Definition of Redlining in Real Estate
Definition: Redlining is against the law, but that doesn't always stop violators. It is a discriminatory practice in real estate, typically involving lenders that refuse to lend money or extend credit to borrowers in certain areas of town or when realtors won't show properties to certain types of people in certain neighborhoods. Those red-lined areas are typically occupied by people in poverty or people of color, or both. It is against the law to discriminate against borrowers based on race or color, among other factors.
Redlining became known as such because lenders would literally draw a red line around a neighborhood on a map, often targeting areas with a high concentration of people of color, and then refusing to lend in those areas because they considered the so-called "risk" too high. Even though redlining is now against the law, major lenders today still end up in court over this despicable practice. You might rightfully wonder how is redlining still a thing? But then you would probably be a white person.
The Fair Housing Act is contained in the Civil Rights Act of 1968 and modified by the Fair Housing Amendments Act of 1988. The act sets forth seven protected classes of people who cannot be discriminated against on the basis of:
- National Origin
- Familial Status
For real estate agents, it means it is against the law to steer clients to particular neighborhoods, whether deliberately by the agent or at the buyer's personal request. It means if a buyer says, "I want to buy a home in a Hmong neighborhood," an agent can't direct a buyer to a neighborhood made up of a high-density population of Hmong.
Agents must show homes in all neighborhoods. I once worked with a buyer who during our tour made it clear that she wanted to view homes in only "white" neighborhoods. Apart from the fact I don't work with racist buyers, I could not work with this person even if I wanted to, which I did not. There are real estate agents in this business who say they do not care about Fair Housing Act, and if a buyer wants to see homes based on protected classes, they will show those buyers because they do not agree with Fair Housing.
It doesn't matter whether an agent agrees or does not agree, violating the Fair Housing Act is against the law. An agent could lose his or her real estate license harboring that kind of backward attitude. But some agents believe they are above the law, or that they won't get caught. There are good and bad people in all professions.
Lending institutions like banks or mortgage brokers may also exhibit behavior that makes it seem like they, too, believe that they are above the law, as they may conveniently overlook practices of redlining. This is not to say that lenders must make loans to individuals who are not credit worthy. Banks are free to set lending policies and guidelines under which they will make mortgages based on economic characteristics such as credit score, debt levels, and employment income. But, they cannot discriminate and refuse to make loans to individuals who happen to live in the "wrong" ZIP code.
They cannot simply conclude that a neighborhood is on the decline due to the poverty level in that neighborhood or amount of crime, for example, and refuse to lend. Banks are allowed to refuse to make loans in dangerous situations, say, an area where regular flooding occurs, which could potentially harm the security for their investment, even with flood insurance. But lenders cannot refuse to lend based on one of the seven protected classes.
It is unlawful for a bank to charge a higher interest rate to one group of people who fall into the protected classes than those who are not part of those protected classes. This is why when a mortgage application asks for ethnicity, it might be a good idea not to write decline to state. The federal government collects and reviews information from loan applications to determine in part whether redlining could be occurring.
Banks cannot establish lending practices that violate the rights of any person based on race, for example, but can establish credit guidelines that are applicable to all applicants, regardless of race, color, religion, national origin, sex, handicap, or familial status. This applies to refinance mortgages, home equity lines of credit, and purchase money loans.
Fight Back Against Redlining
If you feel you have been a victim of redlining and want to file a Fair Housing Complaint, you can do so online for free at portal.hud.gov.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.