Banks lend to wealthier, whiter, and urban Illinois communities while rural, lower-income, and minority areas struggle
A new report released recently by Woodstock Institute finds small businesses in lower-income areas and communities of color received fewer bank loans than businesses in higher-income and predominantly white areas across Illinois. The report Patterns of Disparity: Small Business Lending in Illinois examines and compares lending reported by banks under the Community Reinvestment Act (CRA) in the Bloomington, Carbondale, Champaign-Urbana/Danville, Chicago, Metro East, Moline-Rock Island, Rockford, Peoria, and Springfield/Decatur regions.
The report builds on Woodstock Institute’s 2017 four-part series of research reports examining small business owners’ access to traditional bank loans in eight major metropolitan areas.
Across the state, racial and economic lending disparities persist. Businesses in low- and moderate-income census tracts received a smaller share of bank loans than businesses in higher-income areas. Likewise, small businesses in areas with majority non-white residents received fewer loans than businesses in predominantly white areas.
The report also notes a sluggish, uneven recovery since the Great Recession in each of the nine Illinois regions. The sluggish recovery was most pronounced in rural regions. Only Chicago and the Metro East regions saw lending above 2,000 levels, and only the Chicago region’s lending level matched the national level.
The report provides several recommendations for policymakers, regulators, banks, and non-banks that make loans to small businesses. The report’s top recommendation is that the Consumer Financial Protection Bureau and the Department of Justice conduct an investigation to determine the degree to which racial discrimination is at the root of the disparities identified in this and other similar reports. The report recommends that banks, too, play a role in trying to alleviate the disparities by providing better training of loan officers and by conducting periodic internal mystery shopping. The recommendation cites a 2017 study by the National Community Reinvestment Coalition finding that banks were twice as likely to offer white entrepreneurs help with their loan applications as they were to offer help to Black entrepreneurs.
To help small business borrowers avoid getting caught in a debt trap similar to the way payday loans ensnare individual borrowers, the report recommends that the law require non-bank lenders to determine whether a small business borrower can actually afford to repay the loan before making the loan. A bill intending to accomplish this was introduced in the Illinois State Senate in 2016 (SB 2865; D-Collins) and unleashed a fury of opposition by the industry. The report further recommends that states and the federal government follow the lead of California, which recently passed a law (SB 1235) requiring non-bank lenders to disclose the annual percentage rate (APR) of their loans. Individuals are entitled to that disclosure under the Truth in Lending Act, but only in California are small business borrowers entitled to this information.
“The fight for fair lending is far from over,” said Woodstock Institute President Dory Rand. “Banks and policymakers should be pro-active in reversing these trends so that it’s no longer the norm that whiter and wealthier neighborhoods receive a disproportionate share of small business loans. That’s why we advocate for strong, sensible regulation, such as a more robust and modern Community Reinvestment Act, to hold banks accountable to meet community needs, including access to business capital.”
“I’ve been my own bank. No one should have to do that,” noted Marcus Pickett, owner of Temperature Doctors Heating & Cooling, Inc., who struggles to obtain the capital he needs to grow the first and only African American-owned HVAC business in Rockford, Illinois.
“I’m not really able to go full throttle like I would like to with my business because of the fact that I can’t get capital,” confirmed Jemiyah Beard, a small business owner in Champaign, Illinois, who cannot obtain a traditional bank loan so her new business, Mary’s Master Cleaning Service, can bid on contracts and hire formerly incarcerated people who need jobs.
Illinois Black Chamber of Commerce Executive Vice President Deavay Tyler explained, “We know a lack of capital is the one, universal thing that holds all entrepreneurs back. No matter how good the business plan, Black business owners, especially those outside Chicago, can’t seem to break through. The examples highlighted in this report unfortunately are not the exception, but the rule. We are confident that our members can create jobs for their communities because we’ve seen it happen, we just need the banks to see it too.”