Redlining (Discrimination) Definition
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.
A Little More on What is Racial Redlining
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, student’s 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.
References for Redlining
Academic Research on Redlining
A model of redlining, Lang, W. W., & Nakamura, L. I. (1993). Journal of Urban Economics, 33(2), 223-234. This paper creates a model of mortgage redlining that captures the dynamic information gathering implied by the use of appraisals in mortgage granting. In this model, the precision of appraisals is dependent on the number of previous home sales and in turn, it influences the present home sales because when the appraisals are not accurate, the lenders tend to need larger down payments.
Race, redlining, and residential mortgage loan performance, Berkovec, J. A., Canner, G. B., Gabriel, S. A., & Hannan, T. H. (1994). The Journal of Real Estate Finance and Economics, 9(3), 263-294. This study presents theories of discrimination in credit markets which indicate that under certain conditions, systematic lender bias may lead to creditors holding minority applicants to higher creditworthiness standards than other borrowers. It tests this prediction through the examination of the default-risk characteristics of FHA-insured single-family residential mortgages.
Redlining and the home owners’ loan corporation, Hillier, A. E. (2003). Journal of Urban History, 29(4), 394-420. This is an analysis of the effects of the residential security maps which were developed by the Home Owners’ Loan Corporation (HOLC) on residential mortgages in the state of Philadelphia. The findings suggest that the grades on HOLC’s map don’t explain the differences in lending differences in lending patterns except for interest rates.
Redlining revisited: mortgage lending patterns in Sacramento 1930–2004, Hernandez, J. (2009). International Journal of Urban and Regional Research, 33(2), 291-313. This article explains that the American housing credit housing system continues to imitate long-standing patterns of racial inequality and segregation even though there have been decades of government reforms. It also states that the present housing crisis sheds light on a high concentration of subprime mortgage activity and foreclosure of properties in non-white residential settlements all over the nation.
Mortgage redlining: Race, risk, and demand, Holmes, A., & Horvitz, P. (1994). The Journal of Finance, 49(1), 81-99. This paper states that empirical research on whether mortgage lenders widely practice geographical redlining and whether it is associated with racial discrimination is yet to provide a convincing answer. It presents a new study that attempts to determine if the differences in risk and demand can elaborate the disparity in the flow of mortgage credit.
Credit card redlining, Cohen-Cole, E. (2011). Review of Economics and Statistics, 93(2), 700-713. This article investigates whether racial differences exist in the issuance of consumer credit. The results indicate qualitatively significant differences in the amount of credit that is offered to identically qualified applicants living in black versus white areas after controlling for place-specific factors. Some additional estimates using information on payday lending cement the idea that issuers base lending on location.
Redlining in Boston: Do mortgage lenders discriminate against neighborhoods?, Tootell, G. M. (1996). The Quarterly Journal of Economics, 111(4), 1049-1079. This research indicates that for decades, lenders have been accused of redlining minority neighborhoods and refusing to lend to minority applicants. However, current bank regulations are designed to prevent these actions. The data set presented here allow the identification of the distinct effects of race and geography and also proves that the evidence for redlining is weak.
Financial institution regulations, redlining and mortgage markets, Barth, J. R., Cordes, J. J., & Yezer, A. M. (1979). The regulation of financial institutions, 21, 101-143. This paper discusses the new generation of legislation that aims at providing individuals with equal access to consumer and mortgage credit. It mainly focuses on those regulations enacted to deal with the problem of redlining particularly. The regulations impose and suggest limits that can be used to grant mortgages.
Mortgage redlining research: a review and critical analysis discussion, Benston, G. J. (1979, October). In The regulation of financial institutions: proceedings of a conference held in October 1979 (pp. 144-195). Sponsored by the Federal Reserve Bank of Boston and the National Science Foundation. This article explains that the research on mortgage redlining is a very interesting phenomenon to study. It defines redlining as the refusal by lenders to make mortgages or their imposition of more onerous terms on mortgagors due to bias associated with the location of the property. It states that currently the term is used to describe the alleged refusal by institutions to serve a particular area or group.
Redlining, Aalbers, M. B. (2009). This article presents redlining as a fulfilled prediction and discusses how institutions and processes at various scales fuel the process of redlining and our understanding of it. It explains the origins of redlining in the United States, its development, anti-redlining struggles and finally the redlining investigation. It also deals with the appearance of redlining in other markets apart from mortgage finance.
Insurance redlining, agency location, and the process of urban disinvestment, Squires, G. D., Velez, W., & Taeuber, K. E. (1991). Urban Affairs Quarterly, 26(4), 567-588. This paper finds that the racial composition of a neighborhood is related to agency location even after the effects of family income, housing conditions and a number of dwellings are controlled when examining the changing pattern of insurance agency locations within the Milwaukee metropolitan area. It also offers policy recommendations to reduce the practice and impacts of insurance redlining and to encourage reinvestment in urban communities.
Mortgage redlining: Some new evidence, Avery, R. B., & Buynak, T. M. (1981). Economic Review, 17(3), 15-31. This study notes that the US regulatory and judicial bodies are struggling to consent to a precise definition of discrimination and its prevention despite the enactment of various laws in the previous decade to outlaw discrimination in credit markets. It focuses on examining the relationship between mortgage lending and neighborhood racial characteristics.