The History of Lending Discrimination

Before anti-discrimination laws were in place, redlining prevented certain groups from accessing credit. Redlining is the unfair practice of denying financial services to people in certain neighborhoods based on their race or ethnicity.

Sociologist John McKnight coined the term in the 1960s, based on maps that marked racial and ethnic minority neighborhoods in red, labeling them “hazardous” to lenders. The maps were created by the Home Owners’ Loan Corp. (HOLC), a federal agency.

The HOLC, created as part of the New Deal in the late 1930s, was intended to provide low-interest long-term mortgages to homeowners who couldn’t get financing through regular channels. They made “Residential Security” maps of major cities as part of their City Survey Program.

To create the maps, HOLC examiners classified neighborhoods based on factors such as the age and condition of housing, access to transportation, proximity to popular amenities, economic class, and racial composition of residents. The neighborhoods were color-coded on maps to show their perceived risk to lenders.

The HOLC maps became a tool for widespread discrimination. People in certain areas found it difficult to get a mortgage because capital was directed to White families in green and blue neighborhoods, away from Black and other minority families in yellow and red communities. This made it hard for people in redlined areas to buy a home and build wealth.

As a result, people of color who wanted to own a house were forced to resort to housing contracts that massively increased the cost of housing and didn’t give them equity until their last payment.

With nearly 65% of its neighborhoods marked in red, Macon, Ga., was the most redlined city in the U.S. Today, economic and racial segregation from redlining still persists. Residents in racial and ethnic minority neighborhoods couldn’t access capital to improve their housing or for other economic opportunities.The discriminatory lending practices of redlining, which started in the 1930s, continued to impact neighborhoods even after the passing of the FHA in 1968, according to a 2018 study by the NCRC. For instance, 74% of the areas labeled as “hazardous” by the HOLC more than 80 years ago remained low- to moderate-income neighborhoods, and 64% of these hazardous-graded areas were still predominantly minority neighborhoods.

In contrast, 91% of the areas rated as “best” in the 1930s remained middle- to upper-income, with over 85% still predominantly White.

As a result, the median net worth of Black families is only about 16% of that of White families, and Hispanic families’ median net worth is around 22% of White families’ median net worth. The Mapping Inequality project at the University of Richmond pointed out that the long-term effects of redlining from eight decades ago still influence wealth inequalities seen today, as homeownership played a significant role in intergenerational wealth building in the United States during the twentieth century.

The lingering legacy of discriminatory lending continues to contribute to the racial wealth gap in the U.S., despite the FHA, ECOA, and CRA prohibiting discriminatory practices. For example, Black and Latinx/Hispanic borrowers are charged higher interest rates, with Black and Hispanic White borrowers experiencing higher denial rates for loans compared to non-Hispanic White and Asian borrowers. Additionally, there is a significant homeownership gap between Black and White families, with the national homeownership rate for Black families at 45.5% and for White families at 74.5%.

Furthermore, the effects of discrimination are also evident in small-business lending, where predominantly White neighborhoods receive more small-business loans compared to Black neighborhoods. The decline in loans to Black-owned businesses through the Small Business Administration’s 7(a) program, despite positive economic trends, is also seen as a form of “corporate redlining.”

Andre Perry, a fellow at the Brookings Institution who studies wealth, noted that discrimination in lending can lead to social problems, crime, and reduced education, which hinder people’s upward mobility in society.Creation and Race

If You Are a Victim of Lending Discrimination

Mortgage applicants and homebuyers who feel they have faced discrimination can get in touch with 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).

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.

What is Redlining?

Redlining is the now-illegal 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: 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.

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.