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Redlining is the name given to a discriminatory lending practice dating back to the 1930s, when lenders drew red lines on maps around predominantly black neighborhoods in order to deny a mortgage, claiming it was a risk raised.
While laws of the 1960s banned this practice, regulators will still cite lenders for similar behavior when their lending models show that a protected class has been discriminated against by being denied financial services (or by charging rates or higher fees in some cases) even if they are solvent applicants.
How redlining started
A big reason redlining was born was due to the government release of the 1930s Subscription manual by the Federal Housing Administration (FHA), which insures certain mortgages. The guide was intended for lenders to be able to assess the value of property, based on demographics and location, as well as dictate which borrowers were eligible for mortgages that meet FHA standards.
Banks were reluctant to issue loans without FHA insurance because government backing meant they could share the risk, while still meeting the standard of committing to safe and sound lending practices.
But the language used in the manual has explicitly dissuaded lenders from working with minority groups, stating that areas with “a change in social or racial occupation generally contribute to instability and declining values,” for example.
As a result, he created a system in which lenders routinely turned down mortgages based on the applicant’s place of residence rather than taking into account the profile and creditworthiness of the individual borrower.
How Redlining Was Stopped
Redlining was encouraged by government policy for decades until the civil rights movement in the 1950s forced Congress to pass laws that prevent banks from discriminating against protected categories of borrowers in certain areas based on their race or gender. In the late 1970s, a law was also created to encourage financial institutions to meet the needs of underserved communities through loans. Here are some of the main rules that prevent redlining in mortgages.
The Fair Housing Act
The Fair Housing Act was enacted by President Lyndon B. Johnson in 1968 as part of the Civil Rights Act. With respect to mortgage loans, it prohibits banks from discriminating on the basis of race, color, religion, sex, disability, family status or national origin if they:
- Refuse to grant a mortgage or provide other financial assistance for housing
- Refuse to provide loan information
- Develop different loan terms or conditions for a protected category, such as higher interest rates or management fees
- Discrimination in the assessment of the value of an asset
- Condition the availability of a loan on a person’s response to the harassment
- Refuse to buy a loan
The Community Reinvestment Act
Even with the passage of the Fair Housing Act, discrimination against minority borrowers persisted. Many banks have also refused to open branches or offer their services in low- and middle-income communities.
In response, Congress adopted the Community Reinvestment Act 1977. It requires federal financial regulators to periodically rate financial institutions based on their efforts to meet the borrowing needs of all the communities in which they do business (largely based on branch locations. ), especially in low and moderate income (LMI) neighborhoods. .
The law seeks to encourage banks by asking regulators to take into account ARC Performance and Ratings when assessing an institution’s request to expand its business or offer new services, including the merger or acquisition of another lender.
Depending on the size and type of financial institution, CRA reviews are conducted by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) or the Office of the Comptroller of the Currency (OCC).
Redlining in real estate today
Even with the passage of anti-redlining laws and several updates at the CRA, the financial system and the housing market are still grappling with its red past.
Recent research published by academics at the University of Michigan, who have examined the housing market in “marginalized” and “non-marginalized” neighborhoods that share a border, underscores this fact.
Looking at home sales data from 2000 to 2018, they found that residential properties “just inside the red zone boundaries” were selling for a much lower price than homes “in quality zones. superior ‘across the border. The study concluded that there are still negative effects in housing markets where redlining occurred decades ago.
If you’ve been wrongly rejected for a mortgage
Discriminatory mortgage lending practices still exist today, which is why some of the banking regulators and the Department of Justice joined forces at the end of 2021 to launch a hotline and website for individuals to report redlining activity.
Individuals can report discriminatory lending practices by calling the Department of Justice’s Housing Discrimination Hotline at 1-833-591-0291 or submit a report online.