First of all, what is redlining?
In its basic definition, redlining is a “discriminatory practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity.” This often takes the form of denying someone insurance, a loan, or other services based on their location instead of their credit profile — specifically, denials given to residents living in majority non-white neighborhoods.
The term was coined in the 1960s, in reference to a practice begun in the 1930s in which the federal government would draw literal red lines on maps based on demographics, to denote neighborhoods where they would not invest. Similar methods began to be used for other services such as insurance and mortgages as well, further perpetuating systemic racism by denying those in non-white areas access to financial services.
Thankfully, this practice is now illegal under federal and state laws, including the Equal Credit Opportunity Act (ECOA) and Fair Housing Act,. Critics, though, say that there are loopholes that allow redlining to still take place. And in many ways, the effects of decades of discriminatory lending practices can still be seen today.
How do responsible lenders avoid redlining and ensure fair lending practices?
Our core mission at Climb is to make career-focused education more accessible to everyone, and because of that, ensuring fairness in lending is central to what we do.
We require only the information necessary to make sure borrowers have the most beneficial, legally-compliant offers — such as asking for residency information, to make sure we’re licensed to lend in the area and are adherent to all state-specific lending laws. Or, asking for program details, so learners are shown the correct payment options and tuition funds are sent to the correct school.
And, before we partner with a program for financing, we compare the cost and program length with its expected outcomes. In doing so, we avoid supporting educational institutions that fail to deliver on job placement or other promises made to students. We take care in ensuring that not only do we not collect race data, but that race does not unintentionally make its way into our underwriting criteria.
We also maintain a robust Fair Lending compliance program, to ensure that our underwriting and company practices are up to date and serving the best interests of our learners.
How can different student lending underwriting models open access and combat systemic racism?
An important aspect of Climb financing, and a feature we hope will become more widespread, is that we make sure the education is a good investment and is likely to have a positive economic effect for the person attending.
In determining which programs we will support at Climb, a function we believe to be critically important in advancing our mission, we compare the cost and duration of the education program with the expected outcomes — including graduation rates, job placement rates, and expected salaries. This is to ensure that students are not burdened with unsustainable debt loads and weak economic prospects. We believe this approach is the only ethical, responsible, and functional way to support student borrowers, who are looking to gain tangible career skills that can drive economic advancement.
By looking ahead at the expected salaries which graduates from the program should be making, this underwriting can approve people who are currently unemployed and would not otherwise qualify for credit to pursue additional education and training.
Rather than using any backward-looking educational data, including undergraduate course of study, to qualify or price borrowers, we instead look ahead to the borrower’s future. In doing so, we can ensure that everyone looking for financing for career-focused education is doing so on a level playing field.