Reverse Redlining and the Destruction of Minority Wealth

By Asma Husain
Associate Editor, Vol. 22

In 2012, Wells Fargo entered into a $175 million settlement after being accused of pursuing discriminatory lending practices. Specifically, the bank and its subsidiaries were accused of charging African Americans and Latinos higher rates and fees on mortgages than their White counterparts. Despite the massive figure of the settlement, Wells Fargo continues to deny that it pursued these practices, collectively known as “reverse redlining.” Discriminatory practices in housing have long since been a factor in devaluing minority wealth.

Discriminatory effects on housing have always been intimately tied to minority wealth in the United States. The original form of redlining became widespread after the first World War, when the Home Owners’ Loan Corporation color-coded maps of American cities along racial lines and used that data to categorize lending and insurance risks. Under those categories, primarily Black neighborhoods were traditionally marked off in red to highlight their undesirability. As a result, these neighborhoods suffered from a lack of investment and limited financial services, which systematically devalued them and undermined the wealth of those who lived there. Compounded over decades and codified in law, “redlining destroyed the possibility of investment wherever black people lived.” Although redlining was made illegal through the Fair Housing Act in 1968, its effects remain widespread, evident in the now traditional wealth disparities between inner cities and affluent suburbs.

While redlining denied African Americans loans and mortgages in more desirable, predominantly White communities, reverse redlining “involves targeting residents ‘within certain geographic boundaries, often based on income, race, or ethnicity’ and giving those targeted borrowers ‘credit on unfair terms.’” The effects of reverse redlining are staggering. The proliferation of subprime lending has led to a dramatic uptick in foreclosure rates, and those borrowing under subprime loans are eight times as likely to default as their counterparts borrowing under conventional prime loans. These foreclosures, in turn, contributed to the recent housing market crash. That nationwide effect becomes even more suspect when one examines the communities most targeted by these predatory lending practices. “High interest schemes” not only keep those communities from accumulating wealth on their mortgages, but also “strip communities of the wealth they already have.” The net result is that communities that have historically been restricted in their accumulation of wealth and property, or barred from the process entirely, are now facing obstacles to building their credit, once again cutting them out of the process of building wealth.

The legal response to reverse redlining has developed slowly. Originally, individuals who had been victims of subprime loans brought actions against the banks that had lent to them. These cases eventually garnered more widespread attention as they began to accumulate. In 2014, the State of New York filed a complaint against a local bank on behalf of a class of citizens that it claimed had been systematically blocked from prime lending.  New York Attorney General Eric Schneiderman was quick to condemn banks for these discriminatory practices, stating that, “Redlining is illegal, discriminatory, and must be made a thing of the past, once and for all…It is crucial that all New Yorkers, regardless of the color of their skin or the racial composition of their neighborhood, be afforded an equal opportunity to obtain credit.” That case, however, ended in a $825,000 settlement, and it was not until 2016 that a bank was found liable for reverse redlining by a jury.

In the 2016 case, the bank and its affiliated mortgage company were found guilty of violating the Fair Housing Act, the Equal Credit Act, and the New York City Human Rights Law. Eight plaintiffs filed the case in federal court, alleging that the bank had targeted them for unfavorable loans because they belonged to minority groups. Although the jury found that two of the plaintiffs had waived their claims by modifying their loans, the remaining six were awarded $950,000 total in damages. And although the bank intends to appeal the decision, the case stands for the illegality of reverse redlining on multiple grounds, and under both state and federal laws.

Additionally, a number of state and city governments have taken up cases against major banks on behalf of their citizens, additionally claiming that the loss to property values created by subprime loans was an injury to the cities themselves. In 2014, the City of Los Angeles filed suits against four major banks, alleging that the banks had engaged in both traditional and reverse redlining. While two of those cases are currently set to go to trial next year, one has been dismissed by the court and another has settled. Many cases brought by city and state governments have settled over the past few years, which has resulted in no widespread recourse for reverse redlining. And although much of the money from those settlements is set to be paid into rebuilding funds, settlements are ill-suited to fixing the actual harm underlying these suits.

Legislative deterrents to reverse redlining have never fully materialized. A North Carolina law in the 1990s targeted lending that did not take into account a homeowner’s ability to repay. From 1998 to 2002, subprime lending increased seventeen percent nationally, while subprime lending in North Carolina dropped by three percent. A similar policy was introduced at the federal level in a bill that aimed to ban abusive home loans, but that bill failed to pass a Senate vote. And federal policy limiting subprime loans has not led to an increase in prime loans being offered to minority communities, but rather to a lending freeze that may eventually lead to another boom in subprime lending. But even proposed legislation has failed to recognize that while subprime loans are themselves an economic problem, it is those loans disparate effect on minority communities that is a systemic one.

Another possible solution to widespread predatory lending is the creation of a public bank or financial branch that provides loans at low credit and that can be held accountable by public scrutiny. Nonprofit lenders and micro-financers have already implemented these types of lending practices on a small scale, but the Bank of North Dakota remains the only state-owned bank in the country. Regulating interest rates through the Federal Housing Administration or state-owned banks could help prevent another crisis of foreclosure, losses in property values, and social and fiscal impacts on cities where subprime lending is rampant.

But the model of traditional redlining stands clear in history: the practice did not garner widespread public condemnation until after federal legislation was passed against it. And even after that, the practice persisted, to the point where traditional redlining is still being alleged against banks today. Even if the federal government passes effective legislation against reverse redlining, it will not be able to effectively recoup the value of neighborhoods that have been systematically devalued. And as long as practices like this are allowed to persist, whether perpetrated by banks or homeowners’ associations or the state itself, the end result will be that populations who have historically been denied wealth will remain in that situation.