What Is Redlining?

Definition and Examples of Redlining

Black couple reviewing paperwork at home with a professional
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"Redlining" describes a practice by some mortgage lenders when they refuse to lend money or extend credit to borrowers in certain areas of town or for other discriminatory reasons. It can also apply when real estate agents follow similar practices in showing homes.

The act is referred to as redlining for the “presumed practice of mortgage lenders of drawing red lines around portions of a map to indicate areas or neighborhoods in which they do not want to make loans.” These red-lined areas are typically occupied by people with lower incomes or of a certain race.

What Is Redlining?

The practice of redlining disregards the Fair Housing Act of 1968, which prohibits discriminating against borrowers, buyers, or renters based on race, color, religion, sex, origin, disability, or other differences.

Hudson City Savings Bank was ordered to pay more than $27 million in damages for the practice in 2015, plus a $5.5 million penalty. BancorpSouth paid $4 million in subsidies to redlined neighborhoods in Memphis just a year later.

Another practice called "reverse redlining" involves lenders targeting a specific area or neighborhood when marketing high-cost or predatory mortgage loans.

It's also considered redlining when real estate agents steer you toward particular neighborhoods based on any of the above factors. They must use inclusive advertising and marketing strategies, as well as inform you of your rights under the Act.

How Does Redlining Work?

The Fair Housing Act is contained in the Civil Rights Act of 1968 and it was modified by the Fair Housing Amendments Act of 1988. The act makes it illegal to discriminate in the sale, rental, advertising, or availability of real estate transactions due to factors that form the basis for redlining:

  • Race
  • Color
  • Religion
  • National origin
  • Sex
  • Disability
  • Familial status

It's redlining when a bank charges a higher interest rate for people based on these categories. Interest rates should be competitive across the board for people of equal financial standing.

A practice is only considered redlining when banks and lenders deny you a loan based on your race, gender, or disability. They can legally deny you for other reasons. 

But financial institutions have a legal and moral responsibility to deny loans to individuals who aren't creditworthy. This might seem discriminatory, but it's not redlining. Approving loans for people without the means to repay them created the foundation for the Great Recession. Lenders—as well as the institutions that regulate them—want to discourage similar events from happening in the future.

Banks are free to set their own lending standards based on economic characteristics such as credit score, employment income, and debt levels.

The Fair Housing Act also allows lenders to consider things like the property’s condition, local home values, neighborhood amenities, and their own need for a balanced loan portfolio when evaluating an applicant.

Banks can refuse to approve loans on properties they deem unworthy of investment, and this isn't redlining, either. A bank would not have to approve the request for a mortgage if a buyer wanted to purchase a home in an area where regular flooding or landslides occur.

Preventing Redlining

The Home Mortgage Disclosure Act (HMDA) was created in 1975 to help stave off redlining and other discriminatory lending practices. The law requires lenders to track and regularly report loan-level data to the Consumer Financial Protection Bureau. This allows the CFPB and the Department of Justice to evaluate lending practices and ensure that borrowers are being treated fairly and equitably.

The CFPB can use HMDA data to determine how loan pricing and interest rates compare across different ethnic groups with similar credit scores. It may also look at the underwriting standards that those groups are held to.

When You're a Victim of Redlining

You can file a Fair Housing complaint online for free at HUD.gov if you feel that you've been a victim of redlining. And it might be a good idea to answer if a mortgage application asks for your ethnicity, because the federal government collects and reviews information from loan applications to determine whether redlining is occurring.

Key Takeaways

  • Redlining describes a practice that occurs when lending institutions refuse to make loans to people with lower incomes or of a certain race.
  • The practice is prohibited by the Fair Housing Act of 1968 and the Fair Housing Amendments Act of 1988.
  • Being denied a loan due to economic or credit factors is not considered redlining.
  • The Department of Housing and Urban Development takes redlining complaints online for free.

Article Sources

  1. U.S. Department of Housing and Urban Development. "Housing Discrimination Under the Fair Housing Act." Accessed July 4, 2020.

  2. Consumer Financial Protection Bureau. "CFPB and DOJ Order Hudson City Savings Bank to Pay $27 Million to Increase Mortgage Credit Access in Communities Illegally Redlined." Accessed July 4, 2020.

  3. Consumer Financial Protection Bureau. "United States of America and Consumer Financial Protection Bureau vs. BancorpSouth." Accessed July 4, 2020.

  4. National Association of Realtors. "Fair Housing Declaration." Accessed July 4, 2020.

  5. Federal Reserve. "Federal Fair Lending Regulations and Statutes — Fair Housing Act." Page 1. Accessed July 4, 2020.

  6. Consumer Financial Protection Bureau. "Mortgage Data (HMDA)." Accessed July 4, 2020.

  7. Consumer Financial Protection Bureau. "Home Mortgage Disclosure Act." Accessed July 4, 2020.