Borrowers are now protected from discriminatory loan practices under existing regulations, although this was not always the case. For generations, banks in the US refused to lend to Black families – and other racial and ethnic minorities – who lived in areas “redlined” by the federal Home Owners’ Loan Corporation (HOLC).
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What Is Discrimination in Lending?
Discrimination in lending occurs when lenders make credit decisions based on reasons other than the borrower’s creditworthiness, including any of the federally protected groups. Three federal statutes protect against loan discrimination today:
- The Equal Housing Opportunity Act (FHA)
- The Act on Equal Credit Opportunity (ECOA)
- The Act on Community Reinvestment (CRA)
The 1968 Fair Housing Act (FHA)
In 1948, the Supreme Court declared unenforceable racially discriminatory deed covenants. The Fair Housing Act (FHA) was passed twenty years later. The Act prohibits discrimination against individuals who rent or purchase a property, get a mortgage, apply for housing aid, or participate in other housing-related activities. It prohibits discrimination against individuals based on their race, color, national origin, religion, sex (including gender, gender identity, and sexual orientation), family status, or handicap throughout any stage of a residential real estate transaction. 1
1974 Equal Credit Opportunity Act (ECOA)
Discriminatory financing and housing practices persisted despite the Fair Housing Act, and civil rights organizations lobbied for more laws. Congress enacted the Equal Credit Opportunity Act in 1974. (ECOA). According to the Federal Trade Commission, the ECOA “prohibits credit discrimination based on race, religion, color, national origin, marital status, sex, age, or receipt of public assistance.”
Creditors may request some of this information, but they may not use it to refuse you credit or create credit conditions. For instance, lenders may inquire about whether you get alimony or child support, but only if the income is required to qualify for the loan.
1977 Community Reinvestment Act (CRA)
Even after the FHA and ECOA were implemented, redlining in low-to-moderate-income (LMI) communities persisted. According to the website Federal Reserve History, “there is some evidence that overt discrimination in mortgage lending existed throughout this time.”
As a consequence, the following occurred:
- Illinois was the first state to enact legislation forbidding redlining and requiring banks to publicize their lending practices.
- Congress enacted the Home Mortgage Disclosure Act, requiring banks to publish the location of funded residences and the race and gender of borrowers.
- The Community Reinvestment Act was passed into law by President Carter (CRA).
Aiming to prevent redlining, the Consumer Rehabilitation Act (CRA) compels banks and savings organizations to help all members of their communities, especially those with low incomes, get credit.
4 Federal regulatory authorities were ordered to evaluate the institution’s track record of addressing the credit needs of its whole community, including low- and moderate-income neighborhoods, and consider such track record for assessing the institution’s application for a deposit facility.
What Exactly Is Redlining?
Before the passage of legislation explicitly prohibiting lending discrimination, a practice is known as “redlining” hindered specific communities from obtaining loans. Redlining is a discriminatory practice where inhabitants of particular areas are denied financial services based on their race or ethnic origin.
In the 1960s, sociology professor John McKnight invented the word to refer to maps highlighting racial and ethnic minority communities in red, indicating that they were “dangerous.” The maps were prepared by the Home Owners’ Loan Corporation, a government organization (HOLC).
Corporation for Home Owners’ Loans (HOLC)
The HOLC was established as a government agency during the late 1930s as part of the New Deal. The New Deal was a collection of measures implemented by President Franklin Delano Roosevelt to assist the United States in recovering from the Great Depression. As part of its City Survey Program, the HOLC developed “Residential Security” maps for critical cities.
HOLC examiners categorized communities according to their “perceived lending risk,” using data acquired from local appraisers, bank loan officers, municipal authorities, and real estate salespeople to generate the maps. According to the National Community Reinvestment Coalition, examiners assigned communities a grade based on a variety of characteristics, including the following:
- The housing’s age and condition
- Transportation accessibility
- The proximity of well-known attractions such as parks
- Proximity to negative characteristics such as polluting industries
- Economic class and job status of inhabitants
- The ethnic and racial makeup of the inhabitants
The communities were color-coded according to their estimated risk to lenders on maps.
