Laws today protect borrowers from discriminatory lending practices, but that wasn’t always the case. For decades U.S. banks denied mortgages to Black families—and those belonging to other minority groups—who lived in certain areas “redlined” by a federal government agency called the Home Owners’ Loan Corporation (HOLC).
- Lending discrimination occurs when lenders base credit decisions on factors other than the applicant’s creditworthiness.
- The practice of redlining made it impossible for many members of minority groups to qualify for loans to buy and improve homes.
- Redlining is one factor behind the persistent racial wealth gap in the U.S. today.
- Laws today forbid discrimination based on race, color, religion, sex, national origin, handicap, familial status, age, and whether you receive public assistance income.
What Is Lending Discrimination?
Lending discrimination happens when lenders base credit decisions on factors other than the borrower’s creditworthiness, including any of the protected classes defined under federal law. Today, three federal laws offer protection against lending discrimination:
- The Fair Housing Act (FHA)
- The Equal Credit Opportunity Act (ECOA)
- The Community Reinvestment Act (CRA)
The Fair Housing Act (FHA) of 1968
In 1948 the Supreme Court struck down states’ right to enforce explicit racial deed covenants. Twenty years later the Fair Housing Act (FHA) was enacted. The act protects people from discrimination when they rent or buy a home, get a mortgage, seek housing assistance, or engage in other housing-related activities. It forbids discrimination based on race, color, religion, sex, national origin, handicap, or familial status during any part of a residential real estate transaction.
Equal Credit Opportunity Act (ECOA) of 1974
Despite the Fair Housing Act, discriminatory lending and housing practices continued, and civil rights groups advocated for more legislation. In 1974 Congress passed the Equal Credit Opportunity Act (ECOA). According to the Federal Trade Commission, the ECOA “forbids credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or whether you receive income from a public assistance program.”
In certain situations creditors can ask for most of this information (except religion)—but they can’t use it to deny you credit or establish the terms of your credit.
Community Reinvestment Act (CRA) of 1977
Even with the FHA and ECOA, redlining continued in low-to-moderate-income (LMI) neighborhoods. In its discussion of this period, the website Federal Reserve History notes, “There is some evidence that overt discrimination in mortgage lending persisted.”
A few things happened as a result:
- Illinois became the first state to pass a law that prohibited redlining and required banks to disclose their lending practices.
- Congress passed the Home Mortgage Disclosure Act, which required banks to disclose the location of financed properties and borrowers’ race and gender.
- President Carter signed into law the Community Reinvestment Act (CRA).
The Community Reinvestment Act (CRA) was enacted to prevent redlining and to encourage banks and savings associations to help meet the credit needs of all segments of their communities, including LMI neighborhoods.
The act directed federal regulatory agencies to “(1) assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods; and (2) take such record into account in its evaluation of an application for a deposit facility by such institution.”
What Is Redlining?
Before there were laws that expressly prohibited discrimination in lending, a practice known as “redlining” prevented minorities from accessing credit. Redlining is the discriminatory practice of denying financial services to residents of certain neighborhoods due to race or ethnicity. Sociologist John McKnight coined the term in the 1960s to describe maps that marked minority neighborhoods in red, labeling them “hazardous” to lenders. The maps were created by a federal agency, the Home Owners’ Loan Corporation (HOLC).
Home Owners’ Loan Corporation (HOLC)
During the late 1930s, the HOLC—a federal agency—was created under the New Deal. The New Deal was a series of programs enacted by President Franklin Delano Roosevelt intended to help the U.S. recover from the Great Depression. The HOLC drafted “Residential Security” maps of major cities as part of its City Survey Program.
