The CFPB recently released a significant report titled "Matched-Pair Testing in Small Business Lending Markets." This report summarizes the results of small business lending matched pair testing conducted in conjunction with the U.S. Department of Justice. It provides valuable insights into the lending practices within the small business sector.

Key Findings and Implications

Encouragement/Discouragement

Lenders showed a more favorable attitude towards White testers when it came to providing objective encouragement or discouragement to apply for credit. On average, both Black and White testers were encouraged to apply, but White testers received slightly more positive feedback. Additionally, White testers subjectively reported feeling more encouraged compared to Black testers.For example, in one paired test, a Black tester was informed that his business was too small to qualify for the bank's small business loan products. However, a paired White tester with a similar-sized business was encouraged to apply for a small business line of credit.

Products and Potential Steering

Bank representatives were equally likely to discuss the requested products with both White and Black testers. However, they were more inclined to discuss non-requested products with Black testers. In one instance, a bank representative directed a Black tester towards a home equity line of credit product instead of a business line of credit, even though both testers had requested business credit.The CFPB acknowledges that the instructions given to testers may have influenced the product discussions and that future research is needed to further explore this aspect.

Customer Service

White testers subjectively reported higher levels of customer service compared to Black testers. Although there were no statistically significant differences in objective measures of customer service behaviors such as greetings or thank-yous, the overall experience differed.For instance, a Black tester entered a branch office and was not greeted or acknowledged. It took him a long time to find an employee to discuss his needs, and the representative he met couldn't answer many of his questions. In contrast, a White tester was greeted upon entry and received better assistance.

Information Requested of Tester

The CFPB did not find statistically significant differences between Black and White testers in terms of the amount of information requested during the visit or the likelihood of receiving a follow-up contact. Around one-third of test visits resulted in a follow-up email or call.Overall, while there were some differences observed in certain aspects of lending, the overall differences between Black and White testers seemed minimal.The CFPB emphasizes that the prohibition under the Equal Credit Opportunity Act (ECOA) extends to business-purpose credit transactions and that financial institutions can take certain compliance measures to mitigate the risk of ECOA violations. These include active oversight by the board and management, comprehensive policies and procedures, periodic reviews, and monitoring programs.Financial institutions can also conduct their own testing, such as the matched-pair testing framework used in this study, to identify potential risks.