Credit Inequality & Housing Access

How biased practices in credit & lending contribute to housing inequality & instability.

The homeownership gap between black & white homeowners is greater today than it was 50 years ago.

Bar graph of The black/white Homeownership Gap in Greater Richmond, 2020

In Richmond in 2020, the homeownership rate for white households in Richmond in 2020 was 72% while the homeownership rate for Black households was 48%.

Homeownership Gap Then and Now

The gap in homeownership rates between Black and White residents of the United States is greater today than it was in 1970. In 1970 the homeownership rate was 45% for Black households and 64% for White households, a gap of 19% points. As of 2020, the homeownership rate was 48% for Black households and 72% for White households, which is a gap of 23% points. Although Black homeownership has increased, the disparity in homeownership rates between Black and White households has widened.

Graph showing the difference in homeownership rates by race in greater Richmond from 1970 to 2020

Data Source: U.S. Census Bureau.

Why?

The Black/White homeownership gap has increased over the past 50 years due to a constellation of causes. Past HOME reports and exhibits have focused on redlining, segregation, and intentional government action and inaction. In addition to those factors, the largest remaining barriers to closing the racial homeownership gap are access to capital, the dual financial markets, and the role of credit.

A web of words connected by many lines including: credit, redlining, government support, segregation, access to lending, systemic racism, subprime lending, white flight, and black codes.

Where you live Makes a Difference

Most households rely on mortgage loans to purchase their home, especially first-time homebuyers. Lenders use credit scores to determine whether a person is eligible for a mortgage loan and the type of loans that they are willing to offer. Loan products differ in terms of principal, interest rate, fees, and other factors. Better credit tends to qualify borrowers for better loans. Because of this, credit impacts the cost of borrowing and the size, quality, and location of homes that the borrower can afford.

street map showing a neighborhood with key locations marked nearby a home.

A credit score can be the deciding factor in whether a person can afford a home in the ideal community for them. Where you live affects every aspect of your life: where you shop for food, what school you send your child to, how you access healthcare, the types of transportation available, and more.

What is Credit?

Credit Basics

Credit is the ability to borrow money based on a promise of future repayment. Lenders judge credit worthiness based on information about how a person has taken on debts and repaid them in the past. Specialized credit bureaus collect this information about individuals and provide it to lenders. The information is often summarized in a numerical credit score.

Credit scores typically Range from:

300

Least credit-worthy

to
850

Most credit-worthy

Cropped section of a multicolor arc displaying the numbers of a credit score.

Know your score? Check it here for free: AnnualCreditReport.com

How Does Credit Play a Role?

A modern Invention

Borrowing, lending, and debt are old concepts, but credit reporting, as we know it, began less than 200 years ago. It began as a way to keep track of commercial merchants transactions to prevent over-extension of credit. It wasn’t until around the 1950s that we began to see consumer credit reporting and the modern day credit score become standardized.

As a human-made concept, credit scores are subject to human mistakes and biases.

Corner of Second and Grace streets in downtown Richmond. July 1961 from the Richmond Times Dispatch Archives

Photo: Corner of Second and Grace streets in downtown Richmond. July 1961. Richmond Times Dispatch Archives

What is Included in a Credit Report?

Everyone’s credit report includes personal information, including name, date of birth, social security number, employment history, current and previous addresses, and phone numbers.

Do you know what else appears on your credit report?

Hover to reveal the answer:

Mortgages?

Mortgages

Yes

Mortgages and other mainstream loans from banks, mortgage companies, credit unions, or the federal government are included on credit reports. This includes information about borrowing and repayment of loans from these sources.

Credit Inquiries?

Credit Inquiries

Depends

Credit reports list hard credit inquiries, which are used to evaluate applications for new credit. Soft inquiries are used to review credit information for other purposes and do not appear on credit reports.

Income?

Income

No

Credit reports do not include information about income.

Debt Collections?

Debt Collections

Yes

Credit reports include debt that is sent to collections, which is the only time that many payments appear on a credit report.

