What is Redlining When Seeking a Mortgage?

Redlining Definition

Redlining is the practice of refusing financial assistance services to those looking to buy property in lower income neighborhoods based on the applicants race, ethnicity, and/or other discriminatory factors. This was a practice that historically ensured minorities or other protected classes of people could not buy homes due to the financial bias of their location. Additionally, these practices did not only adhere to home loans, but also to other forms of financial assistance such as school loans and business loans and car loans.

The term redlining began with the introduction of the Home Owners’ Loan Corporation (HOLC) in the late 1930s as part of an effort to recover from the Great Depression. The HOLC created “Residential Security” maps to identify areas where the risk of lending was the greatest.

These areas were classified into 4 categories based on the HOLCs appraisal of that areas commitment to repaying loans:

  • Green - areas were designated with an “A” grade which were known as the best places to issue the maximum possible loans.
  • Blue - areas were designated with a “B” grade because though they were not as wealthy as the green zones those who applied in the blue zone were only given about 10 to 15 less than the maximum possible loan.
  • Yellow - areas were designated with a “C” grade due to the fact that they held loan commitments, but struggled to make payments due to their inflated population and the high possibility that the inhabitants were obsolete in the current job market.
  • Red - areas were designated with a “D” grade and were characterized as undesirable individuals who should not receive financial assistance.

This is where the term came from as individuals in the red areas were typically minorities who lived in areas with a high crime rate or survived on lower incomes. Essentially, financial institutions began issuing loans based on these criteria and formed many geographic barriers based on income throughout a city.

Click here to review more information regarding loan discrimination laws and contact us today for more information regarding a possible class action lawsuit due to discriminatory lending practices.

Reverse Redlining Definition

Over the years laws have been enacted to protect those seeking financial assistance including the Fair Housing Act, Equal Credit Opportunity Act, and the Community Reinvestment Act. However, another form of redlining known as reverse redlining became popular and led to the subprime mortgage crisis in the 2000s.

This practice was a predatory practice which targeted specific individuals for loans the bank knew they couldn’t afford in an effort to offer them unfair terms and higher interest percentages. Unsurprisingly these individuals were typically minorities in low income neighborhoods.

The practice would not only require individuals to pay higher loan premiums, but chances are those individuals would eventually foreclose due to these obscene premiums and the banks would recoup the property as well.

The Only Factors Banks Can Use When Determining a Loan

Though redlining and by extension reverse redlining is technically illegal due to the federal acts that govern financial institutions. Banks are only legally allowed to issue loans based on credit history, income, property condition, neighborhood amenities/city services, and the lender's portfolio requirements.

More information regarding loan factors:

  • Credit History - lenders can grant or refuse loans based on an individual's credit worthiness & FICO scores.
  • Income - lenders may also grant or refuse an individual's application based on their income (job, investments, businesses, etc.) as it is an indicator that the applicant has the ability to pay back the loan.
  • Neighborhood - lenders can also take into account environmental aspects that increase or decrease the value of a property as long as they are not being discriminatory.
  • Property - lenders may appraise the property of the applicant or any nearby properties in order to assess the sustainability of the loan, but this assessment must be made solely on an economic basis and NOT on a discriminatory one.
  • Institutions Portfolio Requirements - many lending institutions may take into account their requirements as these institutions typically have standardized guidelines when issuing loans.

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Do you believe that your loan process is being redlined or discriminated against in some way? Contact us today as you may be entitled to join a class action lawsuit.