The Effect of Credit Scoring on Small Business Lending in Low- and Moderate-Income Areas

FRB Atlanta Working Paper No. 2001-6

26 Pages Posted: 20 May 2001

See all articles by W. Scott Frame

W. Scott Frame

Federal Reserve Bank of Dallas

Michael Padhi

University of Maryland - Department of Finance

Lynn W. Woosley

affiliation not provided to SSRN

Date Written: April 2001

Abstract

This paper empirically examines the effect of the use of credit scoring by large banking organizations on small business lending in low- and moderate-income (LMI) areas. Using census tract level data for the southeastern United States, the authors estimate that credit scoring increases small business lending by $16.4 million per LMI area served. Furthermore, this effect is almost 2.5 times larger than that estimated for higher income census tracts ($6.8 million). The authors also find that credit scoring increases the probability that a large banking organization will make small business loans in a given census tract. The change in this probability is 3.8 percent for LMI areas and 1.7 percent for higher income areas. These findings suggest that credit scoring reduces asymmetric information problems for borrowers and lenders and that this is particularly important for LMI areas, which lenders may have historically bypassed because of their questionable economic health.

Keywords: Credit scoring, small business lending, low-income, Community Reinvestment Act

JEL Classification: G2, O1, O3, E5

Suggested Citation

Frame, W. Scott and Padhi, Michael and Woosley, Lynn W., The Effect of Credit Scoring on Small Business Lending in Low- and Moderate-Income Areas (April 2001). FRB Atlanta Working Paper No. 2001-6, Available at SSRN: https://ssrn.com/abstract=267532 or http://dx.doi.org/10.2139/ssrn.267532

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

Michael Padhi

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Lynn W. Woosley

affiliation not provided to SSRN

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