CFPB Issues Matched Pair Testing Report on Small Business Lending

The CFPB recently issued a report entitled Matched-Pair Testing in Small Business Lending Markets that summarizes results of small business lending matched pair testing that it conducted in conjunction with the U.S. Department of Justice.

The CFPB notes that its Small Business Lending Rule,, which implements section 1071 of the Dodd-Frank Act, requires financial institutions to collect and report to the CFPB data regarding applications for credit by small businesses. However, the CFPB observes that usable data from the Small Business Lending Rule will not be available for some time. The rule is currently subject to litigation, and updates can be found here and here.

Additional information on the Rule can be found here, here and here .

The report is based on matched pair testing conducted in 25 bank branches located in Fairfax County, Virginia and 25 branches located in Nassau County, New York, with 100 total visits by testers across 23 financial institutions over several months in 2023. The CFPB explains that testers were trained to present themselves based on a pre-developed small business profile and inquire about available business financing options. Each visit was audio recorded and testers completed a post-visit survey documenting their visit to generate the data analyzed in this report.  The CFPB also explains that, consistent with prior research, each Black tester was assigned a slightly more favorable financial profile compared to their matched White counterpart.

The CFPB cautions that “[g]iven the design and scope of this pilot research, these findings should not be generalized to the broader small business lending market or to specific financial institutions. These findings do, however, highlight the existence of differential treatment in small business lending.”

The testing focused on four domains of treatment: (1) level of encouragement/discouragement to apply for financing, (2) information provided to the tester about available credit products and potential steering toward product types, (3) overall quality of treatment or customer service, and (4) business and credit information requested of the tester. Significantly, the CFPB states that “[b]ased on related prior work, we hypothesized that white testers would receive favorable outcomes relative to Black testers who were at least equivalently qualified. Broadly, we predicted that any differences in treatment would tend to favor white relative to Black testers, who were each slightly more qualified than their white counterparts.”  Thus, the CFPB assumed that the testing would show less favorable treatment of Black testers.  The findings are summarized below.

Encouragement/Discouragement

•     Lenders provided more favorable levels of objective encouragement/discouragement to apply for credit to White testers as compared to paired Black testers, although both Black and White testers were encouraged to apply, on average.

•     White testers also subjectively reported feeling more encouraged to apply than Black testers, although both Black and White testers reported feeling encouraged, on average.

Examples:

In one paired test, the Black tester was told his business was too small to qualify for any of the bank’s small business loan products. The paired White tester, with a business of the same size, met with the same bank representative at the same banking office and was encouraged to apply for a small business line of credit at the bank for the amount of 10% of his business revenues.

In one test, the White tester was told he qualified for a loan with the bank by a representative who provided encouragement to apply. The Black tester, with a similar business and credit profile, met with the same representative, who told him he did not qualify and suggested he go to a Small Business Administration loan office instead.

Products and Potential Steering

•     Bank representatives were similarly likely to discuss the requested products with both White and Black testers. However, these bank representatives were more likely to discuss non-requested products with Black testers.

Example

In one test, the bank representative directed the Black tester toward a home equity line of credit product but recommended that the White tester apply for a business line of credit. Both the White and Black tester requested business credit. (The CFPB states that a home equity credit product is not business purpose credit and can place the owner’s personal residence at risk if the loan should default.)

The CFPB observes that because testers were instructed to explicitly request information about specific credit products during their visits, it remains unclear if differences might emerge in product discussions in the absence of these instructions. The CFPB adds that future research may consider evaluating and testing hypotheses related to differences in products discussed and the quality of these discussions.

Customer Service

•     White testers subjectively reported higher levels of customer service than Black testers, but there were no statistically significant differences in the objective index measure of observed customer service behaviors (e.g., whether testers were greeted or thanked).

Example

In one test, the Black tester was not greeted or acknowledged upon entering the branch office and had difficulty finding an employee who could discuss his needs. The bank representative he met with also told him that he couldn’t answer many of his questions. The White tester was greeted upon entry and waited only briefly to meet with the same bank representative. The representative brought in their manager to talk with the White tester, who offered to assist the tester in starting a loan application, sent the tester’s information to a small business loan specialist, and told the tester to call the manager the next day if he did not hear from the specialist. On the follow-up survey the White tester gave a customer service rating of 7 out of 8, while the Black tester gave a rating of 2 out of 8.

Information Requested of Tester

•     The CFPB did not observe statistically significant differences between Black and White testers on the amount of information requested during the visit or on rates of follow-up contact after the test visit occurred.

The CFPB also advises that there were no statistically significant differences by race in the likelihood that testers received a post-visit follow-up email or phone call from a bank representative. Overall, a little under one third of test visits resulted in a follow-up email or call.

Overall, the differences between Black and White testers observed in the testing in general appear to be minimal, although there was a more significant difference in the incidences of the bank representative discussing a credit product not requested by the tester—39% for White testers and 59% for Black testers.

The CFPB notes that the prohibition under Equal Credit Opportunity Act (ECOA) against discrimination is not limited to consumer transactions, as it also applies to business-purpose credit transactions, including credit extended to small businesses. The CFPB continues that it has previously identified several compliance management practices that may serve to mitigate the risk of an ECOA violation in a financial institution’s small business lending program. These include:

•     Active oversight by the board of directors and management of the institution’s compliance management system framework.

•     Comprehensive risk-focused policies and procedures for small business lending.

•     Periodic reviews of policies and procedures in place to address the risk of an ECOA violation, with revisions as needed and supported by documentation.

•     Small business lending monitoring programs and risk assessments.

The CFPB adds that a financial institution may also conduct its own testing to identify the risk of an ECOA violation and that, for example, institutions may adopt a testing methodology such as the matched-pair testing framework used in the study.