Redlining (Discrimination) - Explained
What is Redlining?
Written by Jason Gordon
Updated at October 9th, 2021
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What is Redlining?
Redlining is an unethical and unlawful discriminatory practice of systematic denial of services to a certain race or ethnic group. The term is used for describing a situation when a particular ethnic group or race is denied the financial services including mortgages, insurance, or loans.
Back to:BANKING, LENDING, & CREDIT INDUSTRY
How Does Racial Redlining Work?
The term was coined by sociologist James McKnight in the 1960s to describe the situation faced by African Americans in the United States. He explained the lenders would actually put a red line on the map where the African Americans reside. That line indicates where the lenders will not lend. This resulted in lender providing loans only to the whites in higher-income neighborhoods, while minorities in lower-income neighborhoods had no access to capital. Their qualification or creditworthiness were not taken into consideration. Redlining has been observed in credit cards, insurance, students loans, and mortgages. Redlining practices were declared illegal in the U.S. in 1977 after the enactment of the Community Reinvestment Act. According to the law, no lending institution is allowed to exclude a neighborhood on the basis of race of its residents from its services. All financial institutions must provide its services to anyone irrespective of their neighborhood or race. The Fair Housing Act aims to prohibit discrimination against neighborhoods based on their racial profile. Financial institutions may, however, consider the economic factors at hand when evaluating a loan application. They may impose higher rates or stricter repayment terms on certain borrowers. But according to the law, this must be based on the economic factors and not on the race, religion, sex or marital status. Redlining has been an issue for long in the U.S. and still remains a concern in many parts. Reverse redlining occurs when a business targets a predominantly nonwhite neighborhood for selling their products and services at a higher price than the price they offer for the same products or services in a white neighborhoods where competition is high.