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Small Business, Small Farm and Community Development Lending in the U.S. and Texas

This section examines the status of small business, small farm and community development lending in the U.S. and Texas. The Comptroller’s office reviewed CRA data collected by the Federal Financial Institutions Examinations Council and studies released by Texas State Senator Eliot Shapleigh’s Office, the U.S. Department of Labor, the U.S. Small Business Administration (SBA) and the Texas Finance Commission.

According to the Small Business Administration:

  • there are approximately 25 million small businesses in the U.S., including 440,000 in Texas;

  • compared to larger businesses, small businesses hire a larger percentage of women, younger and older workers and those who prefer part-time positions;

  • small businesses generate about three out of every four new jobs added to the U.S. economy, represent about 99.7 percent of all employers and hire 53 percent of the private workforce; and

  • small businesses represent around 96 percent of all U.S. exporters, receive 35 percent of federal contract dollars, provide about 55 percent of the innovations, account for 51 percent of private sector output and 47 percent of all sales in the U.S.[20]

Because of their number and importance to both the national and Texas economies, legislative affairs groups, small business advocates, state and federal regulatory government agencies, banking analysts and others continue to identify and debate the factors influencing small business access to capital and credit. Protecting the interests of small businesses has become a critical concern of state legislators, the banking community and the U.S. Federal Reserve.


Across the Nation

The Federal Financial Institutions Examinations Council annually collects small business, small farm and community development loan data reported by CRA-regulated entities with assets of $250 million or more and institutions of any size if owned by a holding company with assets of $1 billion or more. The maximum small business loan size reported is $1 million and the maximum small farm loan size reported is $500,000.

A total of 1,912 lenders reported CRA data on small business, small farm and community development lending in 2001. This information came from 1,443 commercial banks and 469 savings associations. From the data, the FFIEC found the average small business loan was approximately $37,000 and the average small farm loan was about $61,000. About 92 percent of the small business loans and 83 percent of the small farm loans were for amounts under $100,000. An estimated $225 billion was loaned through six million small business loans and $14 billion was loaned through 235,000 small farm loans.[21]


2001 CRA Data


Loans to Small Businesses and Small Farms in the U.S.
With Revenues of $1 Million or Less
(Lenders Reporting to the FFIEC = 1,912)

  Small Businesses Small Farms
Total Dollars Loaned $225 billion $14 billion
Average Loan Amount $37,000 $61,000
Total Number of Loans 6,000,000 235,000
Percentage of Loans to Businesses with Less than $1 Million in Revenues 44% 90%
Percentage of Loans Under $100,000 92% 83%
Percentage of Loan Originations and Purchases by Large Commercial Banks & Savings Associations with Assets of $1 Billion or More 73% 50%
Source: Federal Financial Institutions Examination Council

The CRA 2001 data show that 44 percent of the reported number of small business loans and 90 percent of the number of small farm loans were made to businesses with revenues of $1 million or less. The average size of loans to businesses with revenues less than $1 million were about the same size as loans to larger firms.

Small business lending increased by almost 20 percent from 2000 to 2001 based on the number of small business loan originations reported to the FFIEC. A combination of factors may have contributed to the increase. Rules for reporting loan renewals were modified and some financial institutions reported the activity of new affiliates for the first time. Mergers and acquisitions also brought a number of previously non-CRA covered institutions under the data reporting requirements.

In 2001, the average business loan to small businesses was $37,000 and about $38,500 for all small firms when including small farms, while the average loan to larger businesses was roughly $35,700.

Ninety percent of small farm loans made to borrowers with revenues of $1 million or less were for less than $100,000. Large commercial banks and savings associations with assets of $1 billion or more originated or purchased about 73 percent of the reported small business loans and about half of the loans reported for small farms in 2001.

