The Community Reinvestment Act and small business lending in low- and moderate-income neighborhoods during the financial crisis
AbstractOver the last three years, the financial crisis and ensuing recession have led to tectonic shifts in the availability of credit, especially for small businesses. Data show that the number of loans to small businesses has dropped from 5.2 million loans in 2007 to 1.6 million in 2009. This trend is of significant concern to policy-makers, particularly given the important role that small businesses play in the US economy. Making credit accessible to small businesses, therefore, is seen as a critical component of economic recovery. Despite this policy focus, however, few studies have documented recent trends in small business lending, and even fewer have focused attention on the implications of the reduction in credit for small businesses in low- and moderate-income neighborhoods. ; In this paper, we seek to address this gap by examining trends in small business lending in low- and moderate-income (LMI) neighborhoods by large banks regulated under the Community Reinvestment Act (CRA). We find that there is a strong relationship between the boom and bust housing market cycle and patterns in small business lending, both over time and over space. While small business lending expanded rapidly between 2003 and 2007, this expansion was uneven, and neither LMI communities nor neighborhoods with a high percentage of African American residents appear to have benefited as much as other areas from the boom. Since 2007, small business lending has contracted significantly, particularly in areas that have also seen contractions in the housing sector. Our results show significant spillover effects of the mortgage crisis into small business lending—for the economy as a whole as well as for LMI areas in particular. Our findings suggest that in order to reverse the cycle of disinvestment in neighborhoods hit hard by foreclosures, we need to address the small business sector as well as housing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Community Development Investment Center Working Paper with number 2010-05.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-04 (All new papers)
- NEP-BAN-2010-12-04 (Banking)
- NEP-ENT-2010-12-04 (Entrepreneurship)
- NEP-URE-2010-12-04 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert DeYoung & W. Scott Frame & Dennis Glennon & Daniel P. McMillen & Peter J. Nigro, 2007.
"Commercial lending distance and historically underserved areas,"
2007-11, Federal Reserve Bank of Atlanta.
- DeYoung, Robert & Frame, W. Scott & Glennon, Dennis & McMillen, Daniel P. & Nigro, Peter, 2008. "Commercial lending distance and historically underserved areas," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 149-164.
- Kenneth P. Brevoort & John A. Holmes & John D. Wolken, 2010. "Distance still matters: the information revolution in small business lending and the persistent role of location, 1993-2003," Finance and Economics Discussion Series 2010-08, Board of Governors of the Federal Reserve System (U.S.).
- Ben R. Craig & William E. Jackson, III & James B. Thomson, 2006. "Small-firm credit markets, SBA-guaranteed lending, and economic performance in low-income areas," Working Paper 0601, Federal Reserve Bank of Cleveland.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.