Payday Loans?

Payday Loans

No

Payday, title, pawn, and other types of alternative loans generally do not appear on credit reports.

Except when missed payments result in collections.

Credit Cards?

Credit Cards

Yes

Credit reports include information on credit card debt, payment history, and credit limits.

Rent Payments?

Rent Payments

No

Standard credit reports generally do not include information about rent payments.

Except when missed payments result in collections.

Utility?

Utility

No

Standard credit reports do not include information about phone, utility, or other bill payments.

Except when missed payments result in collections.

Child Support?

Child Support

Depends

Arrears for child support and alimony appear on credit reports but ongoing on-time payments do not.

Savings?

Savings

No

Credit reports do not include information about a person’s savings or other assets.

Bankruptcies?

Bankruptcies

Yes

Credit reports include bankruptcies. This will show on credit reports for up to 10 years.

Errors?

Errors

Sometimes

Credit reports can contain information that is inaccurate, belongs to another person, or is the result of identity theft. These errors often go unnoticed until a consumer checks their own report.


Credit disparities have profound consequences.

Credit is an essential aspect of the U.S. economy and has important impacts on people’s quality of life. Credit determines who qualifies for loans needed to:

Buy a Home or start a business.

Two images, one of a black woman smiling in front of her two-story home and the second of a black woman standing in front of her real estate business.

Credit scores are also frequently used to screen applicants for:

Renting, jobs, or insurance.

Three side-by-side images of a multi-level apartment building with balconies, a help wanted sign, and a worker on a roof.

Racial and ethnic disparities in credit mean that certain groups have fewer opportunities than others to obtain these important resources.

What causes credit inequality?

Credit disparities Between Racial & Ethnic Groups

White and Asian credit scores are relatively high when compared to Black and Hispanic scores.

The average White and Asian credit scores are in the 54th percentile and 55th percentile, respectively.

Graph showing the average credit scores of U.S. population in 2007

The average Black credit score is in the 26th percentile and the average Hispanic credit score is in the 38th percentile.

Board of Governors of the Federal Reserve System. 2007. Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit.

The Dual Credit Market

There are two distinct & unequal financial markets.

Mainstream

Financial Services

  • Prime Mortgages
  • Savings & Checking Accounts
  • Home Equity Loans
  • Lines of Credit
  • Certificates of Deposit
  • Prime Auto Loans

The mainstream market is fully functional, safe, and regulated. This side can help build wealth, and is credit-building.

Who has access?

Middle/Upper-Income & Predominantly White Communities

Fringe

Financial Services

  • Pawnshops
  • Check Cashers
  • Payday Lenders
  • Rent-to-Own Shops
  • Title Lenders
  • Finance Lenders
  • Sub-Prime Lenders
  • Buy Here Pay Here Auto Lenders

The fringe side of the credit market is barely regulated, ineffective, and unsafe. This side is equity stripping and wealth depleting. These products are designed for the borrower’s failure with unreasonable terms to increase profits for the creditor.

Who is Targeted?

Lower-Income Communities & Communities of Color

Mainstream lenders have often underserved Black and Hispanic individuals and neighborhoods, precluding credit-building opportunities. The excluding and underserving of people of color from mainstream lending has sustained a fringe market, offering high-cost loans that pose substantial risks to borrowers. Fringe lending is typically not reported to credit bureaus unless the borrower misses payments and the debt is sent to collections. Because of this, borrowers risk damaging their credit, but have little or no opportunity to build credit in the fringe market.

Reference: The Fight for Fair Housing, Edited by Gregory D. Squires. Section by Lisa Rice.

How have Financial systems failed Communities of color?

Redlining

Historically, lenders have excluded predominantly African-American neighborhoods from their services.

City of Richmond map showing redlined neighborhoods in 1923

Contemporary credit disparities are, in part, a legacy of historical discrimination. Prior exclusion from mainstream financial services limited Black households’ opportunities to build wealth and pass it on to future generations, which impacted subsequent generations’ ability to secure credit-building loans. One example of this discrimination is called redlining.

