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Credit Scoring and the Availability of Small Business Credit in Low‐ and Moderate‐Income Areas

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  • W. Scott Frame
  • Lynn Woosley

Abstract

This paper estimates that credit scoring is associated with about a $3,900 increase in small business lending per sample banking organization, per low‐ and moderate‐income (LMI) area served, and this effect is roughly equivalent to that estimated for higher‐income areas. For our sample, this corresponds to a $536 million increase in small business credit in LMI areas in 1997 than otherwise would have been the case. This effect appears to be driven by increased out‐of‐market lending by banking organizations, as in‐market lending generally declines. Overall, it does not appear that credit scoring has a disparate impact on LMI areas.

Suggested Citation

  • W. Scott Frame & Lynn Woosley, 2004. "Credit Scoring and the Availability of Small Business Credit in Low‐ and Moderate‐Income Areas," The Financial Review, Eastern Finance Association, vol. 39(1), pages 35-54, February.
    • Handle: RePEc:bla:finrev:v:39:y:2004:i:1:p:35-54
    DOI: 10.1111/j.0732-8516.2004.00066.x
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    References listed on IDEAS

    as
    1. Berger, Allen N & Frame, W Scott & Miller, Nathan H, 2005. "Credit Scoring and the Availability, Price, and Risk of Small Business Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 191-222, April.
    2. Raphael W. Bostic & Glenn B. Canner, 1998. "New information on lending to small businesses and small farms: the 1996 CRA data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 84(Jan), pages 1-21, January.
    3. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-825, August.
    4. Helen F. Ladd, 1998. "Evidence on Discrimination in Mortgage Lending," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 41-62, Spring.
    5. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    6. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    7. W. Scott Frame & Michael Padhi & Lynn W. Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," FRB Atlanta Working Paper 2001-6, Federal Reserve Bank of Atlanta.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    9. McDonald, John F & Moffitt, Robert A, 1980. "The Uses of Tobit Analysis," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 318-321, May.
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