Redlining

What is 'Redlining'

Redlining is the unethical practice where financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of a history of high default rates. In this case, the rejection does not take the individual's qualifications and creditworthiness into account.

BREAKING DOWN 'Redlining'

In some cases of redlining, financial institutions would literally draw a red line on a map around the neighborhoods in which they did not want to offer financial services, giving the term its name. Although the Community Reinvestment Act was passed in 1977 to put an end to all redlining practices, critics say the discrimination still occurs.

Courts have determined that redlining is illegal when lending institutions use race as a basis for excluding neighborhood from access to loans. In addition, the Fair Housing Act, which is part of the Civil Rights Act of 1968, prohibits discrimination against neighborhoods based on their racial composition. However, the law does not prohibit redlining when it is used to exclude neighborhoods or regions on the basis of geological factors such as fault lines or flood zones.

While redlining neighborhoods or regions based on race is illegal, lending institutions may legally take economic factors into account when making loans. Lending institutions are not required to approve all loan applications on the same terms and may impose higher rates or stricter repayment terms on some borrowers. However, these considerations must be based on economic factors and cannot, under U.S. law, be based on race, religion, national origin, sex or marital status.

Examples of Legal Considerations

Banks may legally take the following factors into consideration whether deciding whether to make loans to applicants and on what terms:

Credit history - Lenders may legally evaluate an applicant's credit worthiness as determined by FICO scores and reports from credit bureaus.

Income - Lenders may consider an applicant's regular source of funds, which can include income from employment, business ownership, investments or annuities.

Property condition - A lending institution may evaluate the property on which it is making the loan as well as the condition of nearby properties. These evaluations must be based strictly on economic considerations.

Neighborhood amenities and city services - Lenders may take into account amenities that enhance or detract from the value of a property.

The lending institution's portfolio - Lending institutions may take into account their requirements to have a portfolio that is diversified by region, structure type and loan amount.

Lenders must evaluate each of the above factors without regard to race, religion, national origin, sex or marital status of the applicant.

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