RESEARCH STARTER

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.

Full Article

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 homeownership, 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 Black 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 found that minorities continued to be more likely to be rejected for personal loans (mortgages, car loans, credit cards) than White applicants with the same socioeconomic characteristics. Although the negative consequences appeared to be borne by individuals, the impact was much more profound in that these practices tended to concentrate minorities in declining urban neighborhoods where crime was high, jobs were scarce, and public schools were 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, created 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 was assailed by the banking industry, and because of the large numbers of corporate mergers in the late 1990s, regulatory enforcement was uncertain, although members of minority communities continued to find it difficult to obtain loans.

Covert Discrimination and Second-Tier Banks

The deregulation of the US banking industry beginning in 1980 dramatically affected the cost and availability of consumer financial services. As bank mergers produced fewer branch offices in urban—especially minority—communities and higher fees for bank accounts, including substantially greater minimum cash balances, the number of alternative financial service facilities increased. John P. Caskey’s Fringe Banking: Check Cashing Outlets, Pawnshops, and the Poor (1994) documents the rapid increase in the number 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 was manifested in the dramatic growth of second-tier financial services, generated 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 US 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 were suggested as the reason that “fringe” banks were more accommodating and hospitable to racial and ethnic minorities at the same time that first-tier banks were abandoning racial and ethnic neighborhoods. More disturbing, this subtle form of financial discrimination was creating a modern form of debt peonage that perpetuated economic inequality and therefore exacerbated intergroup tensions.

In 2011 and 2012, three mortgage lenders settled lawsuits in which the US 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 Black 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 Black 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 Black 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. There are also investor and employment‑related class action suits against Wells Fargo tied to alleged discriminatory hiring and lending practices; at least one investor derivative case reached an agreement in principle to settle in 2025.


Bibliography

Attridge, Margaret. “$85 Million Settlement over Wells Fargo Hiring Practices Inches Toward Approval.” Courthouse News Service, 13 Nov. 2025, www.courthousenews.com/85-million-settlement-over-wells-fargo-hiring-practices-inches-toward-approval/. Accessed 18 Jan. 2026.

Chiles, Nick. “Report Details Shocking Racism at the World Bank.” Atlanta Black Star, 3 Dec. 2012, www.brettonwoodsproject.org/resources/report-details-shocking-racism-at-the-world-bank/. Accessed 18 Jan. 2026.

Gibson, Liam. “The $2 Billion Wells Fargo Settlement: How to Claim What You’re Owed.” Wealth Tender, wealthtender.com/insights/banking-credit/wells-fargo-settlement/. Accessed 18 Jan. 2026.

Jackson, Kenneth T. Crabgrass Frontier: The Suburbanization of the United States. Oxford UP, 2008.

“Justice Department Reaches $21 Million Settlement to Resolve Allegations of Lending Discrimination by Suntrust Mortgage.” The United States Department of Justice, 31 May 2012, www.justice.gov/opa/pr/justice-department-reaches-21-million-settlement-resolve-allegations-lending-discrimination. Accessed 18 Jan. 2026.

Leigh, Nancey Green, and Edward J. Blakely. Planning Local Economic Development: Theory and Practice. SAGE, 2013.

Manning, Robert D. “Multicultural Washington, DC: The Changing Social and Economic Landscape of a Post-Industrial Metropolis.” Ethnic and Racial Studies, vol. 21, no. 2, 1998, pp. 329–360.

Reeves, Kendra Newsom, et al. “Racial Equity in Banking Starts with Busting the Myths.” BCG, 2 Feb. 2021, www.bcg.com/publications/2021/unbanked-and-underbanked-households-breaking-down-the-myths-towards-racial-equity-in-banking. Accessed 18 Jan. 2026.

Savage, Charlie. “Countrywide Will Settle a Bias Suit.” The New York Times, 21 Dec. 2011, www.nytimes.com/2011/12/22/business/us-settlement-reported-on-countrywide-lending.html. Accessed 18 Jan. 2026.

Savage, Charlie. “Wells Fargo Will Settle Mortgage Bias Charges.” The New York Times, 12 July 2012, www.nytimes.com/2012/07/13/business/wells-fargo-to-settle-mortgage-discrimination-charges.html. Accessed 18 Jan. 2026.

Squires, Gregory D., ed. From Redlining to Reinvestment: Community Responses to Urban Disinvestment. Temple UP, 1992.

