It was not always the case that laws protected borrowers from discriminatory lending practices, as they do now. For decades, U.S. banks rejected mortgages to Black families and those of other racial and ethnic minorities who resided in regions designated as “redlined” by the federal agency Home Owners’ Loan Corp. (HOLC).
What Does Lending Discrimination Encompass?
Lending discrimination occurs when credit choices are based on reasons other than a borrower’s creditworthiness, including any protected classifications outlined under federal law. Currently, three federal statutes protect against loan discrimination:
The Fair Housing Act of 1968 (FHA)
Equal Credit Opportunities Act (ECOA)
Act on Community Reinvestment (CRA)
1968 Fair Housing Act (FHA)
In 1948, the U.S. Supreme Court ruled that restrictive deed covenants based on race were invalid. The Fair Housing Act (FHA) was passed 20 years later. The legislation protects individuals against discrimination, whether renting or purchasing a property, obtaining a mortgage, applying for housing aid, or engaging in other housing-related activities. Throughout any phase of a residential real estate transaction, skin discrimination based on race, skin color, national origin, belief , sex (including gender, gender identity, and sexual orientation), family status, or handicap is prohibited.
1974 Equal Credit Opportunity Act (ECOA)
Notwithstanding the Fair Housing Act, discriminatory financing and housing practices persisted, and civil rights organizations lobbied for more laws. Congress approved the Equal Credit Opportunity Act in 1974. (ECOA). According to the Fed Trade Commission, the ECOA “makes it unlawful for creditors to discriminate based on race, skin color, religion, national origin, sex, marital status, age, or the fact that a person’s whole (or a portion of) income comes from public assistance.”
Creditors can request some of this information but cannot use it to reject your credit or determine your credit conditions. For instance, lenders may inquire whether you get alimony or child support, but only if the income is required to qualify for the loan.
1977 Community Reinvestment Act (CRA)
Redlining remained in low- to moderate-income (LMI) communities, notwithstanding the FHA and ECOA. In discussing this time, the Federal Reserve History website states, “There is some evidence that overt discrimination remained in mortgage financing.”
Many things occurred as a result:
• Illinois was the first state to outlaw redlining and mandate that banks disclose their lending practices.
• Congress approved the Home Mortgage Disclosure Act, requiring banks to publish the location of funded homes and the race and gender of borrowers; • Former President Jimmy Carter signed the Community Reinvestment Act into law (CRA).
The CRA was designed to combat redlining and to encourage banks and credit unions to assist in meeting the credit requirements of all parts of their communities, especially LMI areas. The law instructed federal regulatory agencies to “(1) evaluate the institution’s track record of meeting the credit requirements of its entire community, including low- and moderate-income neighborhoods,” and “(2) consider this track record when evaluating the institution’s application for a deposit facility.”
What Does Redlining Entail?
Before explicit rules forbade discrimination in lending, redlining hindered some communities from gaining access to credit. Redlining is denying financial services to people of certain areas based on race or ethnicity.
Sociologist John McKnight originated the phrase in the 1960s to describe maps that labeled minority communities as “risky” to lenders by coloring them red. Home Owners’ Loan Corp., a government entity, generated the maps (HOLC).
Home Owners’ Loan Corp. (HOLC)
In the late 1930s, the New Deal established the HOLC, a government agency. The New Deal was a set of measures adopted by then-President Franklin Delano Roosevelt to aid in the recovery of the United States from the Great Depression. The HOLC produced “Residential Security” maps for key cities considered of its City Survey Program.
To generate the maps, HOLC examiners categorized communities based on their “perceived degree of lending risk” using data collected from local appraisers, bank loan officers, municipal authorities, and real estate brokers. Further to National Community Reinvestment Coalition, the examiners scored the neighborhoods based on the following factors: • The age and condition of the housing • Access to transportation • The proximity of popular amenities such as parks • Proximity to undesirable assets such as polluting business sectors • The economic class and employment status of the residents • The ethnic and racial composition of the residents.
