Banking practices and racial relations
Banking practices and racial relations in the United States have a complex history influenced by systemic discrimination and socioeconomic factors. Following the Civil Rights movement, significant legal strides were made to protect the rights of minorities; however, discrimination in banking transitioned from overt to more covert forms. This shift has resulted in disparities in access to consumer credit, which is crucial for home purchases, small business startups, and education funding. Despite legal protections, minorities often face higher rejection rates for loans compared to their White counterparts with similar financial profiles.
The emergence of a two-tier banking system has exacerbated these issues, where mainstream banks limit services in urban areas, pushing minorities towards high-cost, second-tier financial services like check-cashing outlets and payday loans. This system perpetuates economic inequality, as these alternative providers often charge exorbitant fees, trapping low-income individuals in cycles of debt. Additionally, historical practices like redlining, which devalued neighborhoods based on racial composition, continue to impact access to financial resources today. Recent lawsuits against major banks have highlighted ongoing discriminatory lending practices, indicating that while overt discrimination may have diminished, subtle forms of financial bias persist, affecting the socioeconomic mobility of minority communities.
Banking practices and racial relations
SIGNIFICANCE: The extension of legally protected civil rights to minorities in the United States has intensified intergroup conflict over socioeconomic mobility. Bank practices regarding the extension of consumer credit—critical in purchasing a home, starting a small business, or obtaining a college education—have shifted from overt to covert forms of discrimination. This trend has helped create the two-tiered financial services system.
The Civil Rights movement of the 1960s provided the moral and legal impetus for redressing the disadvantaged conditions of racial and ethnic minorities in the United States. In the 1970s and 1980s, minorities made substantial progress in overcoming obstacles to socioeconomic mobility as mirrored in their rising educational and occupational levels. As middle-class minorities grew, however, overt discrimination began to be replaced by subtler but no less pernicious forms of racism. One of the most devastating—because of its long-term consequences—is the unequal access to consumer financial services from first-tier, or traditional, banks. This has contributed to the persistence of racial inequality through lower rates of minority home ownership, small business development, and college graduation. Furthermore, the concentration of minorities in urban communities and the consolidation of corporate banking operations in the late 1990s led to the rapid expansion of second-tier, or fringe, banks that offer high-cost financial services. The second tier of the banking system features check-cashing outlets, rent-to-own stores, and pawnshops, all of which market expensive financial services to primarily poor and minority groups.
Overt Discrimination and First-Tier Banks
The institutionalization of race and class discrimination in bank lending practices dates to the inception of the Home Owner Loan Corporation (HOLC) in 1933. As Kenneth T. Jackson explains in his book Crabgrass Frontier (1985), the HOLC’s goal of stabilizing the home mortgage market was based on appraising property values according to the general characteristics of the surrounding neighborhood rather than the specific properties to be mortgaged. This four-category, color-coded rating system devalued neighborhoods that were densely populated, racially mixed, or aging. Ratings ranged from first grade (green) homogeneous neighborhoods populated by White American (not Jewish) businesspeople and professionals to fourth grade (red) “declining” areas with deteriorating housing stock, low rents, and a racially or ethnically mixed population. This appraisal method is the historical basis of contemporary financial “redlining” or racially discriminatory lending practices, often employed against African Americans.
Overt discrimination by first-tier banks, prohibited by the Civil Rights Act of 1964 and other legislation, has disappeared. However, in subsequent decades, researchers have found that minorities continue to be more likely to be rejected for personal loans (mortgages, car loans, credit cards) than Whites with the same socioeconomic characteristics. Although the negative consequences appear to be borne by individuals, the impact is much more profound in that these practices tend to concentrate minorities in declining urban neighborhoods where crime is high, jobs are scarce, and public schools are inadequate. Furthermore, as illustrated in Robert D. Manning’s “Multicultural Washington, DC,” in Ethnic and Racial Studies (1998), the postindustrial shift of economic activities away from the central city, which resulted in the exodus of the most successful urban minorities to the suburbs, creates a decline in investment in the inner city. In 1977, the Community Reinvestment Act was enacted to fight redlining policies by requiring banks to invest a small proportion of their loans in underserved areas. This legal commitment has been assailed by the banking industry, and because of the large numbers of corporate mergers in the late 1990s, regulatory enforcement is uncertain although members of minority communities continue to find it difficult to obtain loans.
