Lending discrimination and the role of community banks

Abstract

AbstractFirst‐time minority borrowers often receive less desirable outcomes than first‐time White borrowers. Relationship lenders, who use both hard information and soft (community) information about new borrowers, can gain insights into a borrower's creditworthiness even without an existing bank–borrower relationship and provide more loan opportunities for new minority borrowers than transactional lenders. Our results show that borrowing from a relationship lender reduces lending outcome discrepancies between new minority borrowers and new White borrowers, not only in loan acceptance rates but also in borrower perceptions. These results suggest that borrowers' soft information is an important part of relationship lenders' decision‐making process.