To create the maps, HOLC examiners classified neighborhoods on a “perceived level of lending risk” based on information they gathered from local appraisers, bank loan officers, city officials, and real estate agents. According to the National Community Reinvestment Coalition, the examiners graded the neighborhoods based on factors such as:
- The age and condition of the housing
- Access to transportation
- The closeness of popular amenities such as parks
- Proximity to undesirable properties such as polluting industries
- The residents’ economic class and employment status
- The residents’ ethnic and racial composition
The neighborhoods were color-coded on maps, with each color representing the area’s perceived risk to lenders.
|Green||A “Best”||HOLC described A areas as “‘hot spots’…where good mortgage lenders with available funds are willing to make their maximum loans…—perhaps up to 75-80% of appraisal.”|
|Blue||B “Still Desirable”||HOLC described B areas as “still good” but not as “‘hot’ as A areas.” “They are neighborhoods where good mortgage lenders will have a tendency to hold commitments 10-15% under the limit,” or around 65% of appraisal.|
|Yellow||C “Definitely Declining”||C neighborhoods were characterized by “obsolescence [and] infiltration of lower grade population.” “Good mortgage lenders are more conservative in Third grade or C areas and hold commitments under the lending ratio for the A and B areas.”|
|Red||D “Hazardous”||HOLC described D areas as “characterized by detrimental influences in a pronounced degree, undesirable population or an infiltration of it.” It recommended lenders “refuse to make loans in these areas [or] only on a conservative basis.”|
Neighborhoods with predominantly minority populations were colored red—hence, “redlined.” These areas were considered high risk for lenders. According to the University of Richmond’s Mapping Inequality project, “Conservative, responsible lenders, in HOLC judgment, would refuse to make loans in these areas [or] only on a conservative basis.”
A Tool for Discrimination
The HOLC maps were a tool for widespread discrimination. Would-be homeowners in certain areas found it difficult or impossible to get a mortgage, because capital was directed to White families living in green and blue neighborhoods and away from Black and immigrant families in yellow and red neighborhoods. The few loans that were available in redlined areas were very expensive, which made it even harder to buy a home and build wealth.
With nearly 65% of its neighborhoods marked in red, Macon, Ga., was the most redlined city in the U.S.
Here’s a list of the 10 cities with the most neighborhoods marked “hazardous” in the 1930s, per a National Community Reinvestment Coalition (NCRC) study as reported by the informational website NextCity.com.
- Macon, Ga., 64.99%
- Birmingham, Ala., 63.91%
- Wichita, Kan., 63.87%
- Springfield, Mo., 60.19%
- Augusta, Ga., 58.70%
- Columbus, Ga., 57.98%
- Newport News, Va., 57.51%
- Muskegon, Mich., 57.24
- Flint, Mich., 54.19%
- Montgomery, Ala., 53.11%
Economic and Racial Segregation From Redlining Persists
The immediate effect of redlining was that residents in minority neighborhoods couldn’t access capital that could improve the residents’ housing (to buy or renovate) and 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 National Community Reinvestment Coalition (NCRC) shows, the economic and racial segregation created by redlining persists in many cities today.
- 74% of neighborhoods that HOLC graded as “hazardous” more than 80 years ago are low-to-moderate income (LMI) today.
- 64% of the hazardous-graded areas are minority neighborhoods now.
By comparison, 91% of areas deemed “best” in the 1930s remain middle-to-upper income (MUI) today, and 85% are still predominantly White.
The median net worth of Black families is about 10% that of White families; Latinx families’ median net worth is about 12%.
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.”
Effects of Discriminatory Lending
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 minority groups remain at a disadvantage. Here are a few of the lingering effects of redlining.
- Higher Interest Rates—Black and Latinx applicants were charged 0.08% higher interest rates compared with White borrowers, according to a recent analysis of nearly seven million 30-year mortgages by the University of California at Berkeley.
- Lower Loan Approval Rates—A yearlong study by Reveal from the Center for Investigative Reporting, which was based on 31 million records, found a pattern of denials for people of color across the U.S. It showed that Black applicants were turned away at “significantly higher rates” than White applicants in 48 cities, Latinx applicants in 25, Asian applicants in nine, and Native American applicants in three. Reveal found that all four groups were significantly more likely to be denied a mortgage in Washington, D.C. The analysis was independently reviewed and confirmed by the Associated Press.
- Lower Homeownership Rates—Discrimination has led to the racial homeownership gap in the U.S. The national homeownership rate for Black families is 44%, compared to 73.7% for White families, according to a 2020 report by the Redfin real estate brokerage.
- Lower Personal Wealth—According to the same report, 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.
Discrimination goes beyond mortgage lending. A new report from The Business Journals found White neighborhoods receive roughly twice as much per person in small-business loans compared with Black neighborhoods. Similarly, predominantly White neighborhoods receive, on average, about twice as many small-business loans per capita.
