Racial prejudices affected who received paycheck protection program loans, report says
STATEN ISLAND, NY – The Paycheck Protection Program (PPP) was a relief initiative created to help struggling business owners during the coronavirus (COVID-19) pandemic, but it was more difficult for minority entrepreneurs, especially black business owners find a lender. A new research project has found that the problem mostly occurs in small banks and that human bias may be the main reason, The New York Times recently reported.
a economic working paper released Monday revealed that the majority of black borrowers who received assistance from the relief program got their loan from a financial technology company, or fintech, instead of a bank. The newspaper found that the asymmetry was greater among black borrowers than any other racial group, according to the Times.
Sabrina T. Howell, an assistant professor of finance at New York University’s Stern School of Business and lead author of the article, investigated why the disparity exists, the outlet reported.
Researchers found that automated loan verification and processing systems used by fintech companies, as well as big banks, dramatically improved approval rates for black borrowers, the Times reported. There was no glaring discrepancy for any other racial group that was considered, including Asian and Hispanic applicants.
Howell said research shows how technology can help level the playing field.
“The human brain is a much scarier black box than any machine learning algorithm,” she told The New York Times. “You can force an algorithm to meet fair lending standards, and you can make sure that the data it trains on is unbiased. It may be difficult to do, but it is a clear and objective possibility. Whereas when you have a human loan officer standing in front of someone making a decision, you can never do it. “
The Independent Community Bankers of America, a business group for small banks, defended its members and told The Times that community lenders outperform the rest of the banking industry when serving businesses owned by minorities, women and men. veterans. He also criticized the way researchers determined the race of applicants.
Since a borrower’s ethnicity was optional for lenders in the P3, the researchers used Census Bureau data to predict which race was likely to be a business owner, according to the outlet. The Independent Community Bankers of America said this method was unreliable.
The Paycheque Protection Program was a loan designed to directly incent small businesses to keep their employees on the payroll. The loans could have been used to help fund wage costs, including employee benefits, and could also be used to pay mortgage interest, rent, utilities, worker protection costs related to COVID-19, the costs of uninsured property damage caused by looting or vandalism during 2020; and certain vendor costs and expenses for operations, according to the US Small Business Administration.
The program advanced up to $ 10 million to small businesses, and the government then paid off all loans to business owners who followed the rules. If the borrower defaults, the government would still reimburse the lender, The New York Times reported. This meant that any lender should have been willing to lend to any qualified candidate under the PPP.
But it wasn’t, the research project found.
Many banks have limited loans to current customers, making it difficult for homeowners who did not have a business checking account. But even black business owners who had accounts were more likely than those of other races to end up with a fintech loan, the study found, according to the outlet.
The effects were strongest in areas with higher levels of racial animosity. The study measured this with variables such as local housing segregation and the prevalence of racially-motivated Google searches.
Even after controlling for variables such as zip code, industry, recent income, affinity for online lenders, and loan amount, the gap persisted, according to the Times.
This was not the case in the largest banks in the country. When the researchers controlled for these variables, black-owned businesses seemed just as likely as any to get a loan from Bank of America, Citibank, JPMorgan Chase, and Wells Fargo.
This is because the big banks and the fintechs both used automated processes.
Howell told the outlet she hoped the study results and growing research into racial bias in lending could show how technology can help banks make fairer lending decisions.