In a recession, you may be concerned about your bank. Here’s what you need to know.
What is redlining?
Redlining is the illegal practice of refusing to provide financial services to consumers based on the area where they live.
Prior to the passage of the Community Reinvestment Act (CRA) in 1977, consumers who lived in redlined communities regularly were denied consumer loans, mortgages and insurance solely based on their neighborhood.
While redlining was made illegal in 1977, critics maintain that the discrimination continues.
Prior to the passing of the CRA, banks rarely loaned money to people who lived in low-income neighborhoods. Some lenders literally drew red lines around certain neighborhoods on maps. Banks then used the maps as a basis to determine if they should lend to residents.
As a result, the neighborhood in which the person lived, rather than his income or credit history, became a determining factor of whether he or she qualified for a loan.
As a result, aside from direct government investment, most inner-city areas didn’t have access to capital to revitalize neighborhoods or invest in community-based businesses.
Prior to the passage of the Equal Credit Opportunity Act of 1974, many white neighborhoods had covenants prohibiting ownership by racial and religious minorities. This frequently confined minorities to the poorest neighborhoods.
While the passage of the Equal Credit Opportunity Act made the discrimination of minorities in lending illegal, redlining still was prohibiting them from accessing capital.
Still, studies have demonstrated that the CRA eventually succeeded in making capital available to people living in low- and moderate-income neighborhoods.
By outlawing redlining, Congress sought to make capital available to low- and moderate-income people and increase economic opportunity. In addition to outlawing redlining, the CRA created legislation to encourage banks to invest in the communities where they do business to increase economic opportunity for community members.
Some ways that banks have invested in their communities have been to:
- Fund economic development projects to rebuild neighborhoods, provide affordable housing and remodel abandoned commercial buildings in underserved communities.
- Offer free financial-literacy workshops and courses to community members.
- Provide free tax-preparation services to low- and moderate-income residents.
- Donate money to local nonprofit organizations that support the community.
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