By Chase Nerison
Financial Institutions will always have to analyze credit risk. For commercial banks, this is one of its biggest risks. FIs go about managing these risks in various ways through VaR, credit risk models, and more. In the 1930s, the federal government began redlining real estate to mark “risky” neighborhoods to lower overall risk. Experts define redlining as the practice of denying the extension of credit to specific geographic areas due to the income, race, or ethnicity of its residents. This is seen with the systematic denial of mortgages, insurance, loans, and other financial services regardless of the individual’s qualifications and credit. This term was derived from drawing a red line around certain areas in which credit would be denied, typically minority neighborhoods. Fast forwarding to today, there is such a thing as reverse redlining. This is the practice of extending credit on unfair terms to those same communities. Under fair lending laws, redlining is no longer acceptable for making lending or underwriting decisions. Though banned, it is still hurting minorities.
Sociologist John McKnight claimed the term redlining in the 1960s after seeing literal red lines on a map around neighborhoods financial institutions would not invest in based on solely demographics. This was mostly seen with black inner-city neighborhoods. In fact, it was found that lenders would offer loans to lower-income whites but not to middle or upper-income African Americans. With the goal of bolstering the Great Depression’s failing housing market, President Roosevelt created the Home Owners’ Loan Corporation (HOLC). This plan’s goal was to refinance home mortgages and expand Americans’ home buying opportunities. HOLC assigned grades to specific areas to determine its lending rating. These grades were adopted by private and public entities and were extremely important in the housing sector until the 1970s.
Unfortunately, this practice did not achieve its goal without being very unfair and unethical in the process. For example, in Birmingham, Alabama, an area with “executives, businessmen, and retired professional men” was given its highest rating for loans while an adjacent neighborhood was described as a “negro low-cost slum clearance project” and given a low rating and redlined. This creates the conditions for gentrification, which is the influx of higher income, mostly white residents into a traditionally low-income, minority neighborhood. In 1996, homes in redlined neighborhoods were worth less than half of homes in areas the government deemed as best for mortgage lending.
Gentrification’s demographic displacement becomes a major social issue as it changes the characteristics of neighborhoods and has mixed effects on the health of residents. This process was made easier for the incoming white residents as historically redlined areas often exhibit a rent gap, which is the difference between the potential value of the property and the current prices of housing. To prove this point, 87% of San Francisco’s neighborhoods undergoing gentrification were once redlined as “hazardous.” This was how FIs could get around the so-called practice of redlining based on demographics.
The courts saw this unethical, racist practice and determined redlining to be illegal when FIs use race to deny neighborhoods loans. Additionally, the Fairy Housing Act, which is a part of the Civil Rights Act of 1968, makes racially discriminatory lending practices illegal. Rather, financial institutions may account for economic factors when making loans. Since they are not required to approve all loan applications on the same terms, some borrowers may pay higher rates or stricter repayment terms, but these decisions must be based on economic factors. These factors include credit history, income, property condition, neighborhood amenities and city services, and the lending institution’s portfolio. It cannot be based on race, religion, national origin, sex, or marital status.
Transitioning to reverse redlining, this practice of extending credit with higher rates to previously redlined communities is equally troubling to financial experts. If these residents are unable to obtain regular mortgages, they will be forced to accept exploitatively priced housing contracts. This massively increases the cost of housing and there were even practices where the residents gained no equity until their last payment was delivered. It is no surprise that claims of discrimination based on denial of credit have been replaced with litigation involving claims of predatory lending practices based on discrimination. With protection under the FHA, plaintiffs must show the financial institution’s lending practices were unfair and predatory on the basis of race. Unfortunately, it is not always black and white, but the courts strive to reject this practice. For more information about reverse redlining court rulings, see Hargraves v Matthews. Reverse redlining is arguably as problematic for minority families and older urban neighborhoods as the complete denial of financial services.
With the information provided above, it is no surprise COVID-19 has disproportionately affected low-income and minority communities. The groups actually experience higher incidences of COVID on a community level. Already with economic and geographical pressures, disparities in health outcomes become increasingly problematic. Though redlining and reverse redlining are illegal, it still does not make up for their previous actions. It was clearly an unethical and discriminatory practice still affecting the population today. I think advancing health equity is essential, especially during this time. Unfortunately, we cannot rewrite the past, only make the future right. I hope everyone has an equal opportunity to obtain loans, and that the decision is based on only economic factors.
Works Cited
De los Santos, H. (2021, May 26). From redlining to gentrification: The policy of the past that affects health outcomes today. Harvard Medical School Primary Care Review. Retrieved November 21, 2021, from http://info.primarycare.hms.harvard.edu/review/redlining-gentrification-health-outcomes.
Hayes, A. (2021, November 20). What is redlining? Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/r/redlining.asp.
Reverse redlining in mortgage lending. ForensisGroup Expert Consulting. (2020, June 4). Retrieved November 21, 2021, from https://www.forensisgroup.com/reverse-redlining-in-mortgage-lending-the-experts-role-in-meeting-evidentiary-standards-2/.
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