Using a CDFI-Like Program to Expand Online Lending to Minority Business Owners

Abstract

Minority business owners face challenges in accessing credit due to banking industry-wide trends moving away from small-dollar loans and because many have less formal credit information. Online lenders have emerged to meet this market demand, using various sources of data besides credit scores to assess creditworthiness. These platforms help minority business owners who have limited credit data. However, online lenders may suffer liquidity problems during a recession, when business owners may be especially in need of funding.

This Note advocates for programs that incentivize online lenders to invest in low-income and minority communities. Specifically, this Note outlines a proposal for a community development financial institution fund-like subsidy system that offers federal grants to online lenders that invest in certain low-income communities and businesses, upon the condition that these lenders will maintain enough capital reserves to ensure they can continue providing credit during a recession. Such a program can help ensure minority business owners have consistent access to credit.