Racial bias affected Black-owned small businesses seeking pandemic relief loans, study finds
WASHINGTON - Black-owned small businesses were much less likely to receive federal coronavirus relief loans from small banks than they were from online lenders, a new study concluded.
Researchers found that Black-owned small businesses were 70% more likely to get Paycheck Protection Program loans from online companies, probably because those lenders - known as financial technology companies, or fintechs - use automated systems that don't have the racial biases that small bankers may bring to the table when approving borrowers for loans, according to the New York University study.
The research "presents the possibility that there may be benefits from a racial equity standpoint to removing humans and all of the biases, both conscious and unconscious, that come along with human decision-making from the lending process," said Sabrina Howell, an assistant professor of finance at NYU's Stern School of Business and a co-author of the report.
The Paycheck Protection Program (PPP) was launched under the Trump administration to provide forgivable loans to businesses that rehired or kept workers on their payrolls. It was part of a package of measures meant to bolster the worsening economy during the pandemic. But an analysis of $517 billion in emergency small-business loans found that a majority went to larger businesses, which also disadvantaged minority-owned businesses.
Xavier Epps, a financial adviser, said he witnessed firsthand how Black small-business owners were disproportionately affected by the pandemic and when they applied for PPP and other relief programs.
"I can tell you about a fitness business in Virginia I had that was Caucasian-owned versus a fitness business in Maryland I had that was African American-owned, and how they both received very different treatment," said Epps, founder and chief executive of XNE Financial Advising in the District of Columbia. "I was shocked that the system really does work against you based on race," he said, noting that it was harder for his Black clients to get loans and grants than it was for their White counterparts, even when equally qualified.
"It hurt. I don't want to have conversations with a client that says 'Look, you know, if you were a different race [the outcome] would be something else,' " said Epps, who is Black.
Other studies have had similar findings. An August 2020 study by the Federal Reserve Bank of New York found that 41% of Black businesses had folded amid the pandemic - the highest share among all racial and ethnic groups. This year, a survey by a coalition of Federal Reserve Banks found that Black business owners were the most likely to draw from their personal funds to help keep their businesses afloat. They also were five times more likely to not receive any of the PPP funding they had requested, compared with White-owned businesses. While 79% of White-owned firms received all of the PPP funding they sought, only 43% of Black-owned firms did, the report found.
"Whether we would like to admit it or not, we have a divided country, and the reality of it is people's biases surface in all kinds of ways when it comes to lending," said Larry Ivory, chairman of the National Black Chamber of Commerce.
Many factors can play a role in lending decisions, including a borrower's Zip code, loan size and type of business. But the NYU study found that even when controlling for those variables, Black-owned businesses were still more likely to get a PPP loan from a fintech than from a small bank. It was the starkest contrast among all the racial groups studied.
After controlling for those variables, there also was no significant difference in lending by race when it came to the four largest banks - JPMorgan Chase, Bank of America, Wells Fargo and Citibank - which the study's authors said was because large banks have highly automated systems similar to fintechs.
The contrast was most evident in areas with high levels of "racial animus," which was measured in the report by researching the number of racially biased Google searches, segregation levels and other factors.
"Lenders with the most human involvement seem to be responsible for this evidence of discrimination," Howell said.
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When asked for comment on small banks' disparate lending when it comes to Black businesses, the American Bankers Association said in a statement, "Banks played a vital role in getting the majority of those (PPP) loans into the hands of borrowers across the country, including millions of small businesses in communities of color." The association also said the pandemic posed challenges to both lenders and borrowers.
When the pandemic hit in early 2020, the Trump administration's Labor Department issued a memo that waived some policies designed to help minority-owned businesses.
Dozens of groups wrote a joint letter expressing "deep concern" about the move. Ivory, the chamber of commerce chairman, said the action set back Black-owned businesses from the beginning of the pandemic.
In February, the Biden administration changed PPP rules to try to better serve small, vulnerable businesses. But Ivory said it was not enough to make up for the pandemic's unequal impact.
"It has been absolutely devastating, and mentally and emotionally draining," Ivory said. "Not only to deal with the health-care outcomes of family members who are dying but to deal with financial hardships at the same time."
Epps said he lost several clients during the pandemic because they could no longer afford his services, which in turn put his 10-year-old business in a financially precarious position. But he said he didn't blame the clients - they were all in it together, Black-owned businesses struggling to stay afloat.
His firm received two PPP loans, he said, one from a fintech and one from a traditional bank. He said he was rejected six times for another type of coronavirus aid for businesses called the Economic Injury Disaster Loan, despite being eligible. Many of his clients also were rejected, he said.
"Who knows? Maybe me being an African American CEO of a corporation in the D.C. area, maybe that played against," Epps said. "There's a racial element in everything that involves finances."
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