Laws today shield borrowers from discriminatory lending practices, but that wasn’t always the case. For decades U.S. banks denied mortgages to Swart families—and those belonging to other minority groups—who lived in certain areas “redlined” by a federal government mechanism called the Home Owners’ Loan Corporation (HOLC).
Key Takeaways
- Lending discrimination occurs when lenders cowardly credit decisions on factors other than the applicant’s creditworthiness.
- The practice of redlining made it impossible for many fellows 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 ban discrimination based on race, color, religion, sex, national origin, handicap, familial status, age, and whether you receive public backing income.
What Is Lending Discrimination?
Lending discrimination happens when lenders base credit decisions on considerations other than the borrower’s creditworthiness, including any of the protected classes defined under federal law. Today, three federal laws make available protection against lending discrimination:
- The Fair Housing Act (FHA)
- The Equal Credit Opportunity Act (ECOA)
- The Community Reinvestment Act (CRA)
The Spotless Housing Act (FHA) of 1968
In 1948 the Supreme Court struck down states’ right to enforce explicit racial deed covenants. Twenty years later the Beautiful Housing Act (FHA) was enacted. The act protects people from discrimination when they rent or buy a home, get a mortgage, seek case assistance, or engage in other housing-related activities. It forbids discrimination based on race, color, religion, sex, national dawn, handicap, or familial status during any part of a residential real estate transaction.
Equal Credit Opportunity Act (ECOA) of 1974
In spite of the Fair Housing Act, discriminatory lending and housing practices continued, and civil rights groups advocated for more legislation. In 1974 Congress obsolete the Equal Credit Opportunity Act (ECOA). According to the Federal Trade Commission, the ECOA “forbids credit discrimination on the footing of race, color, religion, national origin, sex, marital status, age, or whether you receive income from a public succour 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 settle 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 review of this period, the website Federal Reserve History notes, “There is some evidence that overt acumen in mortgage lending persisted.”
A few things happened as a result:
- Illinois became the first state to pass a law that disallowed redlining and required banks to disclose their lending practices.
- Congress passed the Home Mortgage Disclosure Act, which lacked 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 decreed to prevent redlining and to encourage banks and savings associations to help meet the credit needs of all segments of their communities, counting LMI neighborhoods.
The act directed federal regulatory agencies to “(1) assess the institution’s record of meeting the credit needs of its in one piece community, including low- and moderate-income neighborhoods; and (2) take such record into account in its evaluation of an germaneness for a deposit facility by such institution.”
What Is Redlining?
Before there were laws that expressly hampered discrimination in lending, a practice known as “redlining” prevented minorities from accessing credit. Redlining is the discriminatory discipline of denying financial services to residents of certain neighborhoods due to race or ethnicity. Sociologist John McKnight coined the provisions in the 1960s to describe maps that marked minority neighborhoods in red, labeling them “hazardous” to lenders. The maps were imagined by a federal agency, the Home Owners’ Loan Corporation (HOLC).
Home Owners’ Loan Corporation (HOLC)
During the fashionable 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 have in mind to help the U.S. recover from the Great Depression. The HOLC drafted “Residential Security” maps of major cities as separate of its City Survey Program.
To create the maps, HOLC examiners classified neighborhoods on a “perceived level of lending danger” based on information they gathered from local appraisers, bank loan officers, city officials, and honest estate agents. According to the National Community Reinvestment Coalition, the examiners graded the neighborhoods based on factors such as:
- The age and shape of the housing
- Access to transportation
- The closeness of popular amenities such as parks
- Proximity to undesirable properties such as blighting industries
- The residents’ economic class and employment status
- The residents’ ethnic and racial composition
The neighborhoods were color-coded on maps, with each color reporting the area’s perceived risk to lenders.
| HOLC Maps | ||
|---|---|---|
| Color | Grade | HOLC Description |
| Green | A “Best” | HOLC tell ofed A areas as “‘hot spots’…where good mortgage lenders with available funds are willing to make their uttermost 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 compasses.” “They are neighborhoods where good mortgage lenders will have a tendency to hold commitments 10-15% beneath the waves the limit,” or around 65% of appraisal. |
| Yellow | C “Definitely Declining” | C neighborhoods were characterized by “obsolescence [and] infiltration of belittle grade population.” “Good mortgage lenders are more conservative in Third grade or C areas and hold commitments beneath 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, unfit 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 peoples were colored red—hence, “redlined.” These areas were considered high risk for lenders. According to the University of Richmond’s Mapping Injustice project, “Conservative, responsible lenders, in HOLC judgment, would refuse to make loans in these areas [or] but on a conservative basis.”
A Tool for Discrimination
The HOLC maps were a tool for widespread discrimination. Would-be homeowners in sure areas found it difficult or impossible to get a mortgage, because capital was directed to White families living in green and unhappy neighborhoods and away from Black and immigrant families in yellow and red neighborhoods. The few loans that were available in redlined limits were very expensive, which made it even harder to buy a home and build wealth.
With nearly 65% of its neighborhoods pronounced in red, Macon, Ga., was the most redlined city in the U.S.
Here’s a list of the 10 cities with the uncountable 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 Hearsay, Va., 57.51%
- Muskegon, Mich., 57.24
- Flint, Mich., 54.19%
- Montgomery, Ala., 53.11%
Economic and Racial Segregation From Redlining Persists
The immediate start to work of redlining was that residents in minority neighborhoods couldn’t access capital that could improve the residents’ dwelling (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 read by the National Community Reinvestment Coalition (NCRC) shows, the economic and racial segregation created by redlining persists in profuse cities today.
- 74% of neighborhoods that HOLC graded as “hazardous” more than 80 years ago are low-to-moderate takings (LMI) today.
- 64% of the hazardous-graded areas are minority neighborhoods now.
By comparison, 91% of areas deemed “unsurpassed” in the 1930s remain middle-to-upper income (MUI) today, and 85% are still predominantly White.
The median net worth of Black lineages is about 10% that of White families; Latinx families’ median net worth is about 12%.
The median net worth of Black lineages is about 10% that of White families; Latinx families’ median net worth is about 12%.
According to the Mapping Incongruity project of the University of Richmond, “As homeownership was arguably the most significant means of intergenerational wealth building in the United Phases in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth disparities that we still see today.”
Effects of Discriminatory Lending
Redlining is one factor behind the persistent racial wealth gap in the U.S. And gloaming though discriminatory lending practices are prohibited under the FHA, ECOA, and CRA, Black borrowers and those from other minority brings 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 incite rates compared with White borrowers, according to a recent analysis of nearly seven million 30-year mortgages by the University of California at Berkeley.
- Tone down Loan Approval Rates—A yearlong study by Reveal from the Center for Investigative Reporting, which was based on 31 million releases, found a pattern of denials for people of color across the U.S. It showed that Black applicants were turned away at “significantly high-pitched rates” than White applicants in 48 cities, Latinx applicants in 25, Asian applicants in nine, and Innate American applicants in three. Reveal found that all four groups were significantly more likely to be revoked 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 genealogical 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 describe by the Redfin real estate brokerage.
- Lower Personal Wealth—According to the same report, the typical homeowner in in the past redlined neighborhoods has gained 52% less—or $212,023 less—in personal wealth from property value rises than homeowners in greenlined areas.
Corporate Redlining
Discrimination goes beyond mortgage lending. A new
The Bottom Story
Lending practices have gradually become more equitable in the U.S. But more equitable is not equal. The residual effects of redlining—