A significant factor in historic housing segregation, the practice of redlining dominated lending practices from the 1930s until the passage of the 1974 Equal Credit Opportunity Act (Massey & Denton, 1998). The New Deal-era Federal Housing Authority (FHA) was required by law to classify neighborhoods according to financial risk, and to use these metrics as criteria in the processing of mortgage applications, resulting in a racially stratified redistribution of wealth. With the arrival of Levittowns and white flight, a pro-segregation culture began to manifest within FHA publications, which endorsed racial homogeneity at the neighborhood level (Loewen, 2006). The federal government’s efforts to increase home ownership rates has been described as “one of the greatest mass-based opportunities for wealth accumulation in American history,” but, to the extent that the federal government purposefully tried to maintain the property values of white neighborhoods at the expense of people of color, this opportunity was denied to people of color, and is thought to be a major component in the historic racial wealth gap (Oliver & Shapiro, 2006, p. 18).
While the racial wealth gap and housing segregation would continue to persist, this lending paradigm was shattered following the Civil Rights Era. As political momentum increased for the eradication of both de jure discrimination and the remaining New Deal and Great Society scale social spending programs, the federal government implemented the Equal Credit Opportunity Act of 1974, as well as the Community Reinvestment Act of 1977, which explicitly prohibited redlining and similarly overt racial discrimination in lending practices. While allegations of redlining practices would continue, a distinction between process-based discrimination (in which lending decisions are made according to overtly discriminatory criteria) and outcome-based discrimination (which focuses on the disparate impact caused by lending decisions) ultimately characterized the academic conversation (Ross & Yinger, 2003). While Ross & Yinger (2003) used these terms to describe the mortgage market, the same concepts could easily be applied to the explosion of consumer credit which would come in the following decade.
The following year after the passage of the Community Reinvestment Act, Marquette National Bank of Minneapolis v. First of Omaha Service Corp. (1978) reached the Supreme Court. The plaintiff, Marquette National Bank, alleged that First of Omaha Service was violating state usury laws by offering consumer credit to customers across the country, regulated only by Nebraska’s liberal usury laws. In a unanimous decision, the Supreme Court upheld this practice as legal, effectively legalizing usury nationwide, and “allowing lenders to price in the cost of loans to riskier borrowers” (Trumbull, 2012). This decision paved the way to a massive increase in consumer debt, as access to credit was, nominally, democratized – however, as the Federal Reserve Board was soliciting testimony on the implementation of the Equal Credit Opportunity Act, the infantile consumer reporting industry made it clear that credit access would be anything but democratic. In their pursuit of quantifying risk, bankers demanded the right to consider marital status, usage of birth control, or whether or not a newlywed took her husband’s surname (Williams, 2004). While these criteria didn’t all make it through the federal rulemaking process, shockingly, scoring by zip code did, allowing “banks to surreptitiously continue to score race, class, and national origin, using zip codes as their proxy” (Williams, 2004, p. 16).
As access to consumer credit demonstrably rose over the coming decades, the scope of the consumer reporting industry’s scoring project increased dramatically, which is now estimated to score consumers, on average, once every calendar week (Thomas, 2000). These scores are thought to be “far better predictors of outcomes than broad measures of educational attainment or racial classification,” and, yet, despite their individualized sense of objectivity, assertions of outcome-based discrimination persist (Fourcade & Healy, 2013, p. 570). Instead of overt classist or racist discrimination, it is argued, these credit scoring metrics serve as methods of classification, used by gatekeepers to guard access to material goods – a Foucaultian “dividing practice in which the ‘bad’ are separated from the ‘good’, the criminal from the law-abiding citizen, the mentally ill from the normal” (Burton, 2012, p. 114; Fourcade & Healy, 2013).
Yet, despite this rhetoric, academics still argue that the financial system has resulted in a discriminatory disparate impact. Failure to qualify for credit, it is asserted, pushes consumers into a relatively expensive credit market of last resort, where marginalized and underbanked customers are required to pay predatory fees for access to financial services (Carruthers & Kim, 2011; Fourcade & Healy, 2013). Similarly, access to mortgages, which is now largely governed by credit ratings, is described as a “dual mortgage market,” where individuals without access to credit are required to take on so-called subprime mortgages in order to purchase a home (Immergluck & Wiles, 1999). Not surprisingly, the dual mortgage market’s impact has been to exacerbate wealth loss in communities of color, via a mechanism not all that different from historic redlining (Rugh & Massey, 2010).
Despite these developments, the individualized nature of credit scoring complicates collective action. Increasingly, financial responsibility is equated with personal morality, and financial irresponsibility is stigmatized (Graeber, 2011; Pathak, 2014). Furthermore, the consumer reporting industry has expanded to offer “thousands of ‘consumer scores,’” expanding both the scope of their surveillance, and the responsibilities of the typical consumer significantly, through the application of these credit scoring strategies in non-financialized domains (Pasquale, 2015, p. 33). While some political organization exists, such as Occupy Wall Street’s Strike Debt movement, scoring metrics and questionable lending practices persist, and increasingly capture scores of young people via the growing student debt bubble (Draut, 2006; Strike Debt, 2014; Williams, 2004).
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