Neighborhoods with a high concentration of racial and ethnic minorities were color-coded red—hence, “redlined.” Lenders saw these places as high-risk. Mapping Inequality at the University of Richmond states that “responsible and conservative lenders would cease to give loans in these places” or make them “conservatively.”
A Discriminatory Tool
The HOLC maps were used extensively for discrimination. In some places, prospective homebuyers found it difficult or impossible to get a mortgage due to capital being diverted toward White families living in green and blue neighborhoods and away from Black and immigrant families living in yellow and red districts. The limited loans in redlined regions were very costly, making purchasing a property and developing wealth even more challenging.
In the absence of conventional mortgages, individuals of color seeking to acquire a home were compelled to enter into exploitatively priced housing contracts, which significantly raised the cost of housing and provided them with no equity until their last payment was made. In the 1960s, a group of inner-city citizens founded Chicago’s Contract Buyers League to combat these abuses.
Macon, Georgia, was the most redlined city in the United States, with approximately 65 percent of its neighborhoods designated in red.
The following is a list of the ten cities with the most neighborhoods classified as “dangerous” in the 1930s, as reported by the informative website NextCity.com.
- 64.99 percent Macon, Georgia
- 63.91 percent in Birmingham, Alabama
- 63.87 percent in Wichita, Kan.
- Springfield, Missouri, sixty-one-hundred-and-one-hundred-and-one-h
- Augusta, Georgia, 58.70%
- Columbus, Georgia, 57.98%
- 57.51 percent, Newport News, Virginia
- Muskegon County, Michigan, 57.24
- Flint, Michigan (54.19%)
- Montgomery, Alabama, 53.11%
Economic and racial segregation as a result of redlining continues to exist.
Redlining has the direct consequence of denying inhabitants of racial and ethnic minority communities access to money for home improvements (purchase or renovation) or other economic possibilities. Of course, the effects of redlining did not disappear miraculously with the passage of the FHA in 1968. Rather than that, as a 2018 NCRC report demonstrates, the economic and racial division produced by redlining continues to exist in many communities today.
- Seventy-four percent of communities classified as “dangerous” by HOLC more than 80 years ago are now classified as low-to-moderate income (LMI).
- Sixty-four percent of hazardous-graded areas are located in communities of racial and ethnic minorities.
By contrast, 91 percent of communities classified as “best” in the 1930s remain middle-to-upper-income (MUI) in 2022, while 85 percent remain primarily White.
According to the University of Richmond’s Mapping Inequality project, “because homeownership was arguably the most important means of intergenerational wealth building in the twentieth century in the United States,” these redlining practices from eight decades ago had a long-term effect on the creation of wealth inequalities that persist today.
Discriminatory Lending’s Effects
Redlining is one of the factors contributing to the continuing racial wealth disparity in the United States. And although discriminatory lending practices are forbidden under the FHA, the ECOA, and the CRA, Black borrowers and members of other racial and ethnic minority groups continue to face disadvantages. The following are only a handful of the enduring consequences of redlining.
Increased interest rates
On average, Black and Latinx/Hispanic borrowers paid 0.08 percent more interest than White borrowers on 30-year mortgages, costing them $765 million each year.
Reduced approval rates for loans
A year-long analysis conducted by Reveal at the Center for Investigative Reporting (using 31 million data) discovered a pattern of rejections for persons of color throughout the United States. It found that in 48 cities, Black applicants were rejected at “significantly higher rates” than White applicants, Latinx/Hispanic applicants were denied at a rate of 25 percent, Asian applicants were denied at a rate of nine percent, and Native American applicants were rejected at a rate of three percent. Reveal discovered that all four categories were much more likely to be refused a mortgage. The Associated Press independently verified and corroborated the analysis.
Reduced rates of homeownership
Discrimination has contributed to the racial homeownership disparity in the United States. According to the United States Census Bureau’s 2021 statistics, the national homeownership rate for Black families is 43.1 percent, compared to 74.4 percent for White households.
Reduced individual wealth
According to a survey by real estate company Redfin, the average homeowner in formerly redlined communities has acquired 52 percent less personal wealth—or $212,023 less—than homeowners in greenlined areas.
