What Is Redlining? Definition, Legality, and Effects

What Is Redlining?

Redlining is a discriminatory practice that puts services—usually financial services—out of reach for residents of certain areas based on race or ethnicity. Redlining is illegal.

Evidence of redlining is the systematic denial of mortgages, insurance, loans, and other financial services based on location—and that area’s default history—rather than on an individual’s qualifications and creditworthiness. Notably, the practice of redlining is felt the most by residents of minority neighborhoods.

How Redlining Works

The term “redlining” was coined by sociologist John McKnight in the 1960s and is derived from the practice—used by the federal government and lenders—of literally drawing a red line on a map around the neighborhoods where they would not invest based on demographics alone.

Black, inner-city neighborhoods were most likely to be redlined. Investigations found that lenders would make loans to lower-income White borrowers but not to middle- or upper-income Black borrowers.

Unable to get regular mortgages, Black residents who wanted to own a house often were forced to resort to exploitatively priced housing contracts that massively increased the cost of housing and gave them no equity until their last payment was delivered. Chicago's Contract Buyers League was formed in the 1960s by a group of inner-city residents to fight these practices.

Effects of Redlining

In the 1930s, the federal government began redlining real estate, delineating “risky” neighborhoods for federal mortgage loans based on the race of the residents. The result of this redlining in real estate could still be felt decades later. In 1996, homes in redlined neighborhoods were worth less than half that of the homes in what the government had deemed as “best” for mortgage lending, according to research by home-sale company Zillow. That disparity has only grown greater in the following two decades.

Examples of redlining can be found in a variety of financial services, including not only mortgages but also student loans, credit cards, and insurance. Although the Community Reinvestment Act was passed in 1977 to help prevent redlining, critics say discrimination continues to occur.

For example, redlining has been used to describe discriminatory practices by retailers, both brick-and-mortar and online. Reverse redlining is the practice of targeting neighborhoods (mostly non-white) for higher prices or lending on unfair terms, such as predatory lending of subprime mortgages.

There's also evidence of what Midwest BankCentre CEO Orv Kimbrough calls "corporate redlining." As reported by The Business Journals, since peaking before the 2008 financial crisis, the annual number of loans to Black-owned businesses through the U.S. Small Business Administration's 7(a) program decreased by 84%, compared to a 53% decline in 7(a) loans awarded overall.

The report also found an overall trend of significantly less lending to businesses in Black-majority neighborhoods, compared to White-majority ones. 

Legality of Redlining

Courts have determined that redlining is illegal when lending institutions use race as a basis for excluding neighborhoods from access to loans. In addition, the Fair Housing Act, which is part of the Civil Rights Act of 1968, prohibits discrimination in lending to individuals in neighborhoods based on their racial composition. However, the law does not prohibit excluding neighborhoods or regions on the basis of geological factors, such as fault lines or flood zones.

The destructive legacy of redlining has been more than economic. A 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin/Milwaukee, and the University of Richmond found that "the history of redlining, segregation, and disinvestment not only reduced minority wealth, it impacted health and longevity, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods.... On average, life expectancy is lower by 3.6 years in redlined communities, when compared to the communities that existed at the same time, but were high-graded by the HOLC."

While redlining neighborhoods or regions based on race, religion, national origin, sex, or marital status is illegal under U.S. law, lending institutions are allowed to take economic factors into account when making loans. Lending institutions are not required to approve all loan applications on the same terms and may impose higher rates or stricter repayment terms on some borrowers, but the reason for doing so cannot be any of the prohibited bases.

What Factors Are Lenders Allowed to Consider?

Banks may legally take the following factors into consideration when deciding whether to make loans to applicants and on what terms:

• Credit history: Lenders may legally evaluate an applicant’s creditworthiness as determined by FICO scores and reports from credit bureaus.
• Income: Lenders may consider an applicant’s regular source of funds, which can include income from employment, business ownership, investments, or annuities.
• Property condition: A lending institution may evaluate the property on which it is making the loan as well as the condition of nearby properties. These evaluations must be based strictly on economic considerations.
• Neighborhood amenities and city services: Lenders may take into account amenities that enhance or detract from the value of a property.
• The lending institution’s portfolio: Lending institutions may take into account their requirements to have a portfolio that is diversified by region, structure type, and loan amount.

Lenders must evaluate each of the above factors without regard to the race, religion, national origin, sex, or marital status of the applicant.

Mortgage applicants and homebuyers who believe that they might have been discriminated against can take their concerns to a fair housing center, the Office of Fair Housing and Equal Opportunity at HUD, or in the case of mortgages and other home loans, the CFPB.

The Bottom Line

Redlining represents a shameful chapter in the long history of American racial discrimination. By denying federal housing loans to people in minority communities, the federal government effectively denied the benefits of homeownership to millions of American citizens. Although racial redlining is now illegal, unofficial forms of discrimination continue to this day.