March 02, 2022 –Hispanic Solutions Group
Redlining is the name given to a discriminatory lending practice that dates back to the 1930s, when discriminatory lenders drew “red lines” on maps of “predominantly black” neighborhoods. as a way to deny a mortgage, claiming it was high risk.
But laws that began in the 1960s have banned the practice. Regulators will still cite lenders for similar behavior when their lending patterns show that a protected class was discriminated against by being denied financial services or charging higher rates or fees.
How Redlining Started
The big reason redlining or redlining was born was due to the government-issued Underwriting Manual in the year 1930 by the Federal Housing Administration (FHA), which insures some mortgages. The guidance was so lenders could assess property value, based on demographics and location, as well as dictate which borrowers were eligible for home loans that meet FHA standards.
Banks were reluctant to issue loans without FHA insurance, as having government backing meant they could share risk while meeting the standard of engaging in safe and sound lending practices.
But the language used in the manual explicitly discouraged lenders from working with minority groups, stating that areas with a change in social or racial occupation generally contribute to instability and a decline in values, for example.
As a result, it created a system in which lenders regularly denied mortgage loans based on where the applicant lived instead of considering the individual borrower’s credit profile and creditworthiness, which was correct.
When and how was the red line stopped?
Government policy encouraged redlining for decades until the civil rights movement in the 1950s caused Congress to pass laws that prevented banks from discriminating against protected classes of borrowers in certain areas based on their race or gender.
In the late 1970s, a law was also created to encourage financial institutions to meet the needs of underserved communities through loans.
These are some of the main rules that avoid red marking in
Fair Housing Law
The Fair Housing Act was signed into law by President Lyndon B.
Johnson in 1968 as part of the Civil Rights Act. As for mortgage loans, it prohibits banks from discriminating on the basis of race, color, religion, sex, disability, familial status, or national origin if:
Refuse to make a mortgage loan or provide other assistance
financing for a home
Refusal to provide loan information
Develop different loan terms or conditions for a class protected, such as higher interest rates or service fees.
Discriminate in the appraisal of the value of a property.
Conditioning the availability of a loan on a person’s response to harassment
Community Reinvestment Act
But even with the passage of the Fair Housing Act, discrimination against minority borrowers persisted. Many banks also refused to open branches or offer their services in low- and middle-income communities.
In response, Congress passed the Community Reinvestment Act of 1977. It requires federal financial regulators to periodically rate financial institutions based on their efforts to meet the lending needs of all the communities in which they operate (primarily in branches), especially in low-lying areas. – moderate income (LMI) neighborhoods.
The law seeks to incentivize banks by telling regulators to take into account the CRA’s performance and ratings when evaluating an institution’s request to expand operations or offer new services, including merging with or acquiring another lender.
Depending on the size and type of financial institution, CRA exams are conducted by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), or the Office of the Comptroller of the Currency (OCC).
Redlining in Real Estate Today Even with the passage of anti-redlining laws and various updates to the CRA, the financial system and housing market are still struggling with their redlining past.
Recent research published by academics at the University of Michigan, examining the housing market in marginalized and non-marginalized neighborhoods that share a border, underscores this fact.
Looking at home sales data from 2000 to 2018, they found that residential properties “just inside the boundary of the red-marked zones were selling at a much lower price compared to houses “in higher-rated zones.” across the border. The study concluded that negative effects still exist in housing markets that were redlined decades ago.
What to do if you were wrongfully turned down for a mortgage?
Incredibly discriminatory mortgage lending practices still exist today, which is why some of the banking regulators and the Department of Justice joined forces in late 2021 to launch a helpline and website for people to report red marking activity.
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