Redlining was made illegal by the Fair Housing Act in 1968, but all these years later it continues to be a problem that makes headlines—including the latest lawsuit against a popular online real estate company. What can you learn from its mistake? Let’s find out.
Redlining made news again in October when the National Fair Housing Alliance (NFHA) and other fair housing organizations filed a suit against Redfin, an online real estate service. They claim that Redfin’s minimum home price policy discriminates against sellers and buyers of homes in communities of color, particularly in the metropolitan areas where they do business.
Unlike traditional real estate brokerages that work on a percentage-based commission, Redfin charges a fixed fee for its services. This fee varies from market to market based on the minimum home price policy.
The NFHA alleges that Redfin’s policy disproportionately denies real estate services to communities of color. Additionally, they think the policy is baseless because Redfin would make a set minimum commission regardless of the price of the home. As a result of the policy, NFHA says Redfin is far more likely to exclude non-White zip codes from its service area. At face value, this is a violation of the Fair Housing Act. Impacted areas include Baltimore, Chicago, Detroit, Kansas City, Long Island, Louisville, Memphis, Milwaukee, Newark, and Philadelphia.
Responding to the suit on its website, Redfin says it’s compliant with the Fair Housing Act and that its minimum pricing policy was a decision made to ensure it could pay a living wage and benefits to its employees. The company also says it hasn’t turned an annual profit in its 16 years of existence.
What does a lawsuit against a real estate company have to do with mortgage lending? Just like the minimum loan amounts we have discussed in past blogs, minimum price policies have unintended consequences. Not wanting to offer loans that require more time and resources based on profitability models does potentially have an impact on fair lending programs.
While it may seem like a practical move for the bottom line, it could end up being a bad idea. Research has shown that homes in minority communities are valued significantly lower than homes in majority-White communities. By setting minimum mortgage loan amounts, lenders are essentially choosing not to provide mortgage loans to these communities. That creates a redlining situation—which is likely to draw the attention of regulators, the press, and public interest groups.
Redlining has and continues to be a hot topic. Earlier this year the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against neighborhoods. The Bureau used statistical analysis to show the mortgage company had “no legitimate, non-discriminatory reason to draw relatively few applications for mortgage loans for properties in these African-American areas.” A Chicago mortgage company that failed to draw mortgage applications from African-American areas.
In October, the company filed a motion to dismiss the suit, claiming the CFPB was trying to expand definitions of the Equal Credit Opportunity Act (ECOA).
Meanwhile coverage of redlining—particularly in the last 60 days—has been picking up. Consider this sampling of recent headlines:
Redlining robs Black families of generational wealth. The Washington Post. 10/23/20. Personal finance columnist Michelle Singletary discusses the history and impact of discriminatory housing practices—including the impact on home prices in Black neighborhoods.
Why racial inequities in America's schools are rooted in housing policies of the past. USA Today. 11/02/20. A discussion of how historic redlining has led to public schools divided along economic and racial lines.
A look at ‘redlining,’ the discriminatory real estate practice with Chicago roots. WGN9. 10/21/20. A discussion on how homeownership initiatives in Chicago were used to reinforce segregation and directs readers to the University of Richmond’s Mapping Inequality website to see how their neighborhood is graded.
What the Link Between Heat Islands and Redlining Looks Like in One Virginia City. Virginia Public Radio. 11/09/20. A scientist shares how historic discriminatory housing policies are linked to the impacts of climate change, including hotter temperatures in some minority neighborhoods.
How Redlining Still Impacts Milwaukee Neighborhoods. Milwaukee NPR. 10/22/20. Talks with experts about how redlining still impacts neighborhoods in the form of greater poverty, lower life expectancy, and a higher incidence of chronic diseases.
Redlining Effects Still Seen in Dallas. NBCDFW. 11/13/20. Discusses the historical use of redlining maps and how those areas have received less investment than other areas.
Legacy of the Redline: How exclusionary zoning shaped Jacksonville's Black communities, starting with the city's first zoning map. First Coast News. 10/30/20. As part of its Legacy of the Redline series, this story explains how discriminatory housing policies kept development away from majority-Black neighborhoods.
The reality is quite telling!
With redlining continuing to be a hot topic in the news, now is the time to focus on Fair lending analytics! Your institution needs to take proactive steps to ensure you are managing the risk of potential redlining and other fair lending violations.
You can avoid potential redlining issues by ensuring:
Lending policies comply with fair lending laws. It’s important to follow policies and procedures, but it’s just as important to make sure that those policies and procedures align with applicable laws and regulations and don’t create unintended consequences. When drafting policies that could potentially exclude borrowers, make sure you engage in a preliminary fair lending analysis to determine if that decision might result in unintentional discrimination.
Staff understands lending policies and procedures. Mortgage lenders should not be deciding on their own that a loan is not worth their trouble. Those kinds of practices can lead to all sorts of compliance headaches and potential accusations of Fair lending violations. Make sure you take the time to train staff on existing policies and procedures and explain why they are important. When lenders understand the rule is protecting both their reputation and the company, they are more likely to comply.
Your compliance management system tracks compliance. Don’t assume lenders are following policies and procedures. Test them, monitor them, and document the results. Make sure violations of policy and exceptions are flagged so they can be evaluated and explained.
We all know the drill. We need to prove our processes are working as intended! Understand potential disparities, and then make proactive, practical changes.
Want more insights into fair lending hot topics? Read Fair Lending Enforcement Is Heating Up: Avoid These 3 Mistakes.