CRA-regulated financial institutions increased their market share in the categories of small business and small farm lending between 1996 and 2000 and expanded their share of the number of small business loans to 84 percent in 2000 from 66 percent in 1996. The number of loans as a percentage of all lending during the 1996-2000 period shows that the number of small farm loans as a percentage of all lending for these years increased to 31 percent from 22 percent for CRA reporting banks and thrifts.[22]

Comparing small business lending activity in low- and moderate-income areas in 2001 with 2000, the FFIEC found that the share of the total number of loans and of the dollar amount of lending in these areas remained about the same. The same year-over-year pattern held true for lending in middle- and upper-income areas.

A comparison of the distribution of small business lending reported under the CRA across central city, suburban and rural areas, revealed that small business loans were heavily concentrated in U.S. central city and suburban areas (about 84 percent of the number or dollar amount of all small business loans) where most of the U.S. population and businesses were located. In lower-income areas, an estimated 90 percent of small business loans were made in central city census tracts, while a majority of small business loans were made in the suburbs of higher-income areas. Most small farm loans were made in rural areas regardless of income levels.


In Texas

Despite the economic challenges that followed September 11, 2001, the Texas economy continued to reap benefits from its small businesses and small farms. According to the SBA, small businesses provide the state’s largest source of new jobs and a constant stream of employment opportunities for minorities and women. Texas has about 440,000 small, non-agricultural for-profit businesses operating with up to 100 employees.[23] Most of these businesses are retail and service oriented with revenues of less than $500,000.[24]

The U.S. Department of Labor found that the number of businesses with employees, referred to as employer firms, in Texas increased in 2001 by 0.5 percent while the number of self-employed individuals increased by 0.1 percent. Texas created 53,271 new employer firms in 2001 for a total of more than 390,000 employer firms in the state.[25] U.S. Department of Commerce figures showed that Texas small business proprietors’ income reached $81.3 billion in 2001, an increase of 4.5 percent over 2000.

Generally, small businesses are financed through debt, equity and deferred capital and often through a combination of finance methods. Bank loans represent more than 50 percent of the capital of small businesses in Texas with commercial banks dominating the small business loan market. Personal funds or other sources of equity help finance small business start-ups, while private firms, public nonprofit operations and venture capital entities provide financing to many small businesses. Higher risk money in the form of deferred asset capital, such as royalties to be sold at a discount and leases, provides another source of small business funding.[26]

While a study by the SBA Office of Advocacy found that the number of large business loans has increased more rapidly than small business loans, the Texas Finance Commission’s Analysis of Small Business Lending in Texas study reported in 2002 that 82 percent of Texas small businesses that applied for a loan in 2001 received the loans. These statistics, however, exclude data on many unreported small business loans made by at least 623 small banks and savings associations in Texas because the CRA does not require small banks with assets of $250 million or less to report loan origination data to the FFIEC.[27]

While some small businesses encounter rigorous lending requirements, prohibitive financing costs and other barriers to obtaining loans, reports show that a number of banks in the state continue courting small businesses with loans and financial services. Pat Faubion, Executive Vice President of Corporate Banking at Comerica Bank-Texas, explained that small business lending is a profitable focus in the Dallas-Metroplex area of the state. According to Joe R. Goyne, president and Chief Executive of Lone Star Bank, credit markets remain friendly to small businesses in Texas and “community banks no longer command the lion’s share of the growing small business lending market.”[28]

The Finance Commission of Texas released its Analysis of Small Business Lending in Texas in June 2002. Conducted by the Institute for Policy and Economic Development at the University of Texas at El Paso, the study evaluated the availability, quality and prices of financial services such as lending and depository services offered to consumers, agricultural businesses, small businesses and the practice of business entities in Texas that provide these services. The institute surveyed 1,567 small Texas businesses and examined firms that applied for a loan during the previous three years. The study concluded that:

  • new statewide policies should take into account regional differences in small business lending patterns that exist across Texas;

  • the state should support regional capital access centers to provide training of small business owners and supply one point of access where lenders can help tailor lending to “regional-specific” business needs;

  • programs are needed to help meet the needs of small business for education in business practices and interpretation of lending regulations and requirements. “New methods of outreach should be encouraged;”

