Redlining

Redlining is the term used to describe an illegal practice that makes accession to services (e.g. financial services, etc.) difficult or impossible for some categories of people who are living in the certain zones. Usually, the base for such restrictions is ethnicity and race. Redlining is recognized not only as an illegal practice, but also discriminatory.

There are plenty of examples of redlining. For instance, situations in which a person can’t get a loan, insurance, etc. on a regular basis. The reasons for not getting it are usually hidden in the particular territory the person lives in or the territory's default history, and have nothing to do with the person’s qualifications and creditworthiness.

It’s worth noting that the most affected by this practice are people, whose houses are situated in minority’s neighborhoods.

Main principles of Redlining

Redlining came into use in the middle of the 20th century after an American sociologist, whose name is John McKnight, determined an interesting practice among lenders and the federal government. They separated areas in which they wouldn’t put money by drawing a red line. The distinguishing, which territory worthed investment and which didn’t, was made according to the mere demographics.

From the word redlining derivatives were made. For example, to denote an action a verb “to redline” was created, it means to discriminate against someone by not providing access to financial or any other services. Usually, black neighborhoods were redlined. It was rather easier to get a mortgage if you’re a white person with almost no income, than if you’re an African American with a stable and decent income. Thus, Black citizens were cut from the opportunity to get mortgages. Instead of a mortgage, they had to sign contracts that often were unfair and made African American pay for a house more than it might have cost with the mortgage.

Such unfairness couldn’t last forever. In order to fight it, the Contract Buyers League was created in the 1960s in Chicago. It consisted mostly of Black homeowners of Chicago.

The origin of Redlining

Even though the term redlining came into use in the middle of the last century, the real redlining began in the 1930s. The federal government indicated what territories were dangerous to give them loans. The unfair division was made on racial basis. It initiated a long period of inequality in the real estate sector, even years later many people suffered from redlining, which was increasing every year. In the end of the 20th century, a company named Zillow presented research according to which the houses that the government regarded as best houses were twice as expensive as redlined houses.

Redlining wasn’t limited to mortgage loans, for some categories of people it was difficult to get access to such ordinary things as student loans or credit cards. The Community Reinvestment Act, which was enacted in 1977, tried to diminish the level of disparity. However, the discrimination still existed that time.

Other types of redlining

Reverse redlining. This term describes the situations in which a minority became the target audience. However, it doesn’t imply any benefits, on the contrary, the term refers to the unreasonably high prices in case a seller deals with the minority. The target minority is usually non-white. Redlining is included in the list of discriminatory practices.

Corporate redlining. This kind of redlining is marked by Orvin Kimbrough, the CEO of Midwest BankCentre; it was highly visible right before the 2008 financial crisis in 2007 and in 2008. The Business Journals reported that the U.S. 7(a) loans program, which supports businesses, significantly reduced its support of Black-owned businesses in 2008 compared to 2007. In 2007 the level of support decreased by fifty-three percent and in 2008 it decreased even more by eighty-four percent. It also reported that such programs favors White-majority neighborhoods, providing them more support than Black-majority ones.

Is Redlining legal

Redlining isn’t a legal practice in case the basis of it is race. Moreover, the Fair Housing Act (federal law, which is included in the Civil Rights Act of 1968) prevents the discrimination among people based on race in question of mortgage loans. Nevertheless, the lenders still may redline areas depending on geological factors.

It was found out that such discriminatory practice affected not only economics and created wealth and rights disparity between minorities and majorities, it also affected their life’s expectancy (it decreased more than by three years) and their health.

Nowadays, lenders have all rights to impose different terms on people who borrow money, it isn’t illegal since such institutions aren’t obligated to approve everything on similar terms. However, lenders aren’t allowed to give loans under different conditions based on any types of discrimination.

Allowed factors

There is a list of factors that may be legally used in determining of terms for giving or not giving loans:

• Credit history. It may be used to find out how an applicant handled previous loans, thus, estimating his or her creditworthiness.
• Income. This factor is used to determine whether an applicant has enough money or other sources to repay the given loan.
• Property condition. A lender may also evaluate the property on which an applicant desires to take the loan. Evaluating this factor, a lender must take only economic factors into account.
• Infrastructure. Since infrastructure may increase the price of a property, a lender has a right to estimate it as well.
• Self estimation. An institution may estimate its own requirements for its portfolio diversification.