Financial redlining is when a neighborhood is excluded from services because of the race of its residents. Redlining is typically based on unfounded beliefs that certain groups are more risky for investment purposes because of their race or other demographic characteristics, rather than their actual economic behavior.

The alternative is using risky financial services

Access to Lending

Majority-Black neighborhoods also tend to have less physical access to lenders’ offices compared to majority-white neighborhoods. The map below shows the distribution of financial institutions as compared to the demographics of the Richmond area. Many banks among the top 30 mortgage lenders have branches located throughout areas with majority white population, but fewer in areas with a higher percentage of residents of color. Inversely, payday and title lenders are concentrated in in areas with a high percentage of residents of color.

Map of Richmond and surrounding counties showing population concentrations overlaid with locations of mainstream banks and fringe lenders. Portions fade in to highlight the population densities and bank locations.

Data source: Lenders’ websites and Esri spatial data

Who Uses Fringe Services?

People of color make up a disproportionately large share of fringe lenders’ customer base, and fringe lenders generally focus their operations on areas with high concentrations of people of color. Of their customers, 46% are Black, 40% are Latina, 19% are Asian, and 18% are White.

Graph of the percentages of different races that use fringe services.

Adapted from National Fair Housing Alliance, “Access to Credit”

Loan Originations

Lenders continue to underserve people of color today. For example, relative to their share of the population, Black borrowers are significantly underrepresented in metro Richmond’s mortgage loan originations. Black households make up 28% of total households yet only 18% of the loan originations. Inversely, White households make up 59% of total households yet have 70% of the loan originations.

Graph comparing the amount of white households and loan originations to Black households and originations.

2021 Home Mortgage Disclosure Act Data via Lending Patterns

Moving Forward

What We Can Do

Target Funding for Equity

Lenders can develop Special Purpose Credit Programs to provide credit opportunities to groups who have been harmed by systemic racism in housing and lending.

Governments, businesses, and private donors can fund assistance programs for down payments, closing costs, and interest rate reduction that benefit homebuyers from disadvantaged groups. The public and private sectors can also fund and implement programs for early credit education, especially in disadvantaged neighborhoods and communities.

Commit to Fair Data Practices

Credit bureaus can change the kind of data they accept and report. They can exclude information from sources that only report negative credit events, as well as information resulting from suspected discrimination. If an information provider is proven to have engaged in discriminatory practices, the credit bureaus can require them to fix affected information. Credit bureaus can also give consumers the option to include rent and bill payments on their credit report. Currently, this option is only available under limited circumstances and is not available from all credit bureaus.

Credit bureaus’ reporting and scoring methods can be subjected to regular and rigorous tests for bias along lines of race or other legally protected characteristics. Such bias can occur even when protected characteristics are not an explicit input for reporting and scoring methods.

Landlords and rental agents can stop using credit reports for tenant screening purposes.

Stay Accountable

Community Reinvestment Act (CRA) regulations and examinations can be expanded to require lenders to report data on their service to different racial groups and require regulators to evaluate and rate lenders on such service. CRA is a federal law that encourages lenders to serve the credit needs of whole communities. The law requires regulators to examine lenders’ performance to see if any groups of people are being unfairly excluded from credit opportunities within the communities where the lender operates. These examinations currently focus on exclusion based on income level, which does not necessarily capture racial exclusion.

Governments, industry groups, and employers can require fair housing training for lending and housing professionals.

Join the Fair Housing Movement

Housing is the foundation for opportunity, yet throughout the United States’ history housing policy has been used to perpetuate systemic racism and segregation. Stay updated on our latest policy work and learn how you can get involved and make a meaningful difference.

If you see a fair housing violation, report it to HOME of VA, The Virginia Fair Housing Office, or HUD.

 

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The work that provided the basis for this event was supported by funding under a grant with the U.S. Department of Housing and Urban Development. The substance and findings of the work are dedicated to the public. The author and publisher are solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the Federal Government.