Race and the Lending Gap
Redlining, which entails the denial of credit to low-income and minority communities, has been a concern in the United States for decades. The practice took its most overt form in the early to mid-1900s, when the National Association of Real Estate Boards (NAREB) and the Federal Housing Authority (FHA) discouraged lending in urban communities with high concentrations of the poor and minorities (Judd, 1984; Massey and Denton, 1993; McKenzie, 1994). Since that time, redlining was made illegal by the Federal Fair Housing Act of 1968. Following the passage of this act, community activists led the campaign for a series of laws passed at the federal, state, and local levels which shifted the government's stance from "a position requiring segregation to one prohibiting it, at least in terms of the letter of the law" (Squires, 1994: 69). The Home Mortgage Disclosure Act (HMDA) of 1975 and the Community Reinvestment Act (CRA) of 1977 were among the more important laws passed during this period. These laws have provided community advocates and researchers with data and enforcement mechanisms to challenge discriminatory lending policies of banks. Despite opposition from financial institutions, HMDA and CRA have been strengthened over the years due to the combined efforts of community advocates and researchers (Nyden et. al., 1997; Squires, 2003). Together, these efforts have come to form the community reinvestment movement in the United States (Squires, 1992).
A major watershed in the community reinvestment movement came in 1988 when a series of articles titled "The Color of Money" was published in the Atlanta Journal-Constitution (Dedman, 1988). These articles brought the issues of redlining into the public eye, adding momentum to efforts to address discrimination in housing markets. The articles indicated that a gap existed in mortgage lending between African Americans and whites living in the Atlanta, Georgia. This lending gap placed African American neighborhoods at a disadvantage in the market for mortgage products and was offered as evidence for the continued practice of redlining. Since the publication of the articles, scholars have paid increased attention to the problem of redlining in American cities. Within this growing body of research, disagreement over the extent to which the racial composition of neighborhoods influences mortgage lending has surfaced. Ross and Yinger (2002) offer a detailed examination of this debate in the research. On one side of this argument, scholars have attempted to forward evidence that race is not a significant indicator of mortgage lending patterns. From this perspective it is argued that other characteristics of a neighborhood's population and housing stock predict mortgage lending patterns. On the other side of this argument, scholars have maintained that redlining based on race remains a component of American housing markets. Although these scholars acknowledge that a variety of factors influence lending patterns, race is believed to be an important aspect of the mortgage process.
In the years following the series in the Atlanta Journal-Constitution scholarship began to emerge which downplayed the role of race in mortgage lending. For example, Hula (1991) studied patterns of mortgage lending using aggregate data at the national level. In his analysis, he examined the effects of various population and housing characteristics on both the number and value of mortgages during the 1980's. Hula concluded that there was weak support for redlining based on the racial composition of neighborhoods. Similarly, Shill and Wachter (1993) examined the disposition of mortgage applications in Boston and Philadelphia. In their analysis they also controlled for neighborhood racial composition and housing characteristics. The results of their research produced evidence that rejected claims that redlining was present in the two cities studied.
Another study of mortgage lending which focused on Detroit, Michigan, a majority-minority city, reached similar conclusions concerning the relationship between race and mortgage lending (Perle et. …