  • financial literacy efforts should be supported in the state;

  • “personal contacts” between lenders and borrowers “may remain the primary method for assisting small business borrowers;”

  • “minority-owned businesses are prevalent in Texas and policies must take into account the emerging majority-minority conditions;”[29]

  • businesses owned by minorities and women appear willing to consider alternative strategies “to assist them in pursuit of finance options;

  • “commercial banks dominate” the market for credit for small businesses in Texas. The alternatives range “from Internet banking to a variety of finance companies” that continue to emerge, “but are not a significant source of financing for the vast majority of small businesses in Texas;”

  • “regulators must examine lending practices” of lenders to “insure protection of small businesses” in the areas of Internet banking, credit card lending and other credit financing methods;

  • “small businesses remain subject to greater risk” and lending programs “that share or can transfer risk for lending institutions through guaranteed loan programs risk sharing should be considered among alternatives;”

  • the concept and availability of “non-bank credit providers should also be more fully explained to small business borrowers;”

  • “small business access to capital must take into account the risk of small business ventures and the reality that some small businesses will not survive regardless of debt leniency;”[30] and

  • new statewide policies should be developed “to provide greater assistance to small businesses and take into account the rights of bank-owners and shareholders who have invested based on an expected return” on their investment.[31]

Generally, the small business lending study released by the Texas Finance Commission indicated that the state’s financial institutions treat certain small businesses along parts of the border differently in terms of credit pricing, loan terms, quality of credit and lending practices. The borrower’s history and past experience with the bank, the borrower’s credit history or score, lack of a business plan and insufficient revenue affect the loan terms, quality and pricing of credit received by small businesses.

To increase the number of small business loans in Texas, the Finance Commission’s study suggested:

  • using statewide policies to account for regionally distinct variances in borrowing needs and lending patterns;

  • providing state support for regional capital access centers for business owner training that would focus on each region’s specific borrowing requirements;

  • expanding credit education outreach through online certification of business operators on financial literacy and bank lending regulations;

  • accounting for differences in ethnic minority and majority conditions across the state with modified lending criteria and credit marketing;

  • encouraging the use of guaranteed loan programs to spread financial risk for small businesses; and

  • examining ways to protect small businesses as they access online, credit card and alternative financing methods.[32]

Recent research on agricultural lending and farming in Texas was commissioned and released by The Texas Finance Commission. Conducted by Analytica, Inc. of Houston, Texas, Research on Agricultural Lending in the State of Texas: A Report for the Texas Finance Commission analyzed historical agricultural production data combined with interviews with farmers, ranchers and agricultural lending experts. Among its conclusions, the study found that there was a stable demand for agricultural loans, loan renewals and extensions and that funds were generally available for agricultural loans in the past three years. The study also noted that the total amount of agricultural loans and the total amount and number of these loans from the Farm Service Agency increased during this period.[33] (Please see Appendix D for more detail.)


Community Development Lending Across the U.S.

Community and economic development loans provide support for affordable housing, job training and retention programs and social service facilities to low- and moderate-income communities. National banks and other financial entities make debt and equity investments that fund affordable housing developments, community services for low- and moderate-income people, equity for start-up and small business expansion and programs that revitalize low-income neighborhoods.

The CRA requires financial institutions to disclose data on the number and dollar amount of their community development loans. According to the FFIEC, about 60 percent of the 1,912 CRA reporting institutions made community development loans in 2001 in the average amount of $945,000 per loan.

Commercial banks and savings associations reported extending more than 26,000 community development loans totaling about $25 billion in 2001. Compared to data reported by these institutions in 2000, the number of loans reported in 2001 was 8 percent larger and the dollar amount of community development loans increased by about 25 percent. Large commercial lenders, with assets of $1 billion or more, extended most of the reported community development loans in 2001.[34]

Several federal level agencies administer community development lending and assistance activities across the country. The Office of the Comptroller of the Currency encourages national bank involvement in community and economic development activities and markets. The Department of Housing and Urban Development’s Community Development activities help a wide range of grantees through the programs listed below.