Full Article

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 homeownership, 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 Black 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 found that minorities continued to be more likely to be rejected for personal loans (mortgages, car loans, credit cards) than White applicants with the same socioeconomic characteristics. Although the negative consequences appeared to be borne by individuals, the impact was much more profound in that these practices tended to concentrate minorities in declining urban neighborhoods where crime was high, jobs were scarce, and public schools were 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, created 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 was assailed by the banking industry, and because of the large numbers of corporate mergers in the late 1990s, regulatory enforcement was uncertain, although members of minority communities continued to find it difficult to obtain loans.

Covert Discrimination and Second-Tier Banks

The deregulation of the US banking industry beginning in 1980 dramatically affected the cost and availability of consumer financial services. As bank mergers produced fewer branch offices in urban—especially minority—communities and higher fees for bank accounts, including substantially greater minimum cash balances, the number of alternative financial service facilities increased. John P. Caskey’s Fringe Banking: Check Cashing Outlets, Pawnshops, and the Poor (1994) documents the rapid increase in the number 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 was manifested in the dramatic growth of second-tier financial services, generated 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 US 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 were suggested as the reason that “fringe” banks were more accommodating and hospitable to racial and ethnic minorities at the same time that first-tier banks were abandoning racial and ethnic neighborhoods. More disturbing, this subtle form of financial discrimination was creating a modern form of debt peonage that perpetuated economic inequality and therefore exacerbated intergroup tensions.

In 2011 and 2012, three mortgage lenders settled lawsuits in which the US 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 Black 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 Black 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 Black 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. There are also investor and employment‑related class action suits against Wells Fargo tied to alleged discriminatory hiring and lending practices; at least one investor derivative case reached an agreement in principle to settle in 2025.


Bibliography

Attridge, Margaret. “$85 Million Settlement over Wells Fargo Hiring Practices Inches Toward Approval.” Courthouse News Service, 13 Nov. 2025, www.courthousenews.com/85-million-settlement-over-wells-fargo-hiring-practices-inches-toward-approval/. Accessed 18 Jan. 2026.

Chiles, Nick. “Report Details Shocking Racism at the World Bank.” Atlanta Black Star, 3 Dec. 2012, www.brettonwoodsproject.org/resources/report-details-shocking-racism-at-the-world-bank/. Accessed 18 Jan. 2026.

Gibson, Liam. “The $2 Billion Wells Fargo Settlement: How to Claim What You’re Owed.” Wealth Tender, wealthtender.com/insights/banking-credit/wells-fargo-settlement/. Accessed 18 Jan. 2026.

Jackson, Kenneth T. Crabgrass Frontier: The Suburbanization of the United States. Oxford UP, 2008.

“Justice Department Reaches $21 Million Settlement to Resolve Allegations of Lending Discrimination by Suntrust Mortgage.” The United States Department of Justice, 31 May 2012, www.justice.gov/opa/pr/justice-department-reaches-21-million-settlement-resolve-allegations-lending-discrimination. Accessed 18 Jan. 2026.

Leigh, Nancey Green, and Edward J. Blakely. Planning Local Economic Development: Theory and Practice. SAGE, 2013.

Manning, Robert D. “Multicultural Washington, DC: The Changing Social and Economic Landscape of a Post-Industrial Metropolis.” Ethnic and Racial Studies, vol. 21, no. 2, 1998, pp. 329–360.

Reeves, Kendra Newsom, et al. “Racial Equity in Banking Starts with Busting the Myths.” BCG, 2 Feb. 2021, www.bcg.com/publications/2021/unbanked-and-underbanked-households-breaking-down-the-myths-towards-racial-equity-in-banking. Accessed 18 Jan. 2026.

Savage, Charlie. “Countrywide Will Settle a Bias Suit.” The New York Times, 21 Dec. 2011, www.nytimes.com/2011/12/22/business/us-settlement-reported-on-countrywide-lending.html. Accessed 18 Jan. 2026.

Savage, Charlie. “Wells Fargo Will Settle Mortgage Bias Charges.” The New York Times, 12 July 2012, www.nytimes.com/2012/07/13/business/wells-fargo-to-settle-mortgage-discrimination-charges.html. Accessed 18 Jan. 2026.

Squires, Gregory D., ed. From Redlining to Reinvestment: Community Responses to Urban Disinvestment. Temple UP, 1992.

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