The Unintended Impacts of Anti-Redlining Legislation

Abstract

Federal and state legislation intended to curb the practice of geographic loan discrimination or redlining may have the unintended and undesirable effect of preventing mortgage originators from using environmental characteristics as criteria in lending evaluations. Since the California fault rupture zones (special studies zones) do not contain systematic concentrations of poor, black, or elderly households, they should be targets for differential lending policies, such as mandatory earthquake insurance or structural reinforcements as conditions for mortgage loans. A clarification of the wording of the Housing Financial Discrimination Act is needed to alleviate some of the present potentially damaging effects of failing to discourage residential investment in surface fault rupture zones. is a form of geographic discrimination in lending. The term refers to the refusal to grant mortgage loans to otherwise qualified buyers for sound property in certain areas of the city [1]. Redlining was an early practice of the Home Owners Loan Corporation: maps were color coded to represent relative risks to lenders, with hazardous zones coded as red [2]. The decision that a neighborhood is a poor risk for mortgage loans has been based on several factors, including large numbers of renter-occupiers, changing racial composition, or visible signs of property deterioration [3]. This conservative lending policy has been justified on the argument that banks and saving and loans have a fiduciary responsibility to their investors to protect their savings from undue investment risk.