On maps, communities were color-coded according to the estimated risk they posed to lenders.
Red denote predominantly minority racial and ethnic neighborhoods; thus, “redlining.” These regions were deemed high-risk by lenders. Further to the Mapping Inequality project of the University of Richmond, “conservative, responsible lenders, in the opinion of HOLC, would refuse to offer loans in these regions [or] only do so on a conservative basis.’
A Means to Discriminate
The HOLC maps were a tool for discrimination on a massive scale. In some places, it was difficult or impossible for would-be homeowners to get a mortgage due to the diversion of capital to White families living in green and blue neighborhoods and away from Black and immigrant families living in yellow and red districts. The few pricey loans in redlined neighborhoods made purchasing a house and generating wealth considerably more challenging.
People of color who desired to purchase a home but could not get conventional mortgages were compelled to enter into exploitatively priced housing contracts that inflated the cost of housing and offered them no equity until their final payment was made. A group of inner-city Chicagoans organized the Contract Buyers League in the 1960s to combat these abuses. Macon, Georgia, was the most redlined city in the United States, with around 65 percent of its neighborhoods painted red. Below is a list of the ten cities with the most “dangerous” areas in the 1930s, according to research by the National Community Reinvestment Coalition (NCRC) and the educational website NextCity.com.
1. Macon, Ga., 64.99%
2. Birmingham, Ala., 63.91%
3. Wichita, Kan., 63.87%
4. Springfield, Missouri, 60.1%
5. Augusta, Ga., 58.70%
6. Columbus, Georgia, 57.98%
7. Newport News, Virginia, 57.51%
8. Muskegon, Mich., 57.24
9. Flint, Mich., 54.19%
10. Montgomery, Alabama, 53.11 percent
Economic and Racial Segregation Persists Due to Redlining
Redlining directly denies inhabitants of racial and ethnic minority communities access to finance for home improvement (to buy or repair) or other economic prospects. 1968’s passage of the FHA did not miraculously eliminate the effects of redlining. The economic and racial division produced by redlining remains in many communities today, according to a 2018 NCRC research.
• 74% of neighborhoods deemed “dangerous” by the HOLC over 80 years ago are now LMI.
• Sixty-four percent of the hazardous-graded zones are minority communities.
Comparatively, 91 percent of regions designated “best” in the 1930s are still middle- to upper-income (MUI) in 2022, and 85 percent are still predominantly White. Further to the Mapping Inequality project of the University of Richmond, “as homeownership was arguably the most important means of intergenerational wealth building in the United States in the 20th century, these redlining practices from eight decades ago had long-lasting effects in creating wealth disparities that we still observe today.”
Consequences of Unfair Lending Practices
Redlining contributes to the continuing racial wealth inequality in the United States. Yet even though the FHA, ECOA, and CRA ban discriminatory lending practices, Black borrowers and individuals from other racial and ethnic minority groups continue to be disadvantaged. These are a few lasting repercussions of redlining.
Increased Interest Rates
The University of California at Berkeley analyzed over seven million 30-year mortgages. Black and Latinx/ Hispanic applicants were charged 0.08% higher interest rates than White borrowers, costing them $765 million annually in additional interest.
Reduced Loan Acceptance Rates
The Consumer Financial Protection Bureau’s 2020 mortgage market activity and trends analysis revealed that Black and Hispanic white borrowers had higher rejection rates than non-Hispanic white and Asian borrowers. In 2020, the refusal rate for Black loan applicants was 18.1%, and for Hispanic white loan applicants, it was 12.5%; in contrast, the denial rate for Asian applicants were 9.7%, and for non-Hispanic white applicants, it was 6.9%.
Apart from FHA, all enhanced home-purchase loans had more excellent refusal rates for black and Hispanic white applicants. Asian applicants for FHA home-purchase loans had a greater rate of refusal than Hispanic white applicants but a lower rate than Black applicants.
