Documenting The Social Impact of Mission-Driven Community Lenders
Paper Session
Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Agustin Miguel Hurtado, University of Maryland
Five Research Priorities for Community Development Financial Institutions: Advancing Financial Inclusion Through Evidence-based Practic
Abstract
Community development financial institutions (CDFIs) foster lasting, transformational development by providing inclusive, fair, and equitable financial services to people, organizations, and places underserved by mainstream banking institutions, CDFIs share a common understanding about what they do: empower individuals and communities by meeting them where they are, when needs are significant, and resources are low. Yet despite this shared vision of a more inclusive financial system, CDFIs and their stakeholders may differ on how to best track progress. To foster more alignment across these perspectives, we propose five research areas to help CDFIs highlight progress, identify challenges, and ultimately achieve their goals. 1): Outline the theoretical foundations that underpin CDFI activities. 2): Conduct analyses that highlight historical lessons and emerging trends. 3): Work toward improving evaluation and impact measurement/management. 4): Identify funding strategies that improve capacity and sustainability. 5 Demonstrate the value of CDFIs via improving data quality and accessibility.The Effect of Minority Bank Ownership on Minority Credit
Abstract
We construct the first matched data on bank ownership, employees, and mortgage borrowers to study the effect of racial minority bank ownership on minority credit. We address previous missing data and measurement error issues by introducing numerous novel sources and tools. Using our newly constructed data, we present four findings. First, minority-owned banks specialize in same-race mortgage lending. Almost 70 percent of their mortgages go to borrowers of the same race as their owners. Second, the effect of minority bank ownership on minority credit is large and exceeds that of minority loan officers. We find that minority borrowers applying for mortgages at banks whose owners are of the same minority group are nine percentage points more likely to be approved than otherwise identical minority borrowers at nonminority banks. This effect is over six times that of a minority loan officer. Third, evidence from plausibly exogenous bank failures suggests that the effect of minority bank ownership might reflect an expansion rather than a reallocation of credit to minorities. Fourth, the within-bank default rate of same-race borrowers is much lower than that of otherwise-identical borrowers of other races at minority banks. These findings are consistent with minority bank ownership reducing information asymmetry and inconsistent with owners’ preferences driving the observed effects on minority credit. The evidence is also consistent with an organizational phenomenon, suggesting that the effect of banks’ organizational culture and design on minority credit might outweigh that of banks’ individual employees.MDI Mortgage Lending: Insights from Quantitative Data and Stakeholder Interviews
Abstract
Minority Depository Institutions are mission-driven lenders that locate in underserved communities and apply context and community knowledge to lending decisions. In this paper, we explore MDI mortgage lending from 2019-2022, representing nearly $58billion in mortgage originations. Our analysis highlights the social impact of MDI mortgage lending, particularly as compared to lending from other types of financial institutions. We find that consistent with prior literature, MDIs issue a greater share of lending to minority borrowers and minority communities than do non-MDI lenders. In addition to statistical analysis, our paper also features insights gleaned from interviews with key personnel at these institutions. These interviews help provide an understanding of the MDI mortgage landscape, including the major challenges, needs, opportunities, and goals of the MDI sector.Are Loans to Minority Owned Firms Mispriced
Abstract
Previous research has concluded that compared to white owners, more minority business owners do not apply for credit because they fear being rejected for credit; and minority owners are rejected for credit more often than white owners with the same creditworthiness. We extend these studies by comparing the loan terms for minority firms and white firms that were approved for credit. Small firms in 44 states responded to our national survey that collected financial and other information on firms that borrowed, the terms under which they borrowed, and the type of lender, for firms that borrowed between January 2022 and June 2023. This is the first data set containing interest rate and collateral details in loans to small businesses along racial lines in the U.S. since the Federal Reserve’s Surveys of Small Business Finances in 2003. We examine differences in the interest rate and collateral requirements for businesses owned by people of color compared to businesses owned by whites. We compare Hispanic, Asian, Black, and Native American firms—by group—to white firms in credit terms, across six types of lenders: Large banks (deposits at least $10 billion), small banks, CDFIs, credit unions, fintech lenders and nonbank finance companies. Does a minority firm-white firm disparity in financing exist in the loan terms (interest rate and collateral) of credit provided by lenders in recent years? Is the disparity consistent across the six types of lenders? What is the economic impact of loan mispricing across racial groups?Discussant(s)
Sarah Simms
,
Federal Reserve Bank of San Francisco
Hannah Vargason
,
University of New Hampshire
Jacob Levy
,
Visa Economic Empowerment Institute
William Jackson
,
University of Alabama
JEL Classifications
- G2 - Financial Institutions and Services
- G5 - Household Finance