The bill aims to prohibit "redlining" - the refusal by financial institutions to offer home loans to borrowers on account of the neighbourhood in which they live. After opposition from the banking community last year, the bill was withdrawn from the parliamentary process for more consultation.
What is redlining?
In the United States redlining, or discriminatory lending, has been a feature in low-income communities for a long time. Redlining includes predatory lending, where unfair and abusive loan terms are imposed on borrowers because they lack understanding, or have simply been coerced and lied to. Redlining can turn the dream of home ownership into a nightmare, and poor neighbourhoods where such practices occur can become devastated by the loss of equity and foreclosure.
Examples of redlining practices include:
- Financing excessive fees into loans.
- Charging higher interest rates than a borrower's credit warrants.
- Making loans without regard to the borrower's ability to pay.
- Prepayment penalties.
- Loans of more than 100 percent loan to value.
- Home improvement scams.
- Single premium credit insurance.
- Balloon payments.
- Negative amortization.
- Loan flipping.
- Aggressive and deceptive marketing.
Such practices have been legislated against in the United States with Acts such as the Home Ownership Equity Protection Act (HOEPA), the Community Reinvestment Act (CRA) and the Home Mortgage Disclosure Act (HMDA).
Similar practices here, combined with the need to address the inequalities of the past, have lead to this bill being drafted. Its aim is:
"To provide for the meeting of specific minimum targets by financial institutions in lending to low and medium income level households for housing purposes and to provide for matters connected therewith".
The issues are complex, but at heart is the need to balance the commercial interests of the banks with the rights of people in terms of section 26(1) and (2) of the Constitution where -
(a) everyone has the right to have access to adequate housing; and
(b) the state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of this right;
The Banking Council agreed with its social partners at the Nedlac summit in August 2002 that it is acceptable not to lend in areas where law and order have broken down totally, service charges are not being paid and houses are being ransacked. On the other hand, where this is not the case with the communities, not to lend is unacceptable.
A number of points were agreed upon at the summit. The most important being that the criteria for granting a homeloan should be:
- The creditworthiness and income of the borrower,
- The prospective value of the house, and
- The availability of additional security.
Turning down a loan solely on where the property is located is therefore unacceptable. In addressing the issues, concerned parties should remember that the most effective tool for helping low-income households to become successful homeowners is quality loan counselling and home buyer education by community based entities.
Community Reinvestment Bill
Banking Council of South Africa