Discrimination is not limited to the mortgage lending industry. According to a 2020 article in The Business Journals, White communities get approximately double the number of small-business loans per person as Black ones. Similarly, primarily White communities get around twice as many small-business loans per capita as predominantly Black ones.
Additionally, the paper states that, since the financial crisis of 2008, the number of loans granted to Black-owned firms under the Small Business Association’s 7(a) program has declined by 84 percent, compared to a 53 percent decline in total 7(a) loans.
The reduction occurred despite other favorable developments, including an economy that expanded by 48 percent, an increase in commercial loans of 82 percent, and an increase in bank deposits of 101 percent. Midwest BankCentre’s Chairman and CEO, Orv Kimbrough, refers to this gap as “corporate redlining.”
Several further major studies demonstrate prejudice in small-business lending:
- According to a New York Times study, 75% of the government’s first round of Paycheck Protection Program loans went to firms in census tracts with most white residents.
- Citi, Bank of America, JPMorgan Chase, and Wells Fargo — the nation’s four biggest banks — made 91 percent less 7(a) loans to Black-owned companies in 2019 than in 2007.
- According to the Census Bureau, black firms received 3% of 7(a) loan monies in 2019, even though 9.5 percent of enterprises in the United States are Black-owned.
Discrimination has long-lasting consequences, whether in a mortgage or small-business credit. “When you don’t invest, you create social issues, criminal activity, and a lack of education, which diminishes people’s prospects of ascending the social and economic ladder,” said Matthew Fuentes, a Brookings Institution scholar researching wealth creation and race.
Discrimination in Lending Has Negative Consequences
In the United States, lending policies have increasingly grown more equal. However, more equitable does not mean equal. Redlining’s lingering effects and persistent discrimination against people of color today continue to exa country’s racial wealth inequality. Three-quarters of areas redlined in the 1930s continue to suffer economically now and are far more likely to house low-income, racial, and ethnic minority populations than other localities. Additionally, they are more prone to fall victim to subprime and unscrupulous lenders. 19
There are further long-term harmful consequences. According to a 2020 study conducted by researchers at the National Community Reinvestment Coalition, the University of Wisconsin/Milwaukee, and the University of Richmond, “the history of redlining, segregation, and disinvestment impacted minority wealth and health, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods.” 20 One dismal consequence is that life expectancy is 3.6 years shorter in redlined towns than in similar-aged communities that obtained good marks from the HOLC.
If You Have Suffered From Lending Discrimination
Mortgage applicants and homebuyers who think they have been discriminated against can call the United States Department of Housing and Urban Development’s (HUD) Office of Fair Housing and Equal Opportunity or the Consumer Financial Protection Bureau.
Small company owners who think they have been discriminated against in the loan process due to their race, sex, or other protected category may file a complaint online with the Consumer Financial Protection Bureau.
What Exactly Is Redlining?
Redlining is the now-illegal practice of limiting credit to inhabitants of specific neighborhoods based on their race or ethnic origin. The word was invented in the 1960s by sociologist John McKnight to refer to the Home Owners’ Loan Corporation’s red-flagged maps of racial and ethnic minority communities, declaring them “dangerous” to lenders.
Is Redlining Still Pervasive Today?
Redlining is currently prohibited. However, redlining from the past contributes considerably to the racial wealth disparity today.
What Are the Fair Lending Laws in the United States?
Loan contract rules prevent lenders in the United States from discriminating against protected classifications (such as race, color, national origin, or religion) in any element of a credit transaction.
What Are the Three Types of Discrimination in Lending?
Three distinct types of lending discrimination are recognized by federal law. They include the following, according to the Federal Deposit Insurance Corporation (FDIC):
- Overt discrimination—when a lender blatantly discriminates based on a prohibited basis.
- Disparate treatment—whenever a lender handles applicants differently based on one of the banned traits.
- Disparate impact—when a lender applies a practice uniformly to all applicants, but the method has a discriminatory effect on a prohibited basis and is not justified by business necessity.
What Is the Racial Wealth Gap?
The racial wealth gap describes the difference or imbalance of assets owned by different racial or ethnic groups. It represents the generations-long disparity in access to financial and educational opportunities, income, and resources.