Redlining to be outlawed

The Ministry of Housing is squaring up against banks and financial institutions to force them to provide loans to lower-income people and those living in redlined areas such as townships and informal settlements.

Parliament may soon table the Community Reinvestment [Housing] Bill to complement the Home Loan and Mortgage Disclosure Act of 2000.

The Bill seeks to ban the practice of redlining by which banks refuse to lend money for homes in poor areas they consider to be risky. It stipulates that financial institutions provide mechanisms to ensure that low- and medium-income households are able to obtain financial assistance for housing.

It also outlines the functions of the Office of Disclosure, which was established by the Home Loan and Mortgage Disclosure Act of 2000. The office is required to collate data from financial institutions, particularly in relation to the providing of mortgage loans to lower-income people. This includes monitoring and verifying the progress of financial institutions in meeting targets specified by laws affecting housing.

The nub of the legislation lies in a set of obligations that the legislation suggests be placed on banks. In terms of this Bill, financial institutions must:

  • refrain from refusing home-loan finance to borrowers purely on the grounds of socio-economic characteristics of the residents in the neighbourhood in which the home is located;

  • refrain from the practice of redlining other than where dictated by safe and sound business practice;

  • ensure that the process of borrowing is transparent, open and understood by the borrowers;

  • ensure that all borrowers know the outcome of their applications and if rejected they are furnished with the reasons why the application was unsuccessful; and

  • encourage, where possible, a climate of saving among homeowners and borrowers and provide meaningful incentives to those who save.

    All this information would be submitted to the office in yearly reports to be furnished within 60 days of the end of the reporting period.

    The Bill empowers the minister of housing to outline performance indicators meeting the housing needs of lower-income groups. In making this assessment the minister would consider:

  • the amount of home lending to low- or medium-income groups;

  • innovation in home lending to low- and medium-income group levels;

  • home lending in previously disadvantaged areas;

  • lending to small building contractors; and

  • performance on other aspects of home lending.

    The Bill sets out a rating model to assess a financial institution’s performance. The office is required to submit its assessment to the minister of housing, who is required to develop regulations governing all financial institutions servicing the housing sector in conjunction with the ministers of finance, justice and trade and industry.

    The minister is given discretion to exempt a financial institution or a category of financial institutions from any of the requirements laid out by the legislation for a specified period. This can only be exercised if the financial institution requires time to make adjustments to its systems and procedures to comply with the legislation.

    Any person or financial institution convicted of contravening the legislation would be liable to a fine not exceeding R500 000.

    Financial institutions view the Bill as too onerous and fierce debate is expected once it is tabled.

    A balance between the needs of financial institutions and low-income borrowers needs to be struck. Without it adequate housing will remain elusive to many South Africans.

    Judith February is the manager of the governance unit at the Institute for Democracy in South Africa



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