Redlining is the denial of goods or services to people of a protected class; the term originates from lenders denying worthy applicants mortgages based on their race or ethnicity.
Redlining violates fair housing and fair lending laws, which you’ll need to be familiar with to pass the real estate exam. But no worries – our team of real estate experts will teach you all about redlining and best fair lending practices.
In this post, we’ll define redlining, give examples of how it works, and discuss its adverse effects on minority neighborhoods. Keep reading to learn more!
What Is Redlining in Real Estate?
Redlining is the practice of denying services to eligible applicants, usually on the basis of their race. The term “redlining” comes from when banks used to highlight risky investment neighborhoods with the color red on maps.
In real estate, prejudiced mortgage lending companies often redline minority neighborhoods. This prevents marginalized groups from receiving loans for new housing opportunities.
Steering is the illegal practice of guiding someone to purchase or rent a home in a specific area or community based on their race, religion, gender, color, familial status, or disability, and is a form of redlining.
What Is Reverse Redlining?
Reverse redlining is when banks target these same neighborhoods to offer them predatory loans. Sure, this means that citizens in these communities have access to home loans, but the terms of the loan are abusive.
The History of Redlining in the United States
Redlining began in the 1930s when the Home Owners Loan Corporation and Federal Home Loan Bank Board drew red lines across minority communities. These red lines indicated that these areas were too risky for mortgage loan investments.
Of course, this was a tactic designed to deny housing opportunities to black citizens. While redlining is now illegal, we can still see its adverse effects on the housing market. For example, maps show lower property values in black communities and higher property values in white communities.
Does Redlining Still Occur Today?
We mentioned that redlining is now illegal, but that doesn’t mean it isn’t still happening in real estate today. Banks still discriminate against minority neighborhoods and have found more modern ways to do so. One example of this is digital redlining.
Digital redlining refers to the use of technology in discriminating against non-white neighborhoods. For example, internet service providers may avoid implementing their services in marginalized communities.
As a result, citizens in redlined regions lack access to high-speed internet and other digital services. This perpetuates racial inequality and keeps minorities at a disadvantage.
Examples of Redlining in Real Estate
Now that we’ve defined redlining, we should discuss some examples of how it works in the real estate world.
One example would be if Red’s Mortgage Lending Company frequently gave loans to residents of Neighborhood A, a white community. Meanwhile, Red’s Mortgage Lending Company avoids giving loans to residents of Neighborhood B, a black community.
If Neighborhood B’s residents are worthy creditors, then Red’s Mortgage Lending Company is likely redlining.
An example of reverse redlining would be if Red’s was giving loans to residents of Neighborhood B but setting abusive loan terms. The residents of Neighborhood B lack other options, so they have no choice but to agree to these predatory lending agreements.
Examples of abusive loan terms include:
- Charging higher interest rates
- Excessive broker fees
- Pyramiding late fees
- Hidden balloon payments
- Loan flipping
The Redfin Digital Redlining Lawsuit
In 2022, the federal government found Redfin Corporation guilty of digital redlining. Where did they go wrong? Redfin had set a minimum price for its services and properties. The National Fair Housing Alliance (NFHA) claimed this harmed homes in minority neighborhoods.
While Redfin lost the settlement and had to remove the policy, this shows that redlining is an issue that still impacts minorities.
What Are the Effects of Redlining?
Let’s discuss some of the adverse effects redlining has on fair housing and society.
Residents of redlined neighborhoods struggle to get approved for home loans with fair terms. As a result, minorities cannot leave their communities and move to upper-class, white areas. This causes housing segregation and allows lenders to keep discriminating against marginalized borrowers.
Reduced Home Values
Houses in redlined neighborhoods generally have lower home values than other houses. This enforces the wealth gap between white and minority homeowners, as redlined citizens must sell their homes for less.
Low Home Ownership Rates
Redlining creates a gap in homeownership rates between black and white residents. Because residents in redlined communities suffer from predatory credit loans, they take longer to pay them off. This reduces the number of marginalized homeowners and further contributes to racial inequality.