The HUD Community Development Block Grant (CDBG) Program provides formula-based annual grants to cities, urban counties and states to develop viable urban communities by providing decent housing and a suitable living environment. City departments may collaborate with nonprofit corporations, state and federal agencies to apply for funds for historic preservation and downtown redevelopment projects.

The HUD Community Renewal program supplies revitalization funds for Renewal Communities/Empowerment Zones/Enterprise Communities (RC/EZ/EC).

The HUD CDBG Disaster Recovery Assistance program offers flexible grants to help cities, counties and states recover from presidentially-declared disasters in low-income areas.

The HUD Economic Development Initiative (EDI) supplies access to capital for entrepreneurs, small businesses and local governments as part of HUD’s job growth strategy.[35]

Several agencies have responsibility for community and economic development programs and initiatives in Texas. The 2001 Texas Legislature created the Office of Rural Community Affairs (ORCA) to serve as the state’s central agency focusing on the state’s rural health, economic development and community development programs. The agency also monitors government actions that affect rural Texas.

ORCA researches rural issues, recommends solutions and coordinates rural programs among state agencies. The agency is composed of the program compliance and audit unit, the research, policy and planning unit, the community development program, outreach and training services and rural health units.

The Texas Community Development Program (TCDP), managed by ORCA, is the largest community development program in the U.S. According to Kim White, Research and Policy Planning Specialist at ORCA, HUD awarded the program $88,604,000 in fiscal 2001. The program serves 1,031 eligible rural communities, 247 rural counties and provides services to more than 375,000 people each year.[36]

The TCDP focuses on providing basic human needs and sanitary infrastructure to small, rural communities in outlying areas. Local needs that are eligible for financial assistance include: clean drinking water, sanitary sewer systems, disaster relief and urgently needed projects, housing, drainage and flood control, navigable streets, economic development, community centers and other related activities. The amounts and purposes of each fund administered by the TCDP are described below:

Texas Community Development Program 2001 Funding Summary

Fund Amount
Community Development Fund $48,835,700
Colonia Construction Fund $6,400,400
Colonia Economically Distressed Areas Program (EDAP) Fund $2,000,000
Colonia Planning Fund $460,000
Colonia Self-Help Centers Fund $2,215,100
Disaster Relief/Urgent Need Fund $3,529,680
Planning Capacity Fund $780,000
Housing Infrastructure Fund $2,400,000
Housing Rehabilitation Fund $1,500,000
STEP Fund (Small Towns Environmental Program) $2,300,000
Source: Texas Department of Housing and Community Affairs

Eligible cities and counties may apply biennially through a regional competition for assistance. Eligible activities include infrastructure projects such as sewer and water system improvements, street, bridge, drainage improvements and housing rehabilitation. Each of the 24 state planning regions receives an allocation from the amount available each year. TCDP calculates its allocations based on population, poverty and unemployment information.

ORCA and Regional Review Committees (RRCs) appointed by the governor share the process of scoring applications. RRC meetings are held in each region to score applications. RRC scores account for 50 percent of the total score and ORCA scores provide the other 50 percent.

ORCA approves support for disaster relief and to meet urgent needs if (1) the situation addressed by the applicant was unanticipated and beyond the control of the local government; (2) the problem being addressed was of recent origin (for example, the situation first occurred or was discovered no more than 18 months before the submission of an application for TCDP assistance); (3) each applicant demonstrates that local funds or funds from other state or federal sources are not available to address the problem adequately and (4) the distribution of these funds will be coordinated with other state agencies.

