Redlining
Redlining is a form of systemic discrimination where mortgage lenders, insurance agencies, and other financial institutions treat individuals based on the racial or ethnic composition of their neighborhoods rather than their personal financial situations. The term originated from practices established in the 1930s when maps were created to delineate areas deemed high or low risk for investment, often marking neighborhoods predominantly inhabited by Black Americans and other minorities with a "red line." This practice has contributed to significant barriers for residents in these areas, making it challenging to access loans and build wealth. Although federal laws like the Fair Housing Act of 1968 sought to outlaw racial redlining, ongoing disparities persist, with reports indicating that communities of color still face higher rates of mortgage denials compared to their white counterparts. The implications of redlining extend beyond home ownership; it has been linked to broader issues of urban renewal, gentrification, and the racial wealth gap. Recent legal actions against banks highlight that, despite regulations, some institutions engage in discriminatory lending practices. The debate continues over how to effectively address these entrenched inequities and foster inclusive financial opportunities for all communities.
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Redlining
Redlining is a broad term, denoting the discriminatory treatment of people living in certain neighborhoods by mortgage lenders, insurance agencies, and other businesses. Historically, a “red line” was drawn around certain areas on a community map, and these areas either were excluded as potential clients or were subjected to more stringent conditions. Despite the most overtly racist form of redlining having been outlawed, many see evidence of subtler, ongoing redlining practices based on race or ethnicity.
Redlining arises when business decisions are made not with regard to particular individuals but with regard to particular neighborhoods. Automobile insurance, homeowner’s insurance, mortgage insurance, business loans, and other risk-sensitive financial products are often priced based on conditions in a particular neighborhood or region. For example, an insurance policy for a home in a floodplain might reasonably be priced higher than the same home on higher ground because of the increased risk. Similarly, homes, automobiles, and businesses in areas with high levels of crime, fires, and other risks may be treated differently by insurance agencies and lenders. This is the most neutral definition of redlining. In itself, this practice has sometimes been the target of criticism, since it treats people as groups rather than individuals. For example, some people have objected to automobile insurance rates being set on the basis of a person’s zip code rather than strictly on the basis of the individual’s driving record.
The issue of redlining therefore turns on how people are categorized. Businesses such as insurance underwriting usually require that distinctions be made about different characteristics of policyholders (smokers versus nonsmokers, young versus old, urban versus rural, brick dwelling versus wood-frame dwelling).
Race-based redlining had its origins in the policies and practices of the Federal Housing Administration (FHA), established in 1934. The federal Home Owners' Loan Corporation (HOLC) bailed out the floundering housing market amid the Great Depression, in part by taking over mortgages and in part by standardizing loan processes and training appraisers. As part of those efforts, HOLC created produced graded and color-coded maps of municipalities with forty-thousand-plus residents, indicating neighborhoods that it believed were at higher or lower risk of defaulting on loans. Higher-risk areas were graded D and shaded red. Not only did it consider factors such as housing quality and sale or rental prices considerer, but also racial, ethnic, and socioeconomic composition: HOLC drew red lines neighborhoods inhabited by Black Americans, as well as certain areas with Latino or Hispanic residents, recent immigrants, and lower-class White Americans. Many believe that such HOLC and similar FHA maps codified racial segregation by making it more difficult for residents and business owners in redlined neighborhoods to access to government-backed loans and thus to purchase and maintain property and build wealth.
At the same time, federal programs facilitated investment in largely White areas, and restrictive covenants on deeds prevented people of color from buying certain properties. Scholars have also linked racial redlining with White flight from cities to the suburbs and with the displacement of urban communities of color through urban renewal projects and gentrification.
Redlining on the basis of race was prohibited by the federal Fair Housing Act of 1968, as well as by many state and local laws. In addition, the 1977 Community Reinvestment Act (CRA) requires financial institutions to serve all segments of the community, irrespective of race, income, and other factors. However, the CRA does not require that all applicants must be afforded the same loan conditions and terms. Instead, lenders may consider risk in issuing loans and policies. Various laws and court decisions have also established that race (as well as other characteristics) cannot be a basis for such business decisions..
The issue of race or ethnicity as a criterion persists, however, when it is suspected that certain other criteria (such as a person’s neighborhood) are used as surrogates. Because of longstanding disinvestment and concentrated poverty in many neighborhoods of color, the housing stock is typically older and in worse repair than the average, lowering the home values. Further, such neighborhoods may be more likely to experience problems with gangs, vandalism, and other criminal activity. The racial issues emerge from differing perceptions about the linkage between risk, race, and business practices. The question is whether predominantly White mortgage lenders and insurance agents are motivated strictly by a neutral analysis of risk potential or if they make unfair and unsubstantiated risk assumptions about neighborhoods and households of color.
Regardless of the federal law, some institutions have continued to engage in redlining practices, though less overtly than in the past. Some commentators have theorized that some banks have resorted to this tactic more since the financial crisis that had begun in 2008 and was largely related to the bursting of the housing bubble in combination with subprime mortgage loans. In the fall of 2015, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice settled a lawsuit against Hudson City Bancorp for $33 milion, which was reported as one of the largest settlements regarding redlining in history. The CFPB claimed that evidence showed Hudson City Savings Bank had consistently discriminated against lending to communities of color (largely African American and Latino) for several years. Similarly, the Center for Investigative Reporting reported in 2018 that Black, Latino, Asian, and Native American mortgage applicants in sixty-one metropolitan areas were consistently denied conventional mortgages at higher rates than White Americans were. The banking industry countered accusations of racial bias, attributing such disparities instead to credit histories and debt-to-income ratios (neither of which were publicly available information).
In the late 2010s and early 2020s, renewed media and political attention on racial segregation and the effects of redlining on racial wealth gap brought calls for reform and redress. Some have urged increased enforcement of CRA provisions, updating the law, or even using the old HOLC maps for targeted federal funding. Meanwhile, contemporary cases of redlining and other discriminatory practices also continued to attract attention; for example, in January 2023, City National Bank, a large bank based in California, reached a $31 million settlement with the US Department of Justice (DOJ) over the bank's alleged redlining practices between 2017 and 2020. This came amid a wider DOJ effort known as the Combatting Redlining Initiative, which had been launched in 2021.
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