Next Target: Insurance Redlining

Bank reform offers a chance to address an under-the-radar form of redlining with the same sort of data disclosure HMDA requires about mortgage lending.

“Do the kids in the neighborhood play hockey or basketball?”
— Question posed by a major insurance company to a Boston agent

The Dodd-Frank Wall Street Reform and Consumer Protection Act, recently signed by President Obama, is a direct, if not immediate, response to a financial crisis that started with predatory lending targeted to minority communities. The Dodd-Frank bill contains many measures to address different aspects of the nation’s (and the world’s) financial crisis. One of its lower-profile provisions that deserves more attention is the golden opportunity it affords to effectively respond to the racial discrimination that still permeates the insurance industry.

The costs of mortgage lending discrimination and redlining are widely known. Less understood, but just as critical, is the unavailability or unaffordability of property insurance, a problem that also plagues traditionally underserved communities. In 1986, a sales manager for the American Family Mutual Insurance Company told one of his agents, in writing, to “Quit writing all those blacks!!,” a message that no doubt was intended to discourage doing business in non-white neighborhoods. Apparently agents throughout the industry took the advice, and some are still doing so. In 2009 35 complaints of racial discrimination in the insurance market were filed with private fair housing groups, up from 32 in 2008, according to the National Fair Housing Alliance.

If property insurance cannot be obtained, no bank, CDC, or other financial institution will process a mortgage loan. This effectively denies the potential homeowner the opportunity to purchase the home, and denies the current owner the opportunity to sell the property to a willing buyer. If insurance is available, but on more onerous terms and conditions than the actual risk warrants, this unfairly increases the cost to the buyer and, in some circumstances, may also block the purchase.

Insurance availability and affordability problems are not randomly scattered across metropolitan areas. It is largely low-income and minority neighborhoods that are victimized by insurance redlining. This undercuts local property values along with the property tax revenues that are generated, discourages new families from moving in, and discourages the expansion of local businesses, thus hindering local revitalization efforts. The Dodd-Frank bill builds on previous successful efforts to combat such discrimination.

Buried in its more than 2,000 pages is a subsection entitled “Federal Insurance Office.” This office is charged with several duties including the responsibility “to monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance.” The office is empowered to “receive and collect data and information on and from the insurance industry and insurers” and to “analyze and disseminate data and information.”

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