VIDEO: What is Redlining?

VIDEO: What is Redlining?

In this Compliance Clip (video), Adam explains what redlining is. In particular, Adam discusses the different definitions provided by the regulators as well as the different forms of redlining.


Video Transcript

The following is a transcript of this video.

This Compliance Clip is going to answer the question, what is redlining?

Redlining, of course, is a hot topic in fair lending and it's been around for years, but sometimes it's difficult to understand what exactly is considered redlining. Part of the reason is the regulators define redlining a couple of different ways. They're not always consistent in the way they do that. So let's take a look at how the regulators have defined redlining in a couple different ways. 

First of all, redlining can be defined as a form of illegal disparate treatment in which a lender provides unequal access to credit or unequal terms of credit because of a protected class of the resident of a certain area. That's one definition.  Another definition could be the systematic denial of loan to residents of specific, often racially associated, neighborhoods or communities. Another definition that came from a Department of Justice complaint on February 5, 2024, defines redline as “redlining occurs when lenders deny or discourage applications or avoid providing loans or other credit services in neighborhoods based on the race, color, or national origin of the residents of those neighborhoods.” In other words, it's basically drawing a circle around a specific area and treating them differently than you treat other areas of the community. And typically those areas that have a circle drawn around them are the high-minority areas of the community. So that's what redlining is.

Redlining can violate both the Fair Housing Act, as well as the Equal Credit Opportunity Act, meaning that redlining can occur from all credit products, not just mortgages.

Now, there's different types of redlining, like reverse redlining which happens when a lender targets certain areas to offer less favorable terms. Another type of redlining that we've seen developing in recent years is called digital redlining. And this happens online, it could be based on demographics such as sorting by certain characteristics of somebody and targeting marketing and advertising to somebody or not to somebody. And so there's different forms of redlining.

The regulators are the ones who would identify redlining in a financial institution. And what they could be looking for is a number of different things. A regulator may find that on a prohibited basis,  a creditor has redlined by doing a number of things. It could have redlined by failing or refusing to extend credit in certain areas. They could redline by targeting certain borrowers or certain areas with less advantageous products. They could redline by making loans in a certain area at less favorable terms or conditions. They could redline by omitting or excluding an area from marketing efforts. And they could redline by discouraging applicants to apply.

So, redlining is all of these things and it's essentially in its simplest form- drawing a redline around an area and saying we're not going to lend to this area because they are a protected class or we are going to give less favorable terms to this area or we're going to discourage this area  or not market to this area because they are a protected class. 

And so that is redlining in short. Of course, redlining and fair lending are a much much bigger topic than this. But hat's all we have time for in this Compliance Clip.

CFPB Report: Consumer Frustrations with Credit Card Rewards

FinCEN Advisory on Iran-Backed Terrorist Organizations