The number of small business loan originations and total volume in minority areas in Massachusetts in 2016 was the highest it’s been in nearly a decade. But both of those categories still only make up less than 10 percent of all Community Reinvestment Act loans issued in the commonwealth in 2016.
Those are some of the main findings of a recently released report issued by the Massachusetts Community and Banking Council that examines small business lending in minority neighborhoods in Massachusetts from 2007 to 2016.
According to the study, banks in Massachusetts in 2007 issued almost 15,500 small business loans in minority areas for a total volume for $343.76 million. That equals 5 percent of total CRA loans issued and 5.5 percent of total volume that year.
Banks issued 12,119 small business loans in minority areas for a total volume for $452.76 million in 2016, making up 8.5 percent of total CRA loans and 9 percent of total volume, according to the study.
“The 9 percent number was a nice surprise, which is more or less in line with a percentage of firms that are in minority areas,” Stuart Ryan, the author of the report, told Banker & Tradesman. “Over the last few years, regulators have brought a number of pretty serious situations to the attention of the Justice Department and they have pursued them.”
“In Massachusetts, there are not any high-profile issues I am aware of, although I have heard they (bankers and regulators) are paying more attention,” he added.
Room for Improvement
Despite the uptick, Ryan said there is plenty of room for improvement.
Total small business loans in minority areas still make up a very small percentage of CRA loans. And while total volume was the highest in 2016 as a percentage of total CRA loans, volume was also 9 percent in 2014 and 9.5 percent in 2013.
Bram Berkowitz
Additionally, the number of small business loans issued in minority areas in 2007, almost 15,500, is more than 3,000 loans issued than in 2016.
Another thing to consider, said Ryan, is population growth.
According to the study, the number and size of minority neighborhoods in Massachusetts, which are referred to as census tracts, has increased significantly over the past few decades as the state’s minority population growth has outpaced white population growth.
In 1990 there were just 106 minority census tracts in the state, accounting for 8 percent of the total census tracts and 5.7 percent of the state’s population. In 2015, the last time a tally was taken, there were 246 minority census tracts representing 16.7 percent of total census tracts and 15.2 percent of the total population.
But while minority population growth has outpaced white population growth, small business loan volume is still higher in white areas in half of the counties in Massachusetts between 2012 and 2016.
“Look at how much minorities account for in state population; that number is going up,” said Ryan. “To me there could be an improvement in that regard, if loan percentages were more in line with the population.”
Due to the data available, the study looks at loans made in minority areas, Ryan said; but that doesn’t mean the loan necessarily went to a minority-owned business, meaning the data could be slightly skewed.
Much Work to Do
Rob Williams, a loan officer at the Massachusetts Growth Capital Corporation, a quasi-public agency that provides access to capital for small businesses, said he has seen an uptick of businesses participating in MGCC programs.
These include taking advantage of working capital, loan guarantees and targeted technical assistance to solve specific financial and operational problems – in other words, a lot of gap financing and mezzanine lending.
But in terms of the traditional lending process, Williams said he still sees banks declining many minority-owned businesses and thinks there is a long road ahead.
“The first thing that jumped out at me is we still have so much work to do to get people access [to capital],” he said, adding that credit scores, still a huge factor in obtaining a loan, have not really risen in the African-American community.
In addition, the rate of homeownership, one of the most important ways for working- and middle-class families to build wealth, has remained virtually unchanged for African Americans in the past 50 years, according to a report released in 2016 by the Economic Policy Institute.
Black homeownership remains just over 40 percent, trailing 30 points behind the rate for whites, who have seen modest gains during that time.
Williams thinks everyone needs to take a hard look at the traditional lending model, and perhaps come up with a new one, maybe with lenders making equity injections instead of traditional loans.
But like Ryan, Williams agrees that the MCBC report does shows one major difference occurring now that hasn’t occurred as much in previous years: “I think more banks are starting to realize with the CRA that they want to have more of an impact in minority communities.”