Severe Weather Preparedness Disaster Relief funds help communities on an as-needed basis to recover from natural disasters, such as a drought, flooding or tornadoes where the governor has proclaimed a state disaster or has requested a federal disaster declaration. TCDP funds are used to restore basic housing, water and sewer facilities. Projects involving activities that address water or sewer urgent needs that resulted in either death, illness, injury or pose an imminent threat to life or health within the affected applicant's jurisdiction are eligible for Urgent Need Fund assistance. The TCDP, however, does not accept applications until applicants discuss their proposals with ORCA, the Texas Commission on Environmental Quality (TCEQ) and Texas Water Development Board (TWDB) representatives. Applicants must meet rigorous application criteria, obtain matching financing, apply for TWDB assistance and comply with other requirements.

ORCA provides money from several funds to eligible county applicants for projects in severely distressed unincorporated residential areas along the Texas-Mexico border known as colonias. According to the Texas Secretary of State, approximately 400,000 Texans live in colonias which lack electricity, adequate sewage systems and decent, safe and sanitary housing.[36]

ORCA provides competitive-based funding every two years from the Planning and Capacity Building Fund to help eligible cities and counties plan and assess local needs and develop improvement strategies.

The TCDP’s Housing Infrastructure Fund awards grants to develop the infrastructure necessary to build affordable single and multifamily housing for low- and moderate-income individuals. The funds may not be used for actual new housing construction costs.

To meet HUD program objectives, at least 51 percent of the housing units built in conjunction with each Housing Infrastructure Fund project must be occupied by low- to moderate-income persons. TCDP funds can be used to finance 100 percent of the eligible project costs when low- to moderate-income persons occupy at least 51 percent of the units.

ORCA also offers financial support for housing rehabilitation activities through the Housing Rehabilitation Fund.[37]

A number of banks operating in Texas provide assistance to low- and moderate-income communities around the state. For example, Compass Bank has worked with multiple city government, community development organization and nonprofit foundation partners across the state to fund affordable housing programs.[38] The table below lists its programs, commitments, purpose and partners by major city:

Examples of Community Development
Lending for Affordable Housing

Austin Foundation Communities Individual Development Account Individual Development Account (IDA) Program $4,000 grant per individual from Foundation Communities IDA Program. Compass Bank provides low interest rate, no fee loans with relaxed underwriting requirements to low- and moderate-income individuals. Matched savings accounts to assist individuals with saving to make a down payment on a home, start a business or pursue an education. Compass Bank, Foundation Communities and Corp. for Enterprise Development.
Dallas Enterprise Foundation's Mortgage Assistance Program (MAP) Grant of up to $15,000 per low- or moderate-income individual. Closing cost and home repair on a sliding scale. Compass Bank, Enterprise Foundation and Dallas are financial institutions.
Fort Worth N/A Grant of up to $13,999 per individual from the City of Fort Worth for low- and moderate-income individuals. Closing cost assistance provided on a sliding scale. Compass Bank, City of Fort Worth and area financial institutions.
Houston Covenant Community Capital Corp. Grant of $4,000 per low- or moderate-income individual from Covenant Community Capital. Matched savings accounts to help individuals save for a home down payment, start a new business or for education. Compass Bank, Covenant Community Capital Corp., McCauley Institute, HUD, U.S. Department of Health and Human Services (DHHS) and United Way of the Texas Gulf Coast.
Houston Housing Opportunities of Houston (HOH) Grants of $3,500 or $9,500 per low- and moderate-income individual. Down payment and closing cost assistance. Compass Bank, HOH and Houston financial institutions.
San Antonio Neighborhood Housing Services (NHS) Variable grants amounts from NHS for low- and moderate-income individuals. Closing cost assistance and homebuyer counseling. Compass Bank, NHS and area financial institutions.
Waco City of Waco Grant of $15,000 per low- or moderate-income individual from the city. Closing cost assistance. Compass Bank and City of Waco.
Source: Compass Bank

In 2002, Washington Mutual Bank and PMI Mortgage Insurance Co. launched a $200 million pilot loan program designed to expand opportunities for homeownership for low- and moderate-income borrowers in Texas, California, Florida, Washington and Oregon. The program will enable eligible borrowers in Texas, with incomes under 80 percent of the Area Median Family Income (AMFI), to purchase single-family homes with a small downpayment of 1 percent.[39]

Endnotes

[20] U.S. Office of Advocacy, Economics Statistics and Research, September 2002, www.sba.gov. (Last visited September 23, 2002.)

