Redlining

Definition

Redlining is a discriminatory practice where banks and insurance companies refuse or limit loans, mortgages, insurance, etc., within specific geographic areas, especially inner-city neighborhoods. These areas are often home to racial or ethnic minorities. The term originates from the red lines drawn on maps to delineate areas of perceived financial risk.

Phonetic

The phonetic spelling of the keyword “Redlining” is: ˈrɛdˌlaɪnɪŋ

Key Takeaways

1. Systemic Discrimination: Redlining has its roots in the 1930s policies of the US Federal Housing Administration. This involved colour-coding residential areas, with red shading referring to African American ones. The policy enforced housing segregation and limited financial services for people living in such neighborhoods.
2. Long-term Effects: Due to redlining, people living in ‘red zones’ were often denied important services including housing loans or insurance. This made it difficult for these predominantly African American communities to accrue wealth and fostered socio-economic disparities that continue to persist.
3. Modern Impact: Although redlining is no longer official policy, its effects can still be felt today. A disproportionately higher percentage of people in formerly redlined areas struggle with housing instability, face higher poverty rates, and live in environmentally hazardous areas. It continues to influence urban development and housing policies in American cities.

Importance

Redlining is a crucial term in business/finance because it refers to a discriminatory practice by which banks, insurance companies, etc. unfairly limit loans, insurance, or other financial services in specific areas of the community, often targeting racial or ethnic groups. The term ‘redlining’ originates from the physical red line bankers would draw on a map delineating where they would not invest. The practice has led to the systemic disenfranchisement of some minority communities, perpetuating economic disadvantages and segregation. The understanding and awareness of redlining are vital in ensuring equal economic opportunities for all individuals, regardless of their geographical location or ethnic background.

Explanation

Redlining refers to a discriminatory practice that puts services (usually financial) out of reach for residents of certain areas based on racial or ethnic composition without regard to the residents’ qualifications or creditworthiness. The term’s origins come from the red lines that were drawn on maps to denote areas where banks would not invest or lend. This practice dates back to the 1930s when the Federal Home Loan Bank Board asked Home Owners’ Loan Corporation (HOLC) to look at 239 cities and create “residential security maps” to indicate the risk level of lending to neighborhoods. The neighborhoods were colored and labeled: green and blue indicated the best places to lend, while yellow and especially red signaling high risk. The areas marked red were often comprised of minority communities. The purpose of redlining was to protect financial institutions from what was perceived as risky investments in areas with a high concentration of racial minorities. This popular practice among banks and insurance companies in the mid-20th century effectively excluded many minorities, particularly African Americans in urban areas, from accessing necessary funds for home ownership and development. As a result, these neighborhoods were neglected and left impoverished, creating a socioeconomic disparity that has persisted into the 21st century. Even though Redlining is now outlawed as a result of legislation such as the Fair Housing Act, its effects are still seen today, and financial discrimination still occurs.

Examples

1. Mortgage Lending: A classic example of redlining occurred in the mid-20th century in the United States. Many banks, insurance companies, and other lending institutions marked neighborhoods predominantly inhabited by people of color on a city map with a red line. These areas were often denied financial services, like mortgages, resulting in a lack of homeownership opportunity and economic advancement for the populations living within the “redline.” 2. Insurance Practices: In the late 1990s, the State of Texas accused Nationwide Insurance of varying its rates and coverage offerings based on neighborhoods, a practice similar to redlining. The accusation claimed that neighborhoods predominantly consisting of people of color were provided fewer services or charged higher rates. 3. Access to Banking Services: In more recent years, data has shown that banks have fewer branches in neighborhoods with predominantly people of color, even if the income levels are comparable to other neighborhoods. This lack of access to financial services is considered a modern form of redlining, as it limits financial opportunities for residents in these areas.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Discrimination
• Mortgage Lending
• Urban Development
• Creditworthiness
• Fair Housing Act

Sources for More Information

• Investopedia
• Cornell University
• Corporate Finance Institute
• The Balance