Discrimination and unequal treatment have been a pervasive thorn in the side of the lending industry since its inception and one of its most common and damaging forms is the illegal practice of redlining. Although specifically outlawed time and time again via a number of industry regulations and acts, redlining persists among disreputable lenders, loan officers, and brokers. On October 22nd, 2021, the Department of Justice, headed by Merrick Garland, announced the latest governmental response with the Combatting Redlining Initiative (CRI). This new initiative, led by a partnership of the DOJ’s Civil Rights division and the U.S. Attorneys’ Offices, will give the federal government enhanced powers to stifle redlining across the board.
Illegal redlining sprang from the early days of the Home Owners’ Loan Corporation, an office established by Franklin Roosevelt’s New Deal in 1934 and ostensibly created to assist in refinancing defaulting mortgages and to assist Americans with home purchases. As part of its efforts in determining levels of investment ‘security,’ the HOLC created maps of the 239 largest cities in the country and divided each city up into investment zones, utilizing local appraiser feedback. Type A neighborhoods were primarily suburban neighborhoods with new construction, considered the safest and/or most affluent areas. Type B were older but ‘still desirable’ neighborhoods, Type C were neighborhoods ‘in decline,’ and Type D neighborhoods - surrounded by a red line - were considered to be the riskiest investments. Thus, ‘redlining’ was born. These neighborhoods were almost exclusively minority-dominated areas. Although data suggests that the HOLC itself rarely, if ever, directly lent via these criteria, its community investment maps were so heavily shared once published that private lenders widely used the maps to avoid lending in the redlined areas. Contemporary research estimates that 80-95% of all minority-owned homes in the United States were included in Type D neighborhoods at the time the HOLC maps were created.
In the years since, many laws have been enacted in an effort to expose and weed out the discriminatory nature of redlining. The Fair Housing Act (FHA) of 1968 explicitly made illegal the unequal treatment of Americans while purchasing a home, while the Equal Credit Opportunity Act (ECOA) of 1974 disallowed lenders from showing bias against credit applicants on the basis of sex, gender, race, age, religion, marital status, or nation of origin. The Home Mortgage Disclosure Act of 1975 forced banks to publicize their geographic lending data, proving that discriminatory redlining was being put to use in banks and lending institutions across the country. Finally, the Community Reinvestment Act was passed in 1977 to encourage commercial banks to meet the needs of all segments of their local communities and was implicitly created to combat redlining. Even still, a 2018 study showed that black applicants are still widely denied loans or credit when compared to similar white applicants across dozens of urban markets. The CFPB have also revealed that their research shows that predominantly white neighborhoods are given the lion’s share of marketing dollars and that advertising strategies are unfairly attuned to non-minority customers.
Garland noted that the newly created CRI will build upon the already-established laws on the books meant to abolish redlining in several different ways. First, the CRI will press into service U.S. Attorneys’ Offices nationwide as “force multipliers” to confirm that fair lending regulations are enforced and verified by local housing market experts and that the credit needs of minority neighborhoods are protected. Garland promised that non-depository lender behavior would be monitored and analyzed more closely than ever before, as they currently lend far more in today’s housing market than ‘traditional’ banks. The CRI will also allow the DOJ to work more closely with State Attorneys General and financial regulators such as the CFPB to discover and resolve fair lending violations across the country. While announcing the creation of the CRI, the Attorney General clearly set forward the DOJ’s goal to eliminate redlining in America completely.
“When people are denied credit simply because of their race or national origin, their ability to share in our nation’s prosperity is all but eliminated,” Garland said. “Today, we are committing ourselves to addressing modern-day redlining by making far more robust use of our fair lending authorities. We will spare no resource to ensure that federal fair lending laws are vigorously enforced and that financial institutions provide equal opportunity for every American to obtain credit.”
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