Covert Discrimination and Second-Tier Banks
The deregulation of the U.S. banking industry beginning in 1980 has dramatically affected the cost and availability of consumer financial services. As bank mergers produce fewer branch offices in urban—especially minority—communities and higher fees for bank accounts, including substantially greater minimum cash balances, the numbers of alternative financial service facilities are increasing. John P. Caskey’s Fringe Banking: Check Cashing Outlets, Pawnshops, and the Poor (1994) documents the rapid increase in the numbers of second-tier, or “fringe,” banks that offer high-cost services to poor and minority clients. Second-tier financial service providers include regional and national chains of check-cashing outlets (which charge 1.5 percent to 3 percent for essentially a two- to three-day loan), pawnshops (which charge 10 percent to 15 percent per month plus storage fees), rent-to-own stores (annual cost of credit from 150 percent to 450 percent), and finance companies (which charge 24 percent to 38 percent per year and require costly insurance). The most usurious loans are postdated, personal “payday” checks that typically cost 25 percent for a one-week loan or 1,250 percent per year.
The shift from overt to covert bank discrimination, which is manifest in the dramatic growth of second-tier financial services, generates billions of dollars in annual corporate profits. Michael Hudson, in Merchants of Misery: How Corporate America Profits from Poverty (1996), documents the direct and indirect linkages between second-tier banks and major financial corporations such as BankAmerica, Fleet Financial, Ford, NationsBank, and Western Union. These include providing profitable lines of credit, purchasing publicly traded stock, and “flipping” or buying high-interest loans from small companies for a small percentage or “finder’s fee.” In addition, the U.S. government’s shift to paperless financial transactions at the end of the 1990s forced those excluded from top-tier banks to cultivate new and more costly relations with second-tier financial services providers. The profit motive and linkage between the first- and second-tier banks have been suggested as the reason that “fringe” banks are more accommodating and hospitable to racial and ethnic minorities at the same time that first-tier banks are abandoning racial and ethnic neighborhoods. More disturbing, this subtle form of financial discrimination is creating a modern form of debt peonage that perpetuates economic inequality and therefore will exacerbate intergroup tensions.
In 2011 and 2012, three mortgage lenders settled lawsuits in which the U.S. Department of Justice charged them with discriminatory mortgage lending practices during the housing boom and subprime bubble of the 2000s. In December 2011, Bank of America agreed to pay $335 million on behalf of its Countrywide Financial unit to settle a suit alleging that Countrywide had discriminated against African American and Hispanic loan applicants between 2004 and 2008 by charging them higher fees than White applicants with similar credit histories. The bank was also charged with steering more African American and Hispanic applicants to subprime mortgages, which have higher interest rates, compared to White applicants with similar credit profiles. The compensation agreement was the largest residential fair-lending settlement in history. In May 2012, SunTrust Mortgage reached an agreement to pay $21 million to settle charges that it had increased loan fees and interest rates for Black and Hispanic applicants compared to White applicants between 2005 and 2009. And, in July 2012, Wells Fargo, the largest home mortgage lender in the United States at the time, agreed to pay $175 million to settle allegations that it had charged 30,000 African American and Latino borrowers higher fees due to their race and had also sold subprime mortgages to 4,000 borrowers of color when White borrowers with similar risk profiles were sold prime mortgages. Wells Fargo was at the center of another lawsuit over racism in banking practices. In February 2022, civil rights attorneys filed a class action lawsuit against the bank on behalf of victims of racial redlining and lending discrimination. Wells Fargo has faced an additional five lawsuits prior to the 2022 lawsuits alleging racist and discriminatory practices.
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