What Is Redlining?

Definition and Examples of Redlining

Black couple viewing a home for sale
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"Redlining" describes a practice by some mortgage lenders when they refuse to lend money or extend credit in certain areas of town or for other discriminatory reasons. It can also apply when real estate agents follow the same sort of practice when they're 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 areas are often home to people with lower incomes or of a certain race.

What Is Redlining?

The practice ignores the Fair Housing Act of 1968, which prohibits discriminating against borrowers, buyers, or renters based on their 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 to redlined neighborhoods in Memphis just a year later.

Another practice, called "reverse redlining," involves lenders targeting a certain area when they're selling high-cost or predatory mortgage loans.

The term also applies when real estate agents steer you toward certain areas based on any of the above factors. They must use inclusive advertising and marketing tactics. They must 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. It was then modified by the Fair Housing Amendments Act of 1988. It's not legal to discriminate in the sale, rental, advertising, or availability of real estate transactions due to race, color, religion, national origin, sex, disability, or family status.

This might happen if a bank charges a higher interest rate for people based on any of these factors. Rates should be the same or close across the board for people of equal financial standing.

A practice is only redlining when banks and lenders deny you a loan based on these factors. They can deny you for other reasons. 

Lenders do have a legal and moral duty to deny loans to those with poor credit or low income. This might seem discriminatory, but granting loans to people who don't have the means to repay them prompted the Great Recession. Lenders—as well as the institutions that regulate them—want to avoid the same sort of events in the future.

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

The Fair Housing Act also allows lenders to factor in issues such as the property’s condition, local home values, amenities, and their need for a balanced loan portfolio.

Banks can refuse to approve loans on properties that they don't deem to be worthy of investment. This isn't redlining, either. A bank would not have to approve a request for a mortgage if a buyer wanted to purchase a home in an area that's prone to flooding or landslides.

Preventing Redlining

The Home Mortgage Disclosure Act (HMDA) was passed in 1975 to help stave off redlining and other such lending practices. The law requires that lenders track and 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.

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

If 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 U.S. collects and reviews loan applications to decide whether a practice is redlining.

Key Takeaways

  • Redlining describes a practice that occurs when lenders refuse to make loans to people with lower incomes or of a certain race.
  • The practice is banned by both the Fair Housing Act of 1968 and the Fair Housing Amendments Act of 1988.
  • Being denied a loan due to income or credit factors is not considered redlining.
  • HUD takes redlining complaints online for free.