What Is Redlining?
Redlining is an unethical practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity. It can be seen in the systematic denial of mortgages, insurance, loans, and other financial services based on location (and that area’s default history) rather than an individual’s qualifications and creditworthiness. Notably, the policy of redlining is felt the most by residents of minority neighborhoods.
- Redlining is a practice that denies services to whole neighborhoods on the basis of race or ethnicity.
- The Community Reinvestment Act of 1977 made all redlining practices illegal.
- Reverse redlining targets neighborhoods by selling products and services at higher prices than they are sold for in areas with greater competition.
The term “redlining” was coined by sociologist James McKnight in the 1960s and derives from how lenders would literally draw a red line on a map around the neighborhoods they would not invest in based on demographics alone. Black inner-city neighborhoods were most likely to be redlined. Investigations found that lenders would make loans to lower-income whites but not to middle- or upper-income African Americans.
Indeed, in the 1930s the federal government began redlining real estate, marking “risky” neighborhoods for federal mortgage loans on the basis of race. The result of this redlining in real estate could still be felt decades later. In 1997 homes in the redlined neighborhoods were worth less than half that of the homes in what the government had deemed as “best” for mortgage lending, and that disparity has only grown greater in the last two decades.
Examples of redlining can be found in a variety of financial services, including not only mortgages but also student loans, credit cards, and insurance. Although the Community Reinvestment Act was passed in 1977 to put an end to all redlining practices, critics say the discrimination still occurs. For example, redlining has been used to describe discriminatory practices by retailers, both brick-and-mortar and online. Reverse redlining is the practice of targeting neighborhoods (mostly nonwhite) for products and services that are priced higher than the same services in areas with more competition.
Courts have determined that redlining is illegal when lending institutions use race as a basis for excluding neighborhoods 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.
Redlining is not illegal when done with regard to geological factors, such as fault lines or flood zones.
While redlining neighborhoods or regions based on race is illegal, lending institutions may 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.
Banks may legally take the following factors into consideration when deciding whether to make loans to applicants and on which terms:
- Credit History. Lenders may legally evaluate an applicant’s creditworthiness 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.