Commercial Lending Distance and Historically Underserved Areas

Robert DeYoung, W. Scott Frame, Dennis Glennon, Daniel P. McMillen, and Peter J. Nigro
Working Paper 2007-11a
Revised July 2007

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We study recent changes in the geographic distances between small businesses and their bank lenders, using a large random sample of loans guaranteed by the Small Business Administration. Consistent with extant research, we find that small borrower-lender distances generally increased between 1984 and 2001, with a rapid acceleration in distance beginning in the late-1990s. We also document a new phenomenon: a fundamental reordering of borrower-lender distance by the borrowers' neighborhood income and race characteristics. Historically, borrower-lender distance tended to be shorter than average for historically underserved (for example, low-income and minority) areas, but by 2000 borrowers in these areas tended to be farther away from their lenders on average. This structural change is coincident in time with the adoption of credit scoring models that rely on automated lending processes and quantitative information, and we find indirect evidence consistent with this link. Our findings suggest that there has been increased entry into local markets for small business loans and this should help allay fears that movement toward automated lending processes will reduce small businesses' access to credit in already underserved markets.

JEL classification: G21, G28

Key words: small business loans, borrower-lender distance, credit scoring

The authors thank Robert Avery and Leora Klapper for helpful comments and discussions and an anonymous referee for suggesting substantial improvements. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, the Office of the Comptroller of the Currency, or the U.S. Treasury Department. Any remaining errors are the authors' responsibility.

Please address questions regarding content to W. Scott Frame, Financial Economist and Associate Policy Adviser, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8783, 404-498-8810 (fax),; Robert DeYoung, University of Kansas, Lawrence, KS; Dennis Glennon, Office of the Comptroller of the Currency, Washington, D.C.; Daniel P. McMillen, University of Illinois at Chicago; or Peter J. Nigro, Bryant University, Smithfield, RI.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.