Is Your Banker Discriminating Against You?
Wells Fargo, one of the largest banks in the country and the leading originator of mortgages to consumers, recently reached a settlement agreement with the Department of Justice over accusations of lending discrimination. The settlement requires the bank to pay a whopping $175 million while avoiding any admission of guilt. The DOJ was investigating the bank for allegedly steering well-qualified mortgage applicants towards sub-prime loans based on their ethnicity and race. Wells Fargo is not the first—nor will it be the last—financial institution to be accused of lending discrimination. Just last year Bank of America paid $355 million to settle similar claims made against their Countrywide mortgage division.
Consumer vs. Small Businesses
The problem of lending discrimination isn't limited to consumer loans. Many minority-owned businesses face a similar situation when applying for business credit. They are either rejected or offered onerous terms simply because of their ethnicity or race. But unlike consumers who have fallen victim to this practice, small-business owners don't have someone looking out for them; the Department of Justice and Attorneys General focus their efforts on protecting consumers, not businesses. Legislation, like the Equal Credit Opportunity Act, which protects against lending discrimination also defends consumers, not businesses.
Even if there was an advocate for small-business owners who wanted to identify instances of lending discrimination, they wouldn't have the data necessary to make a case. In 2003, the Federal Reserve Board stopped producing the Survey of Small Business Finance, which was helpful in identifying patterns that could signal lending discrimination. When this survey was produced, the data was used by researchers to show that minority-owned businesses consistently paid higher interest rates than equally-qualified businesses owned by white males.
Without an advocate and hard data, business owners need to look out for themselves to avoid falling prey to discriminatory lenders. This is hardly an easy task. Business owners don’t have a clear and definable benchmark to which they can compare their treatment.
The Consumer Financial Protection Bureau (CFPB) has indicated that they will begin tracking lending practices to small businesses to ensure that potential discrimination is investigated and corrected. Lenders will soon be required to keep records on the gender, race and ethnicity of small-business loan applicants and provide this data to the CFPB. This greater transparency, additional data and the watchdog mandate of the CFPB should make unscrupulous lenders think twice before making someone pay more because of the way they look.
In the meantime, here's what minority-owned small businesses can do now to ensure that they are being treated fairly:
Speak directly with other minority business owners. Anecdotal evidence will provide a good source of feedback on how other companies like yours are being treated by specific lenders.
Seek credit from a broad mix of lenders. Don’t just target large banks; seek out opportunities with credit unions, asset-based lenders, receivables factoring companies and others to minimize the risk of discrimination from a certain class of lender.
Work with institutions that have sound consumer lending practices in place. While there is no guarantee that banks known for treating consumers well will also treat small businesses well, the probability is greater than with institutions that don’t have this reputation.
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