The History of Discrimination in Lending

Although the laws have changed, the legacy of racism still fosters a racial wealth gap. See full article at Investopedia.com.

Laws today aim to protect borrowers from discriminatory lending practices, but that wasn’t always the case. For decades, U.S. banks denied mortgages to Black applicants—and those belonging to other racial and ethnic minority groups—who lived in certain areas redlined by a federal agency called the Home Owners’ Loan Corp. (HOLC). Although HOLC has been defunct since the early 1950s, those practices still resonate today.

KEY TAKEAWAYS

• Lending discrimination occurs when lenders base credit decisions on factors other than the applicant’s creditworthiness.
• Denying financial services to residents of certain neighborhoods due to race or ethnicity is commonly called redlining.
• The discriminatory practice of redlining made it impossible for many members of racial and ethnic minority groups to qualify for mortgages.
• Though now outlawed, redlining is one factor behind the racial wealth gap that persists in the United States today.
• Laws today forbid discrimination based on race, color, national origin, religion, sex, familial status, or disability.

Economic and Racial Segregation from Redlining Persists Today

The immediate effect of redlining was that residents in racial and ethnic minority neighborhoods couldn’t access capital to improve their housing (to buy or renovate) or for other economic opportunities. Of course, the impacts of redlining didn’t magically end when the FHA was passed in 1968. Instead, as a 2018 study by the NCRC showed, the economic and racial segregation created by redlining persisted in many cities.11 For example:

• 74% of neighborhoods that the HOLC graded as “hazardous” more than 80 years earlier remained LMI.
• 64% of HOLC’s hazardous-graded areas were still racial and ethnic minority neighborhoods.8

By comparison, 91% of areas deemed “best” in the 1930s remained middle- to upper-income (MUI), and more than 85% were still predominantly White.12

The median net worth of Black families is about 16% that of White families; Hispanic families’ median net worth is about 22% that of White families.13

According to the Mapping Inequality project of the University of Richmond, “As homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth inequalities that we still see today.”

The Lingering Legacy of Discriminatory Lending

Past redlining is one factor behind the persistent racial wealth gap in the U.S. And even though discriminatory lending practices are prohibited under the FHA, ECOA, and CRA, Black borrowers and those from other racial and ethnic minority groups remain at a disadvantage. These are a few of the lingering effects of redlining:

Higher Interest Rates

An analysis of nearly 7 million 30-year mortgages by the University of California at Berkeley found that Black and Latinx/Hispanic applicants were charged 0.08% higher interest rates compared with White borrowers, costing them $765 million in extra interest per year.15

Lower Loan Approval Rates

In a 2020 mortgage study conducted by the Consumer Financial Protection Bureau, Black and Hispanic White borrowers had higher denial rates than non-Hispanic White and Asian borrowers. For Black loan seekers, the denial rate was 18.1%, and for Hispanic White loan seekers, it was 12.5%. By contrast, the denial rate for Asian applicants was 9.7%, and for non-Hispanic White applicants, it was 6.9%.16

Lower Homeownership Rates

Discrimination has led to a significant homeownership gap between Blacks and Whites in the U.S. The national homeownership rate for Black families in late 2023 was 45.5%, compared to 74.5% for White families, according to the U.S. Census Bureau.17

Lower Personal Wealth

According to a 2020 report from real estate firm Redfin, over the past 40 years, the typical homeowner in previously redlined neighborhoods has gained 52% less—or $212,023 less—in personal wealth from property value increases than homeowners in greenlined areas.18

“Corporate Redlining” Hampers Black-Owned Businesses

Discrimination goes beyond mortgage lending. A 2020 analysis by The Business Journals found that White neighborhoods received roughly twice as much per person in small-business loans compared with Black neighborhoods. Similarly, predominantly White neighborhoods received, on average, about twice as many small-business loans per capita.19

The report also noted that, since peaking before the 2008 financial crisis, the number of loans made to Black-owned businesses through the Small Business Administration’s 7(a) program decreased by 84%, compared to a 53% drop in 7(a) loans awarded overall.19

The decline came despite other positive trends, including a 48% growth in the economy, an 82% rise in commercial loans, and a 101% increase in bank deposits. Orv Kimbrough, chair and chief executive officer at Midwest BankCentre, called this disparity “corporate redlining.”19

Discrimination, whether seen in mortgage or small-business lending, has lasting effects. “When you don’t invest, you get social problems, you get crime, less education, all of which reduces the chances of people climbing the social and economic ladder,” noted Andre Perry, a fellow at the Brookings Institution who studies wealth creation and race.19

If You Experience Lending Discrimination

Mortgage applicants and homebuyers who believe they have been discriminated against should contact the Office of Fair Housing and Equal Opportunity (FHEO) at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau (CFPB).2021

Small business owners who believe they have been discriminated against based on race, sex, or another protected category can submit a lending discrimination complaint online with the CFPB.22

What is Redlining?

Redlining is the now-illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity. The term was coined by sociologist John McKnight in the 1960s, based on Home Owners’ Loan Corp. (HOLC) maps that marked racial and ethnic minority neighborhoods in red, labeling them “hazardous” to lenders.

Does Redlining Happen Today?

Redlining is illegal now. But the redlining that occurred in the past still contributes significantly to the racial wealth gap that persists today.

What Are the U.S. Fair Lending Laws?

Fair lending laws in the United States prohibit lenders from discriminating based on certain factors (such as an applicant’s race, color, national origin, or religion) during any aspect of a credit transaction.

What Are the Three Types of Lending Discrimination?

Federal law recognizes three types of lending discrimination. According to the Federal Deposit Insurance Corp. (FDIC), they are:23

• Overt discrimination—when a lender blatantly discriminates based on a prohibited factor
• Disparate treatment—when a lender treats applicants differently based on one of the prohibited factors
• Disparate impact—when a lender applies a practice uniformly to all applicants, but the practice 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 in accumulated wealth held by different racial or ethnic groups. It reflects the generations-long inequality in access to financial and educational opportunities, income, and resources.

The Bottom Line

Lending practices have gradually become more equitable in the U.S. But more equitable is not equal. The residual effects of redlining—and the ongoing discrimination against people of color today—continue to perpetuate the country’s racial wealth divide. Three-quarters of neighborhoods redlined in the 1930s continue to struggle economically today and are much more likely than other communities to be home to lower-income, racial and ethnic minority residents. They are also more likely to be the target of subprime and predatory lenders.24

There are other enduring negative outcomes, too. A 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin-Milwaukee, and the University of Richmond reported that, “the history of redlining, segregation and disinvestment not only reduced minority wealth, it impacted health and longevity, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods.” In fact, the study found, life expectancy is 3.6 years lower in formerly redlined communities than in communities that had received high grades from the HOLC.25

National Community Reinvestment Coalition. “Redlining and Neighborhood Health.”