The report also notes that, since peaking before the 2008 financial crisis, the number of loans made to Black-owned businesses through the Small Business Association's 7(a) program decreased by 84%, compared to a 53% drop in 7(a) loans awarded overall.
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, Chairman and CEO at Midwest BankCentre, calls this disparity "corporate redlining."
Here are a few other key findings that provide evidence of discrimination in small-business lending:
- A review by the New York Times showed that 75% of the government's initial round of Paycheck Protection Program loans went to businesses in majority-White census tracks.
- Citi, Bank of America, JPMorgan, and Wells Fargo—the nation's four largest banks—made 91% fewer 7(a) loans to Black-owned businesses in 2019 than in 2007.
- Black businesses got 3% of 7(a) loan dollars in 2019. About 9.5% of U.S. businesses are Black-owned, according to the Census Bureau.
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," said Andre Perry, a fellow at the Brookings Institution who studies wealth creation and race.
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 ongoing discrimination against people of color today—continue to bolster 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 house lower-income, minority residents.
They are also more likely to be subject to other negative outcomes. A new 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin/Milwaukee, and the University of Richmond finds 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." One sobering impact: Life expectancy is 3.6 years lower in redlined communities than in communities of the same age that had received high grades from the HOLC.
Mortgage applicants and homebuyers who believe they have been discriminated against should contact the Office of Fair Housing and Equal Opportunity at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau.
Small business owners who believe they have been discriminated against based on race, sex, or other protected category can submit a lending discrimination complaint online with the Consumer Financial Protection Bureau.
U.S. Department of Housing and Urban Development. "Housing Discrimination Under the Fair Housing Act." Accessed Sept. 17, 2020.
Federal Trade Commission. "Mortgage Discrimination." Accessed Sept. 17, 2020.
Federal Reserve History. "Community Reinvestment Act of 1977." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Community Reinvestment Act (CRA)." Accessed Sept. 17, 2020.
Academia.edu. "Redlining." Accessed Sept. 17, 2020.
National Community Reinvestment Coalition. "HOLC ‘Redlining’ Maps: The Persistent Structure Of Segregation And Economic Inequality, Page 4." Accessed Sept. 17, 2020.
University of Richmond Digital Scholarship Lab. "Mapping Inequality: Redlining in New Deal America." Accessed Sept. 17, 2020.
University of Richmond Digital Scholarship Lab. "Mapping Inequality: Redlining in New Deal America: Introduction." Accessed Sept. 17, 2020.
Next City. "Mapping 80 Years of Segregation in U.S. Cities." Accessed Sept. 17, 2020.
National Community Reinvestment Coalition. "HOLC ‘Redlining’ Maps: The Persistent Structure Of Segregation And Economic Inequality." Accessed Sept. 17, 2020.
National Community Reinvestment Coalition. "HOLC ‘Redlining’ Maps: The Persistent Structure Of Segregation And Economic Inequality, Page 9." Accessed Sept. 17, 2020.
Board of Governors of the Federal Reserve System. "Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence from the Survey of Consumer Finances." Accessed Sept. 17, 2020.
University of California at Berkeley. "Consumer-Lending Discrimination in the FinTech Era." Accessed Sept. 17, 2020.
Reveal. "For people of color, banks are shutting the door to homeownership." Accessed Sept. 17, 2020.
Redfin Real Estate Brokerage. "Redlining’s Legacy of Inequality: $212,000 Less Home Equity, Low Homeownership Rates For Black Families." Accessed Sept. 17, 2020.
Portland Business Journal. "One System, (Un)equal Access." Accessed Nov. 12, 2020.
National Community Reinvestment Coalition. "Redlining and Neighborhood Health." Accessed Sept. 18, 2020.
U.S. Department of Housing and Urban Development. "About the Office of Fair Housing and Equal Opportunity (FHEO)." Accessed Sept. 17, 2020.
Consumer Financial Protection Bureau. "Having a problem with a financial product or service?" Accessed Sept. 17, 2020.
Consumer Financial Protection Bureau. "The importance of fair and equitable access to credit for minority and women-owned businesses." Accessed Nov. 12, 2020.