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Isn't lending discrimination based on a borrower's race illegal?

The Equal Credit Opportunity Act prohibits discrimination on the basis of a borrower's race or color (among other protected classes). Lenders may not discourage you from applying for a business loan or factor in your race or color, or the race or color of the people in the neighborhood where your business is located, when deciding whether to lend to you. They also may not give you less-favorable loan terms for the same reasons. 

One of the problems is the lack of transparency and how it affects enforcement, as business lenders are not required to provide information about the racial identity of their borrowers. This makes it difficult to identify the problem and enforce existing laws. Unconscious bias leading up to the decision of whether to lend, and how a loan is structured, is difficult to track.

Perhaps the bigger problem is the racial wealth gap in general. This includes the legacy of redlining (denying mortgages to qualified Black applicants and segregating neighborhoods), employment bias, underbanking in minority communities, barriers to education, and other discriminatory policies that have a multi-generational impact on wealth creation. Even if the laws have changed, the legacy remains. 

For example, Black entrepreneurs are less likely to have the collateral typically required to secure a loan than their white peers, who have wealth levels 11 to 16 times higher, according to the Minority Business Development Agency (U.S. Dept. of Commerce). They also may not have as much family or personal wealth, a major source of startup capital, to help them fund their business. Those who live in underbanked communities may not have had the opportunity to build up credit. Therefore, even when a financial institution is applying its lending standards equally, Black and other minority borrowers are often disproportionately burdened.

What is the Community Reinvestment Act (CRA) and how can it help me find a lender that serves my community? 

The Community Reinvestment Act requires federal banking regulators to encourage financial institutions to meet the needs of the communities in which they reside, including low- to moderate-income neighborhoods. The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency supervise commercial banks and other financial institutions to ensure they're meeting the standards set forth by the CRA.

If you're shopping for loans, you can check a financial institution's CRA rating and performance evaluations to determine whether they're the right fit for you. The four-tiered CRA rating (ranging from "Outstanding" to "Substantial Noncompliance") is an indication of how well an institution is meeting the credit needs of its community. For example, a bank with a "Needs to Improve" rating may not be the right lender for a Black-owned business. 

A bank's Performance Evaluation (or "PE"), as determined through the framework of the CRA, is a written summary that expands on their CRA rating. The PE provides an explanation of what was assessed, along with the facts and analysis used to reach their conclusion. 

How do I find minority-owned lending institutions or those that specifically cater to minority-owned businesses?

Checking a bank's CRA rating is a good first start, but there is a growing number of minority-owned banks and lending institutions that cater to minority-owned businesses. This is especially true with regard to newer "fintech" institutions. These include online banks and lenders that use novel algorithms to determine creditworthiness instead of traditional means. This tends to remove some of the barriers faced by Black-owned and other minority businesses. 

One way to look for a minority-owned bank is to look for the Minority Depository Institution (MDI) designation, which means a given financial institution is owned or directed primarily by African Americans, Asian Americans, Hispanic Americans, or Native Americans. To earn the MDI designation, 51% of an institution's voting stock must be owned by minority individuals or a majority of the board of directors consists of minorities and the community served is predominantly minority.

Does the Small Businesses Administration (SBA) offer resources to minority-owned businesses? 

The Small Business Administration (SBA) also provides a few programs intended to help socially or economically marginalized entrepreneurs and businesses. These include: 

  • 8(a) Business Development Program — Helps businesses owned by economically and socially disadvantaged people get access to federal contracts, mentoring, and assistance securing funding.
  • Microloans — While it won't help businesses with capital needs totalling more than $50,000, SBA's microloan program—facilitated through local community-based nonprofit organizations—can help smaller ventures get off the ground. 
  • Community Advantage Pilot Loan Program — Provides SBA 7(a) loan guaranties of up to $250,000 for businesses in underserved markets. While good credit is important, qualification is not determined by the amount of cash on hand or available collateral.

Celebrate Black History Month by getting the funding your business needs

If you're struggling to secure funding for your Black-owned business, you're not alone. While the legacy of discriminatory economic policies persists, there are more options than ever for minority-owned businesses to find capital. Persistence, along with finding the right strategy, often pays off. If you have any legal questions related to your business, reach out to a Rocket Lawyer network attorney for fast and affordable advice. Make 2021 the year you finally launch your dream or find the capital you need to take it to the next level.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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