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Commercial lending distance and historically underserved areas

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  • Robert DeYoung
  • W. Scott Frame
  • Dennis C. Glennon
  • Daniel P. McMillen
  • Peter Nigro

Abstract

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.

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  • Robert DeYoung & W. Scott Frame & Dennis C. Glennon & Daniel P. McMillen & Peter Nigro, 2007. "Commercial lending distance and historically underserved areas," FRB Atlanta Working Paper 2007-11, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2007-11
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gregory F Udell, 2015. "SME Access to Intermediated Credit: What Do We Know and What Don't We Know?," RBA Annual Conference Volume,in: Angus Moore & John Simon (ed.), Small Business Conditions and Finance Reserve Bank of Australia.
    2. Elizabeth Laderman & Carolina Reid, 2010. "The Community Reinvestment Act and small business lending in low- and moderate-income neighborhoods during the financial crisis," Community Development Investment Center Working Paper 2010-05, Federal Reserve Bank of San Francisco.
    3. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    4. John R. Walter & Patricia E. Wescott, 2008. "Antitrust analysis in banking : goals, methods, and justifications in a changed environment," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 45-72.
    5. Fidrmuc, Jarko & Hainz, Christa, 2008. "Integrating with Their Feet: Cross-Border Lending at the German-Austrian Border," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 248, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    6. 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.
    7. Kenneth P. Brevoort & John D. Wolken, 2008. "Does distance matter in banking?," Finance and Economics Discussion Series 2008-34, Board of Governors of the Federal Reserve System (U.S.).
    8. Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small Business Lending After the Financial Crisis: A New Competitive Landscape for Community Banks," Economic Perspectives, Federal Reserve Bank of Chicago, issue 3, pages 1-30.
    9. repec:bla:ecnote:v:46:y:2017:i:3:p:527-554 is not listed on IDEAS
    10. Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small Business Lending: Challenges and Opportunities for Community Banks," Working Papers 16-02, University of Pennsylvania, Wharton School, Weiss Center.
    11. Ergungor, O. Emre & Moulton, Stephanie, 2011. "Do bank branches matter anymore?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    12. Inderst, Roman, 2008. "Retail finance: Bringing in the supply side," CFS Working Paper Series 2008/36, Center for Financial Studies (CFS).

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