Access to Credit: A Guide For Lenders and Women Owners of Small Businesses

Ensuring Lending Practices Free of Gender Bias

During the focus group and in subsequent discussions, the issue of gender bias in the small business lending process was a major concern to women business owners and to many lenders as well. Almost every woman business owner we interviewed volunteered at least one incident in which she had to confront gender bias by someone in her lender’s organization.

Some lenders expressed similar concerns about gender bias within their own institutions. For this discussion, gender bias refers to lender behaviors that foster inappropriate consideration of the applicant’s gender in the credit underwriting and approval process. Gender-biased behaviors can severely hamper women seeking small business credit and can impede the formation of profitable customer relationships, even before customers’ needs or loan requests are assessed. In addition to discouraging potentially profitable loans, gender bias could lead to violations of the Equal Credit Opportunity Act.

The comments by lenders and women business owners strongly suggest that both groups should remain alert to the potential for gender bias, and be prepared to deal, in an open and constructive manner, with any practices that unfairly burden women business applicants.

Gender Stereotyping

Gender stereotyping consists of beliefs and attitudes that create different expectations for individuals based on their gender and can lead to biased behavior. Almost all women business owners we talked to said they experienced gender stereotyping from their lenders, primarily through loan officers’ comments and remarks. The most frequent comments were references to the woman business owner’s physical appearance or age; the unsuitability of the business for a woman; the spouse’s view of the business; marriage plans; plans for childbearing or childcare arrangements; and other gender-related remarks unrelated to the financial aspects of the application or the applicant’s loan qualifications. Women business owners found these comments irritating and in many instances demeaning. Such comments also fostered the business owners’ perceptions that the lending institution might allow gender bias to influence the credit decision on their loan application. The net result was to create immediate barriers between women business owners and the institution’s loan officers.

Lenders need to be mindful that stereotypical comments or questions related to gender offend and alienate women customers, can contribute to improper loan underwriting, and risk violation of fair lending laws.

Lifestyle Issues: Divorce and Childbearing

In addition to their concerns about outright gender stereotyping, women business owners commented about some lenders’ insensitivity to lifestyle issues which commonly affect women. Divorce and the presence of children were the two most frequently mentioned.

A few women related how the temporary financial disruptions of divorce hurt their applications for business credit years afterward. These disruptions included the loss of a home which could otherwise be pledged as collateral, temporary credit history problems, and the temporary depletion of savings.

Women generally viewed these disruptions as short term. Once overcome by rebuilding personal financial resources and credit histories, these circumstances should have little impact on a business loan application. However, women business owners reported that lenders persisted, in many cases, to use past divorce-related financial or credit problems as an indicator of an applicant’s current creditworthiness.

Women also perceived that some lenders view the actual or potential presence of children as a risk factor that could threaten a woman business owner’s ability to manage her business and repay her loan. Women business owners stated that lenders should be mindful that childraising responsibilities are increasingly shared between mothers and fathers and, therefore, should not be considered in assessing a woman business owner’s application for credit any more than they should be in assessing a man’s application.

Networking and Marketing

Women business owners reported that they routinely attended lenders’ networking events such as chamber of commerce dinners, cocktail parties, and golf outings, and that they generally found that these events were effective opportunities to meet and exchange information with lenders.

However, they also reported that these events lose their effectiveness for women business owners when theybecome social rather than professional interactions. Welldesigned small business networking events are sensitive to the time, location, and preferences of women as wellas men, and should include loan officers and business owners of both genders.

Regarding lender marketing, women business owners commented that they responded favorably when financial institutions portrayed women businessowners in their marketing campaigns. Marketing and sales efforts to reach women business owners should show that their banking relationships will be conducted in an atmosphere free from gender stereotyping. For example, marketing pieces can portray women as owners of businesses not traditionally owned by women. Most importantly, they should portray businesswomen using the financial, negotiating, and management skills necessary for successful business ownership.

Gender and Compliance with the Equal Credit Opportunity Act

A discussion of gender bias and stereotyping and their effect on women business owners’ access to credit would not be complete without reviewinghow provisions of the Equal Credit Opportunity Act relate to small businesscredit.

The following discussion of gender-based protections and small business lending compliance requirements under the Equal Credit Opportunity Actis excerpted from the brochure, “A Guide to Business Credit and the EqualCredit Opportunity Act,” developed by the Federal Reserve System. To obtain a copy, see Part 3 of this Guide, Sources of Additional Information.“Obtaining credit can be a difficult process — especiallythe first time — for any business owner. Sometimes, however, women may be concerned that they are receiving less favorable treatment not for credit-related reasons, but because of their gender. All business applicants have certain protections against discrimination under the Equal Credit Opportunity Act. The ECOA makes it illegal for lenders to deny a loan application, to discourage a woman from applying for a loan, or to give a woman less favorable terms because of gender status. Under the law, lenders may not take factors such as sex, race, national origin, or marital status into account; nor may they assume that a woman will interrupt her business plans to get married or to raise children.

“There is often confusion about just what the lender can ask of a spouse (or another person who has no connection to the business). The ECOA sets limits on the signatures and information that can be obtained. With respect to signatures, the lender is allowed to require another person’s guarantee in addition to that of the woman applicant, should her application fail to meet the lender’s standards of creditworthiness. If all or most of the assets listed on the woman’s personal financial statement are owned jointly with her spouse, or with someone else, the lender is likely to require such a guarantee. But the lender is not permitted to arbitrarily require that the guarantor be her spouse.

“In the case of secured credit, the lender is allowed to obtain a spouse’s signature on certain documents when the applicant offers jointly-owned property as security for the loan. In this event, the spouse (or other co-owner) may be asked to sign documents — such as a mortgage or other security agreement — that would be necessary under applicable state law to make the property available to satisfy the debt.

“Other than that, the lender may not ask for information about the woman’s spouse unless the spouse has some connection to the business, or unless she is relying on her spouse’s income to satisfy the debt; she is relying on alimony, child support or separate maintenance payments to establish creditworthiness; or she is living in one of certain states classified as ‘community property states’.”

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