What is Redlining?
Redlining is the unethical and discriminatory practice in the US and Canada that does not offer services, particularly financial services such as loans, insurance, mortgages, and others, to the residents of certain communities associated with certain race or ethnicity, rather than considering a person’s credit score and qualifications. The practice can be accomplished indirectly by imposing higher interest rates. However, under fair and equal lending laws Redlining can’t be used for making underwriting or lending decisions.
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In the 1960s, American Sociologist John McKnight coined the term “Redlining” for the first time to describe the discriminatory practices used by the federal government and financial institutes when investments in certain areas were restricted based on the demographics of the area, predominantly populated by African Americans.
In 1930s, the US government started redlining real estate that indicated the risky communities based on their race from being given financial services. Financial institutes used to provide loans to low-income Americans but not to middle- or upper-income African Americans. In 1960, Chicago’s Contract Buyers League was formed against these discriminatory practices.
In 1977, the Community Reinvestment Act was passed to prevent redlining, but the effort was worthless. The reverse redlining is the practice of lending on unfair terms and higher prices to neighborhoods areas where non-white resides.
However, redlining has been made illegal by law and the Fair Housing Act, which is part of the Civil Rights Act 1968, which bans redlining based on race. But the law does not ban excluding regions or neighborhoods based on geological factors.
Financial institutes may take economic factors into consideration when making loan, regardless of their race, religion, sex etc. they may not approve all loan applications on the same term and may impose higher interest rates and restriction to the term. As redlining has been restricted by law, no loan can be provided on the bases of religion, race, sex, marital status, or national origin.
Financial Institutions may consider the following factors into account while making loans to applicants. It includes:
While making loans financial institutes may consider the source of income of applicants such as business ownership, employment, annuities, and investments.
- Credit Score
Financial institutes can consider credit history and score of the applicant as determined by FICO scores and reports from credit bureaus to know how risky it could be to provide loan to the given applicant.
- Property Consideration
Financial institutes may evaluate the property on which it is making the loan, as if the applicant fails to make repayments financial institute can recover money by selling the property.
- Financial Institution’s portfolio
The financial institutions have various applications, and they may consider their requirements to have a portfolio that is diversified by loan amount, region, and structure types to mitigate any risk.
- Nearby amenities and services
Financial institutions may consider nearby amenities and services of the property as it plays an important role in increasing or decreasing the value of the property.
In case, the loan applicant of homebuyer is ever discriminated on the bases of their race, sex, religion, marital status, and national origin, they can file a report to Consumer Financial Protection Bureau (CFPB) or with HUB.
If they believe they might be discriminated they can take their concern to a fair housing center, the Office of Fair Housing and Equal Opportunity at the US department of Housing and Urban Development or in the case of mortgages and other home loans, the Consumer Financial Protection Bureau.
Disadvantages of Redlining
In 2020, a study by researchers at the University of Wisconsin/ Milwaukee, the National Community Reinvestment Coalition and the University of Richmond find that Redlining reduces minority wealth as well as affects longevity and health that cause legacy of chronic disease and premature death.
The practice adversely affects the social and economic conditions in redlining areas as it hinders the economic development, limits the inflow of investments, and paralyzes the housing market. All this impacts the development in these areas and push the population towards poverty.
As the residents in redlined areas tend to bond together and oppose other communities the urban population becomes more segregated, which result destabilization of urban community.