Lower Rates of Homeownership
In the United States, discrimination is to blame for the disparity in homeownership across races. The national homeownership rate for Black families is 45.3%, compared to 74.6% for White families, according to statistics from the U.S. Census Bureau for the second quarter (Q2) of 2022.
Reduced Private Wealth
According to a survey by the real estate company Redfin, the average homeowner in formerly redlined communities has accumulated 52% less wealth, or $212,023 less, due to property value appreciation than the average homeowner in greenlined regions.
Business Redlining
Discrimination extends beyond the mortgage industry. According to an article published in The Business Journals in 2020, White communities obtain almost twice as many small-business loans per inhabitant as Black ones. Similarly, primarily White communities average around twice as many small-business loans per capita.
The research also highlights that the number of loans given to Black-owned firms under the Small Business Association’s 7(a) program has declined by 84% from its peak before the 2008 financial crisis, compared to a 53% decline in 7(a) loans issued overall. The reduction occurred despite other favorable developments, such as the economy expanding by 48%, commercial loans increasing by 82%, and bank deposits rising by 101%. Midwest BankCentre’s chair and chief executive officer (CEO), Orv Kimbrough, refers to this imbalance as “corporate redlining.”
Here are many further significant results that demonstrate prejudice in small-business lending:
Why 8.6% of the almost 6 million PPP loans examined by the National Bureau of Economic Research were granted to Black-owned firms, with fintech lenders issuing 26.5% and small banks issuing just 3.5%.
• In 2021, 6% of 7(a) loan approvals went to Hispanic-owned firms, 2.6% to Black-owned businesses, and 0.4% to American Indian-owned enterprises.
Whether in mortgage or small-business finance, discrimination has enduring impacts. Andre Perry, a scholar at the Brookings Institution who researches wealth creation and race, said, “When you don’t invest, you have social issues, you get crime, and you get less education, all of which diminishes the likelihood of individuals ascending the social and economic ladder.”
What are redlines?
Redlining is the discriminatory practice of limiting credit to people of certain regions based on their race or ethnicity; it is now prohibited. Sociologist John McKnight invented the word in the 1960s to characterize House Owners’ Loan Corp. (HOLC) maps that labeled racial and ethnic minority districts as “dangerous” to lenders.
Is redlining occurring today?
Redlining is currently unlawful. Nonetheless, previous redlining substantially contributes to the persistent racial wealth difference today.
What are the U.S. laws on fair lending?
In the United States, fair lending rules prohibit discrimination based on certain protected classifications (such as race, color, national origin, and religion) during any phase of a credit transaction.
What three forms of lending discrimination exist?
There are three categories of loan discrimination recognized by federal law. The Federal Deposit Insurance Corporation (FDIC) lists the following as examples:
• Overt discrimination — when a lender discriminates openly based on a banned factor • Disparate treatment — when a lender treats applicants differently based on one of the forbidden criteria
• Disparate impact – when a lender applies a procedure similar to all applicants, yet the practice has a prohibited discriminatory effect and is not supported by business need.
What is the racial wealth gap? The racial wealth gap is the disparity or imbalance between the assets held by various racial or ethnic groups. It represents the discrepancy in access to financial and educational opportunities, money, and resources that have persisted for decades.
The Bottom Line
In the United States, lending procedures have increasingly grown more equal. But more equitable is not equal. Redlining’s lingering impacts and discrimination against persons of color exacerbate the country’s racial wealth gap. Three-quarters of the 1930s redlined areas continue to suffer economically and are far more likely than other localities to be home to low-income, racial, and ethnic minority populations. In addition, they are more likely to be targeted by subprime and predatory lenders. 26
There are other long-lasting harmful effects. Researchers from the National Community Reinvestment Coalition, the University of Wisconsin-Milwaukee, and the University of Richmond determined in a study published in 2020 that “the history of redlining, segregation, and disinvestment not only reduced minority wealth but also impacted health and longevity, leaving a legacy of chronic disease and premature death in many high minority neighborhoods.” The life expectancy in redlined towns is 3,6 years shorter than in communities of the same age that obtained good ratings from the HOLC.