[21] Federal Financial Institutions Examinations Council, “Reports–Findings from Analysis of Nationwide Summary Statistics for 2001 Community Reinvestment Act Data Fact Sheet,” Washington D.C., July 2002, p. 2.

[22] The Federal Reserve Board, “Remarks by Governor Edward M. Gramlich,” Arlington, Virginia, April 8, 2002, p. 3, http://www.federalreserve.gov/boarddocs/speeches/2002/20020408/default.htm. (Last visited November 27, 2002.)

[23] Texas Finance Commission, Executive Summary, Analysis of Small Business Lending in Texas, Special Report to the Finance Commission of Texas, Institute for Policy and Economic Development, Austin, Texas, April 2002, p. 25.

[24] Texas Finance Commission, Analysis of Small Business Lending in Texas, Austin, Texas, April, 2002, p. 25.

[25] U.S. Small Business Administration, Office of Advocacy, “2002 Small Business Profile: Texas,” p. 1, http://www.sba.gov/advo/stats/profiles/02tx.txt. (Last visited November 13, 2002.)

[26] Senator Eliot Shapleigh, E-News Extra Special Report: Borderland of the Americas, Chapter Eight, Lending Practices and Access to Capital and Credit, October 2002, http://www.shapleigh.org/enewsxtra.html. (Last visited December 9, 2002.)

[27] U.S. Small Business Administration, Office of the Advocacy, “Micro-Business-Friendly Banks in the United States, 1998 Edition, p. 4; and Telephone Interview with Bob Bacon, Director of Strategic Support, Texas Department of Banking, Austin, Texas, December 31, 2002.

[28] Hala Habal, Dallas Business Journal, “Loan Stars,” August 17, 2001, p. 1.

[29] Texas Finance Commission, Analysis of Small Business Lending Study, (Austin, Texas, April, 2002,) p. 25.

[30] Texas Finance Commission, Analysis of Small Business Lending Study, (Austin, Texas, April, 2002,) p. 26.

[31] Institute for Policy and Economic Development, The University of Texas at El Paso, Special Report to Finance Commission of Texas (El Paso, Texas, April 2002), p. 26.

[32] Institute for Policy and Economic Development, The University of Texas at El Paso, Special Report to Finance Commission of Texas (El Paso, Texas, April 2002), p. 25.

[33] Analytica, Inc., Research on Agricultural Lending in the State of Texas: A Report for the Texas State Finance Commission, Austin, Texas, September 2002, pp. i-ii.

[34] Federal Financial Institutions Examination Council's (FFIEC), Reports–Findings from Analysis of Nationwide Summary Statistics for 2001 Community Reinvestment Act Data Fact Sheet, July 2002, http://www.ffiec.gov/hmcrpr/cra_fs01.htm. (Last visited December 19, 2002.)

[35] U.S. Department of Housing and Urban Development, Office of Community Planning and Development, June 2002, http://www.hud.gov/offices/cpd. (Last visited December 19, 2002.)

[36] Office of Rural Community Affairs, October 2001, http://www.orca.state.tx.us. (Last visited November 21, 2002.)

[36] Gwen Shea, Texas Secretary of State, Colonias Frequently Asked Questions, http://www.sos.state.tx.us/border/colonias/faqs.html. (Last visited September 20, 2002.)

[37] Texas Department of Housing and Community Affairs, Community Development, p. 2.

[38] Compass Bank, “Affordable Housing Programs,” http://www.compassweb.com/compass/community/housing/index.cfm. (Last visited November 13, 2002.)

[39] Donna Kimura, Affordable Housing Finance Magazine, Washington Mutual Works Toward Support Goal, http://www.housingfinance.com/ahf/ahf_articles/01JulyAugWaMu/. (Last visited January 3, 2003.)