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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
The surprising use of credit scoring in small business lending by community banks and the attendant effects on credit availability and risk
Allen N. Berger
Adrian M. Cowan
W. Scott Frame
Abstract

The literature has documented a positive relationship between the use of credit scoring for small business loans and small business credit availability, broadly defined. However, this literature is hampered by the fact that all of the studies are based on a single 1998 survey of the very largest U.S. banking organizations. This paper addresses a number of deficiencies in the extant literature by employing data from a new survey on the use of credit scoring in small business lending, primarily by community banks. The survey evidence suggests that the use of credit scores in small business lending by community banks is surprisingly widespread. Moreover, the scores employed tend to be the consumer credit scores of the small business owners rather than the more encompassing small business credit scores that include data on the firms as well as on the owners. Our empirical analysis suggests that credit scoring is associated with increased small business lending after a learning period, with no material change in the quality of the loan portfolio. However, these quantity and quality results appear to vary depending on the way in which credit scores are implemented in the underwriting process.


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Allen N. Berger & Adrian M. Cowan & W. Scott Frame, The surprising use of credit scoring in small business lending by community banks and the attendant effects on credit availability and risk, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2009-09, 2009.
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Keywords: Small business - Finance ; Credit ratings ; Community banks ; Risk
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