Commercial Lending Distance and Historically Underserved Areas

FRB of Atlanta Working Paper No. 2007-11a

36 Pages Posted: 12 Jul 2007

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

W. Scott Frame

Federal Reserve Bank of Dallas

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Daniel P. McMillen

University of Illinois at Chicago - Center for Urban Real Estate

Peter J. Nigro

Bryant University - Department of Finance

Date Written: July 2007

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.

Keywords: small business loans, borrower-lender distance, credit scoring

JEL Classification: G21, G28

Suggested Citation

DeYoung, Robert and Frame, W. Scott and Glennon, Dennis and McMillen, Daniel P. and Nigro, Peter J., Commercial Lending Distance and Historically Underserved Areas (July 2007). FRB of Atlanta Working Paper No. 2007-11a. Available at SSRN: https://ssrn.com/abstract=998554 or http://dx.doi.org/10.2139/ssrn.998554

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

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

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

250 E Street, SW
Senior Financial Economist; Economics Department
Washington, DC 20219-0001
United States
202-874-4725 (Phone)
202-874-5394 (Fax)

Daniel P. McMillen

University of Illinois at Chicago - Center for Urban Real Estate ( email )

601 South Morgan Street
MC 144
Chicago, IL 60607-7121
United States

Peter J. Nigro

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

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