END REDLINING AND LENDING DISCRIMINATION
ONCE AND FOR ALL.  IMPROVE CREDIT ACCESS
FOR PERSONS AND NEIGHBORHOODS OF COLOR 

Redlining and lending discrimination are still alive and well, and credit access is still a major problem for people of color. 

 

Beginning in the 1930s, as part of President Franklin D. Roosevelt's New Deal, the Federal Housing Administration (FHA) created loan programs that lowered down payment requirements and extended the term of home loans from 5 to 30 years — all in an effort to make home ownership accessible to more Americans.  To help banks determine who should get home loans, the government-run Home Owners’ Loan Corporation established a system for appraising neighborhoods, now commonly referred to as "redlining."  Essentially, the United States government created color-coded maps, assigning green for "good" neighborhoods and red for "bad" neighborhoods (literally drawing red lines around what they considered "bad" neighborhoods, hence the name). 

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Unsurprisingly, Black neighborhoods (pretty much across the board) were given both the color red and the worst grade (D), which classified them as "hazardous" places to underwrite mortgages because “colored infiltration is a definite adverse influence on neighborhood desirability.”  Read more here.  Naturally, without the ability to obtain conventional financing, these neighborhoods significantly declined as businesses left, segregation and discrimination deepened, and predatory lending and slumlords thrived. 

 

In large cities, Black Americans were now confined almost exclusively to the "inner city," where freeways soon bypassed them altogether.  Although smaller in scale, those in rural areas fared no better as they were now relegated to the "wrong" side of town, or tracks as it were.  The very few Black people who did obtain financing saw their property values plummet as White Americans refused to buy in what was now firmly considered "Black" neighborhoods.

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Redlining was devastating for Black Americans.  Between 1934 and 1962, the federal government backed $120 billion of home loans.  MORE THAN 98% OF THE LOANS WENT TO WHITE PEOPLE.  

There is plenty of evidence to confirm that this type of discrimination still happens every day.  Read more here

A report by Reveal from The Center for Investigative Reporting, which analyzed 31 million Home Mortgage Disclosure Act records, revealed that "modern-day redlining persisted in 61 metro areas even when controlling for applicants’ income, loan amount and neighborhood."  Their reporting "showed Black applicants were turned away at significantly higher rates than Whites in 48 cities, Latinos in 25, Asians in nine and Native Americans in three.  In Washington, D.C., Reveal found all four groups were significantly more likely to be denied a home loan than Whites."  They found that "lending patterns in Philadelphia today resemble redlining maps drawn across the country by government officials in the 1930s, when lending discrimination was legal."

Without question, excessive borrowing by the American public (i.e. people taking out loans they could not afford) added fuel to the 2007-2009 Financial Crisis fire (read more here).  We absolutely CANNOT make that mistake again.  That said, it is critical that we find a balance between overly restrictive credit requirements and giving under-served borrowers the opportunity for sustainable homeownership — because the system is badly broken.   

In 2015, the Consumer Financial Protection Bureau (CFPB) released a Data Point that found "one in ten adults in the U.S., or about 26 million people, are 'credit invisible.'  This means that 26 million consumers do not have a credit history with one of the nationwide credit reporting companies.  An additional 19 million consumers have “unscorable” credit files, which means that their file is thin and has an insufficient credit history (9.9 million) or they have stale files and lack any recent credit history (9.6 million). In sum, there are 45 million consumers who may be denied access to credit because they do not have credit records that can be scored. Together, the unscorable and credit invisible consumers make up almost 20 percent of the entire U.S. adult population.  Consumers who are credit invisible or unscorable generally do not have access to quality credit and may face a range of issues, from trying to obtain credit to leasing an apartment."  Read reports here and here.

A study from the National Fair Housing Alliance found that:  "Our current credit-scoring systems have a disparate impact on people and communities of color. These systems are rooted in our long history of housing discrimination and the dual credit market that resulted from it.  Moreover, many credit-scoring mechanisms include factors that do not just assess the risk characteristics of the borrower; they also reflect the riskiness of the environment in which a consumer is utilizing credit, as well as the riskiness of the types of products a consumer uses."

The report concludes, "By 2042, the majority of people in this country will be people of color.  Credit-scoring mechanisms are negatively affecting the largest growing segments of our country and economy. America cannot be successful if increasing numbers of our residents are isolated from the financial mainstream, and subjected to abusive and harmful lending practices. Credit scores have an increasing impact on our daily activities, and determine everything from whether we can get a job, to whether we will be able to successfully own a home. The current credit-scoring systems work against the goal of moving qualified consumers into the financial mainstream because they are too much a reflection of our broken dual credit market. This paradigm must change."  Read the entire report here.

We believe their recommendations are a great place to start (click here)

Evidence:

Daniel Aaronson, Daniel Hartley and Bhaskar Mazumder.  "The Effects of the 1930s HOLC “Redlining” Maps."  Federal Reserve Bank of Chicago.
   3 Aug 2017 

Aaron Glantz and Emmanuel Martinez.  "Kept Out."  Reveal from The Center for Investigative Reporting.  15 February 2018

United States.  Consumer Financial Protection Bureau.  "Data Point: Credit Invisibles. " May 2015

United States.  Consumer Financial Protection Bureau.  "Who Are the Credit Invisibles?"  December 2016

Lisa Rice & Deidre Swesnik.  "Discriminatory Effects of Credit Scoring on Communities of Color."  National Fair Housing Alliance.