What Is Redlining?

What Is Redlining?

Let me explain redlining to you directly: it's a discriminatory practice that makes services, especially financial ones, unavailable to residents in certain areas purely because of their race or ethnicity. You need to know that redlining is illegal.

You'll see evidence of it in the systematic refusal of mortgages, insurance, loans, and other financial services based on where someone lives and that area's default history, not on the person's own qualifications or creditworthiness. This hits residents of minority neighborhoods the hardest.

Key Takeaways on Redlining

Understand this: redlining denies services, usually financial, to people in specific areas based on race or ethnicity. Fair lending laws prohibit using these factors in lending or underwriting decisions. It's most linked to mortgage lending, but it shows up in student loans, business loans, car loans, and personal loans too.

Because of these practices, homeownership and wealth are far lower in redlined communities than in non-minority ones. Remember, redlining is illegal.

How Redlining Works

The term 'redlining' comes from sociologist John McKnight in the 1960s, based on how the federal government and lenders actually drew red lines on maps around neighborhoods they wouldn't invest in, solely due to demographics.

Black inner-city neighborhoods were the most targeted. Investigations showed lenders giving loans to lower-income White borrowers but not to middle- or upper-income Black ones.

Without access to regular mortgages, Black residents seeking homeownership often turned to exploitative housing contracts that jacked up costs and built no equity until the final payment. In the 1960s, Chicago's Contract Buyers League formed to combat this.

Effects of Redlining

Starting in the 1930s, the federal government redlined real estate by marking 'risky' neighborhoods for loans based on residents' race. You can still feel the impact today—in 1996, Zillow research showed homes in redlined areas worth less than half those in 'best' areas, and the gap has widened since.

Redlining appears in various services like mortgages, student loans, credit cards, and insurance. The 1977 Community Reinvestment Act aimed to stop it, but critics say discrimination persists.

For instance, retailers use redlining by charging higher prices in non-white neighborhoods or offering unfair terms like predatory subprime mortgages—this is reverse redlining.

There's also 'corporate redlining,' as Midwest BankCentre CEO Orv Kimbrough describes it. Reports show loans to Black-owned businesses via the SBA's 7(a) program dropped 84% since before 2008, versus 53% overall, with less lending in Black-majority areas compared to White ones.

Legality of Redlining

Courts have ruled redlining illegal when lenders use race to exclude neighborhoods from loans. The Fair Housing Act, part of the 1968 Civil Rights Act, bans discrimination in lending based on a neighborhood's racial makeup. However, excluding areas for geological reasons like fault lines or flood zones is allowed.

Redlining's damage goes beyond economics—a 2020 study by the National Community Reinvestment Coalition and others found it reduced minority wealth, affected health, and caused chronic disease and early death. Life expectancy in redlined areas is 3.6 years lower on average than in higher-graded ones from the same era.

Lenders can consider economic factors in loans, and they're not obligated to approve all applications identically—they can set higher rates or stricter terms, but not for prohibited reasons like race.

Fast Fact on Redlining

Here's a key point: lenders aren't barred from redlining areas due to geological factors, such as fault lines or flood zones.

What Factors Are Lenders Allowed to Consider?

When deciding on loans and terms, banks can legally look at several factors. I'll outline them for you.

Warning on Housing Discrimination

Housing discrimination is illegal. If you suspect discrimination based on race, religion, sex, marital status, public assistance use, national origin, disability, or age, take action. File a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Lenders must evaluate those factors without considering the applicant's race, religion, national origin, sex, or marital status. If you think you've faced discrimination in mortgages or homebuying, contact a fair housing center, HUD's Office of Fair Housing and Equal Opportunity, or the CFPB.

Where Does the Term 'Redlining' Come From?

Sociologist John McKnight coined 'redlining' in the 1960s, from the 1930s practice of government and lenders drawing red lines on maps around neighborhoods they avoided investing in due to racial demographics.

Why Is Redlining Discriminatory?

Redlining discriminates by blocking financial services for residents in areas based on race or ethnicity. You see it in denials of mortgages, insurance, and loans based on location, not individual merits. Black inner-city areas were hit hardest.

What Factors Can Banks Use When Making Loans?

Banks can account for economic factors in loan decisions. If based only on economics, they don't have to approve all loans the same way and can apply higher rates or stricter terms. But U.S. law forbids basing approvals on race, religion, national origin, sex, or marital status.

The Bottom Line

Redlining is a dark part of America's history of racial discrimination. By withholding federal housing loans from minority communities, the government denied homeownership benefits to millions. Though racial redlining is now illegal, informal discrimination lingers today.