Redlining is the practice of either denying services outright, or making services more difficult to acquire, because of race or ethnicity. The Fair Housing Act was supposed to end it. It's re-emerging, as we've documented, in Baltimore, St. Louis, and Detroit (and certainly elsewhere).
Reverse redlining, on the other hand, is targeting people of color for bad deals--giving them access in order to charge much more in interest and fees than they could get away with charging a white customer. Oh--the banks are doing that too. It's fascinating (and enraging) to see how they work both sides like that.
The Nation's Michelle Chen reports that at least one case emerged from the pre-Dodd-Frank era that is a paradigm case of reverse redlining:
The lawsuit, filed by Brooklyn Legal Services, with support from Center for Responsible Lending and private attorneys, charged Emigrant Savings Bank under the Fair Housing Act, Equal Credit Opportunity Act, and New York City Human Rights Law for “aggressively marketing toxic mortgages to Black and Latino homeowners,” using a process is known as “reverse redlining”—pushing high-cost, toxic products that inevitably led homeowners into a financial disaster that still scars the city’s increasingly unaffordable working-class neighborhoods.
The no-verification scheme used in this case was effectively banned by regulatory safeguards recently enacted in the Dodd-Frank reforms. But similar aggressive profiteering could be used to fleece homeowners again given the weakness of current regulations.
According to the suit, Emigrant required no actual proof of the borrower’s financial risk status—just a simple signature certifying ability to handle the debt on a “resource letter.” The bank reportedly “did not discuss the letter with borrowers or explain it to them, and it was typically left unread…. Emigrant knew that the Resource Letter was worthless.”
The plaintiffs won nearly a million dollars for it:
The plaintiffs were awarded a total of $950,000, with individual awards ranging from about $70,000 to $225,000. The verdict provides just partial restitution for the home asset losses. But the jury’s definitive finding shows the consequences of depriving black and brown communities of fair access to credit.
Chen adds what, in my mind, is the most chilling aspect of banking practices today: high interest schemes that strip communities of wealth they already have--not just additional wealth.
As a civil-rights issue, predatory asset-stripping might be more disastrous than duping people into worthless speculative real estate, because it robs communities of the equity they already possessed.
One obvious solution to both redlining and reverse redlining is the creation of a public financial institution that can lend at low credit and also use transparent lending criteria open to the checks and balances of public scrutiny. Nonprofit lending already demonstrates that implementing this kind of lending is possible, and, of course, the Bank of North Dakota demonstrates that it can be scaled up.
Mehrsa Baradaran's justification of state-run banking is partially applicable here. She writes:
. . . the democratization of credit is not an issue that should be left to the banks. The supply of credit has always been a public policy issue, with banks functioning as intermediaries. Insofar as the state enables credit markets, all creditworthy Americans deserve equal access to credit, especially because reasonable and safe credit can provide a smoother path both through and out of poverty. If banks are not providing credit to the poor, the state should provide it directly.
I'd go a step further and say that we can hardwire democracy into banking by setting up networks of public banks capable of directly providing accessible credit, and/or underwriting community banking--a "public option" in banking from small loans to mortgages to massive infrastructure and development loans. All of it.