This paper empirically examines the effect of the use of credit scoring by large banking organizations on small business lending in low- and moderate-income (LMI) areas. Using census tract level data for the southeastern United States, the authors estimate that credit scoring increases small business lending by $16.4 million per LMI area served. Furthermore, this effect is almost 2.5 times larger than that estimated for higher income census tracts ($6.8 million). The authors also find that credit scoring increases the probability that a large banking organization will make small business loans in a given census tract. The change in this probability is 3.8 percent for LMI areas and 1.7 percent for higher income areas. These findings suggest that credit scoring reduces asymmetric information problems for borrowers and lenders and that this is particularly important for LMI areas, which lenders may have historically bypassed because of their questionable economic health.
JEL classification: G2, O1, O3, E5
Key words: credit scoring, small business lending, low-income, Community Reinvestment Act
The authors thank Clark Burdick, Gregory Elliehausen, Robert Eisenbeis, Loretta Mester, Aruna Srinivasan, Daniel Waggoner, Larry Wall, and conference participants at the Federal Reserve System’s research conference “Business Access to Capital and Credit” for helpful comments on an earlier draft. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to W. Scott Frame, Senior Economist, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303, 404-498-8783, firstname.lastname@example.org; Michael Padhi, Senior Economic Analyst, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303, 404-498-8019, email@example.com; or Lynn Woosley, Examiner, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303, 404-498-7300, firstname.lastname@example.org.
To receive notification about new papers, please use the on-line publications order form, or contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404/498-8020.