Innovations for Underwriting Minority and Small Business Enterprises

FinRegLab is investigating ways to improve credit access for minority-owned companies and other underserved small businesses through the use of non-traditional data sources and mission-based lenders.

The research project will help evaluate efforts by minority depository institutions, community development financial institutions, and other community-based lenders to explore ways that bank account records and other sources of cash-flow information can be used to scale their lending operations. It will also evaluate the predictiveness of different credit attributes using loan performance data from larger fintech lenders.

FinRegLab expects the project to be the first in a series of studies focusing on ways that data and technology can improve financial services for small businesses, which create two out of every three net new jobs in the U.S. and can be a critical path for wealth-building among households of color. The current project will have three primary components over the next two years:

Mission-Based Lenders’ Adoption

In one workstream, FinRegLab is working with Emmanuel Yimfor of Columbia University to structure studies of pilot programs by minority depository institutions, community development financial institutions, and other smaller lenders to explore the potential to scale their lending to minority business enterprises through use of automated data flows, non-traditional data sources, and partnerships with fintechs. FinRegLab will start the workstream with a qualitative report to highlight lessons learned through the pilots and past initiatives.

Empirical Research

FinRegLab is partnering with Sabrina Howell of New York University to analyze data from fintech lenders who have been using automated sources of cash-flow data since before the COVID-19 pandemic. The analysis will compare the predictiveness of a range of metrics distilled from automated cash-flow data as well as traditional credit scores and report information to identify which data points are most useful in underwriting loans to minority business enterprises and other types of small businesses.

Stakeholder Engagement

The third workstream involves engaging market actors, policymakers, advocates, and other stakeholders to explore the implications of the research for market practices and public policy going forward. FinRegLab will use webinars, podcasts, and convenings to share findings with key audiences.

The project will be structured to facilitate later empirical analysis of loans from the pilot programs as they conclude. Additional components may be added over time to assess the potential for mission-based lenders to combine “high tech” and “high touch” approaches and to increase the scale of their operations substantially through partnerships with fintechs.