that wealth is a central indicator of the economic\u00a0well-being<\/span>\u00a0and stability of households and that such low levels of wealth are a significant indicator of deep economic insecurity.<\/p>

Professor Edward Wolff\u2019s 2017 paper, \u201cDeconstructing Household Wealth Trends in the United States, 1983-2016<\/a>,\u201d noted\u00a0that throughout the last 33 years unincorporated business equity has consistently been the second-largest percent of gross assets only behind principal residence. Business equity is a foundational part of wealth development in this country, making small business development a central aspect of strengthening financial\u00a0well-being<\/span>\u00a0for many Americans. With the aforementioned growth of women-owned businesses, it\u2019s necessary that we learn more about and understand the barriers that women and\u00a0particularly\u00a0women of color face as business owners. To properly assist women in the journey to equal wealth and success as entrepreneurs, we must pay close attention to the basic level of treatment among small business owners by\u00a0financial institutions.<\/p>

Examining Small Business Lending<\/b><\/h2>

\u201cDisinvestment, Discouragement and Inequity in Small Business Lending<\/a>\u201d examines the racial realities and the practices of bank investing in small businesses. As\u00a0a follow up to those explorations, this white paper added a gender lens. The purpose of mystery shopping is not only to uncover possible fair lending and compliance violations,\u00a0but<\/span>\u00a0to better understand the barriers that different people experience when trying to gather information from lenders. Mystery shopping helps to reveal “discrimination with a smile.” It uncovers behaviors that an individual may not realize are an issue but, when seen in the totality of the matched-pair\u00a0setting,<\/span>\u00a0reveal the presence of discouragement, discrimination and fundamental marketing failures. Revealing these barriers allows us to work towards solutions to dismantle them.<\/p>

Throughout 2018 and 2019, NCRC completed racial and gender mystery shopping in the small business pre-application stage in Atlanta\u2019s MSA and in D.C.\u2019s MSA. The shopping focused on the experience that White and\/or Black females have when inquiring about a small business loan. NCRC analyzed the differences in treatment that matched-pair testers received throughout the interaction when they inquired about a small business loan.<\/p>

Methodology<\/b><\/h2>

NCRC, in collaboration with our academic partners, conducted and examined 60 matched-pair gender tests (white male v. white female) in the Atlanta MSA and 60 male and female race tests (white male v black male and white female v black female) in the Washington, D.C.,\u00a0MSA for<\/span>\u00a0a total of 240 interactions between testers and banks. These tests occurred in 90 bank branches belonging to 54 financial institutions. The purpose of the research was to determine the baseline customer service level that men and women testers received when seeking information about small business loans.<\/p>

This study, like our previous studies,\u00a0was\u00a0designed to answer the following research questions.\u00a0Are minority and non-minority small business owners with similar economic and business\u00a0profiles:<\/span><\/p>