Higher Mortgage Default Rates
Citizens in redlined neighborhoods are more likely to default on their home loans due to abusive terms. This perpetuates a vicious cycle, as defaulting negatively affects a borrower’s credit. A low credit score hinders borrowers from receiving home loans with reasonable terms in the future.
Increased Subprime Mortgages
Redlining results in lending companies giving out subprime mortgages to borrowers. Subprime mortgages are loans given to borrowers ineligible for prime-rate loans. While this may sound positive, subprime loans have higher interest rates and increased down payments.
Because redlining impacts minorities in these ways, this lending practice is illegal under fair lending laws.
What Are the Fair Lending Laws?
Fair lending laws protect fair housing principles and prohibit discriminatory lending practices. The two most important fair lending laws are:
- The Fair Housing Act
- The Equal Credit Opportunity Act
The Fair Housing Act
- National origin
- Sex (sexual orientation and gender identity)
- Familial status
- Disabilities (mental or physical)
Examples of FHA Violations
Housing providers violate the Fair Housing Act when they:
- Use predatory lending tactics
- Discourage minorities from living in white neighborhoods
- Deny housing to tenants because of their religious beliefs
- Refuse to repair a same-sex couple’s unit
- Rent out a housing unit that’s inaccessible for people in wheelchairs
- Sexually harass female tenants
The Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA) prohibits discrimination against borrowers applying for loans. The ECOA ensures that all protected classes have equal access to housing opportunities.
According to the Federal Trade Commission, protected characteristics under the ECOA also include:
- Marital status
- Eligibility for public assistance
- Exercise of any rights under the Consumer Credit Protection Act
Examples of ECOA Violations
Mortgage lending companies violate the Equal Credit Opportunity Act when they:
- Engage in predatory lending tactics
- Deny loans to borrowers because of differing religious beliefs
- Ask borrowers about their marital status
- Charge minorities with higher interest rates
- Deny loans to women because of their gender
- Discourage older people from applying for loans
Who Enforces the Fair Lending Laws?
The Department of Housing and Urban Development enforces the FHA. The Consumer Financial Protection Bureau enforces the ECOA. If a borrower feels they are facing redlining discrimination, they can contact either organization for help.
Penalties for Redlining in Real Estate
Mortgage companies that use discriminatory lending practices can be sued for:
- Damages of up to $10,000 for individual lawsuits
- Damages of up to $500,000 (or 1% of their net worth) for class-action cases
When Is Redlining Not Illegal?
There are a few cases where redlining is legal. For example, if a neighborhood falls on a fault line or flood plain, lenders can legally redline this area.
What Factors Can Lenders Consider When Giving Loans?
Mortgage lenders cannot discriminate based on zip code, but they can consider the following factors when giving out loans:
- The borrower’s credit history
- The borrower’s income (and surplus income)
- The borrower’s collateral
- Loan amount
- The condition of the borrower’s property
- The lending institution’s portfolio
How Do We End Redlining in Real Estate?
Real estate professionals can help end redlining by refusing to work with lenders who use predatory tactics. We can also support the institutions that fight discriminatory lending, such as:
- The Community Reinvestment Act
- Home Mortgage Disclosure Act
Community Reinvestment Act
The CRA requires the federal government to encourage banks to help support borrowers. This act reverses the harmful effects of redlining by helping marginalized communities get fair home loans.
Home Mortgage Disclosure Act
The Home Mortgage Disclosure Act (HMDA) requires that banks report and disclose mortgage data. The HMDA forces banks to be transparent about which communities they give the most loan opportunities to.
What to Know Before the Real Estate Exam
Redlining is a discriminatory lending practice that disadvantages protected classes in real estate. Now that you’re a pro on redlining, you’re that much closer to acing the real estate exam and fighting for fair housing. But don’t stop here- brush up on other key terms with our Real Estate Flashcards. With the help of this useful tool, you’ll head into exam day feeling confident!