Consumer Compliance Outlook > 2022 > Fourth Issue 2022

Consumer Compliance Outlook: Fourth Issue 2022

Overview of Special Purpose Credit Programs Under the Equal Credit Opportunity Act

By Kenneth Benton, Principal Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia

With the increased focus on racial economic disparities in recent years,¹  some financial institutions have contemplated creating tailored lending programs to help address this issue. But some institutions have expressed concerns whether a loan program targeting a protected class would violate the disparate treatment rules of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).

These fair lending laws generally prohibit creditors from discriminating on a prohibited basis — including race — in credit and housing transactions.²  Regulation B, ECOA’s implementing regulation, also generally prohibits creditors from collecting information about race, color, religion, national origin, or sex to reduce the risk that creditors could use this information to discriminate on a prohibited basis.³ 

But Congress created a carveout in the ECOA to these requirements for Special Purpose Credit Programs (SPCPs), which allow creditors to consider prohibited-basis information in credit transactions to meet special social needs or to help an economically disadvantaged class of persons.⁴  Provided that all the requirements for an SPCP are satisfied, a creditor may target applicants on a prohibited basis⁵  and deny applicants who do not meet the eligibility requirements.⁶ 

Although SPCPs have been available since 1976 when they were added to the ECOA,⁷  they have not been widely implemented.⁸  This may reflect lenders’ desire for greater clarity about the requirements for a compliant SPCP to avoid violating the ECOA and the FHA,⁹  since fair lending violations have significant legal and reputational risks.

To address lenders’ concerns, the Consumer Financial Protection Bureau (Bureau) issued an Advisory Opinion (AO) in 2021 that details and clarifies the requirements for an SPCP and provides explanatory examples.¹⁰  Following this guidance, several federal agencies issued an interagency statement that encourages lenders to consider SPCPs,¹¹  and the Department of Housing and Urban Development (HUD) issued guidance to clarify that a compliant SPCP generally does not violate the FHA.¹² 

Because of the renewed interest in SPCPs and the recent guidance, Consumer Compliance Outlook is publishing this article: 1) to discuss the requirements for establishing a compliant SPCP, 2) to provide examples of SPCPs that some financial institutions have implemented, 3) to review the recent government-sponsored enterprises’ (GSEs) SPCP plans, and 4) to provide an update on the Community Reinvestment Act (CRA) and SPCPs in the 2022 CRA rulemaking proposal.

SPCPs Under the ECOA

The ECOA authorizes three different SPCPs:

• A credit assistance program expressly authorized by federal or state law for the benefit of an economically disadvantaged class of persons
• A credit assistance program administered by a nonprofit organization for its members or an economically disadvantaged class of persons, or
• A special purpose credit program offered by a profit-making organization to meet special social needs, according to the standards prescribed in the Bureau’s regulations.¹³ 

The ECOA’s legislative history shows that Congress focused on programs designed “to prefer members of economically disadvantaged classes’’ and ‘‘to increase access to the credit market by persons previously foreclosed from it.”¹⁴ 

SPCPs Requirements Offered by For-Profit institutions

Because Outlook focuses on outreach to financial institutions, this article reviews the requirements for SPCPs that for-profit institutions offer to meet special social needs. Regulation B specifies the following SPCP requirements that apply to for-profit financial institutions:

(i) The program is established and administered pursuant to a written plan that identifies the class of persons that the program is designed to benefit and sets forth the procedures and standards for extending credit pursuant to the program; and

(ii) The program is established and administered to extend credit to a class of persons who, under the organization’s customary standards of creditworthiness, probably would not receive such credit or would receive it on less favorable terms than are ordinarily available to other applicants applying to the organization for a similar type and amount of credit.¹⁵ 

Here are the details of these requirements:

Written Plan

The written plan must:

• identify the class of persons the program is intended to benefit;
• specify the procedures and standards for extending credit under it; and
• list either its duration or when it will be reevaluated to determine whether to continue it.¹⁶ 

Class of Persons the Program Is Intended to Benefit

An SPCP must target a class of persons ‘‘who would otherwise be denied credit or would receive it on less favorable terms,”¹⁷  and the plan must explain if the class of persons will be required to demonstrate a financial need and/or share a common characteristic. The AO provides the following illustrative, but not exhaustive, examples of a class of persons an SPCP could target:

• minority residents of low- to moderate-income census tracts;
• residents of majority-Black census tracts;
• operators of small farms in rural counties;
• minority- or women-owned small business owners;
• consumers with limited English proficiency; or
• residents living on tribal lands.¹⁸ 

Procedures and Standards

The SPCP must include the procedures and standards for extending credit and be designed to increase the likelihood that either:

• a class of persons who would otherwise likely be denied credit will receive it under the program, or
• that a class of persons who would likely otherwise receive credit on less favorable terms will receive it on more favorable terms under the program.¹⁹ 

To satisfy this requirement, the creditor may:

• modify its existing loan standards;
• introduce a new product or service;
• adjust the terms and conditions or eligibility requirements for an existing product or service; or
• modify policies and procedures for loss mitigation programs, such as loan modifications.²⁰ 

The AO includes an example of a creditor offering a new small business loan product for women-owned businesses that relaxes its regular loan standard of three years of industry experience to one year, if the creditor determined that its three-year requirement would likely prevent women-owned businesses from qualifying for small business credit.²¹ 

The written plan must also explain how the SPCP’s policies and standards will increase credit availability for the class of persons the SPCP is intended to benefit.²²  If the targeted class shares a common characteristic, the plan may also discuss whether the creditor will be requesting and considering prohibited-basis information, such as race or nationality, which an SPCP may permissibly request.²³ 

Program Duration/Reevaluation

The plan must specify its duration, which can be done by specifying how long it will last, by choosing a date to reevaluate if it is still needed, or by using a hybrid approach. The AO provides this example of the hybrid approach for the program’s duration: It will end either on a specific date or when a preestablished origination volume has been reached, whichever occurs earlier. If the creditor extends the program beyond the plan’s date, it must document the extension.

Description of Analysis

The Commentary for Regulation B specifies that a written plan ‘‘must contain information that supports the need for the particular program.’’²⁴  To that end, the plan must describe or incorporate the analysis determining the program is needed. A creditor can conduct a broad analysis using its own research or outside data, such as Home Mortgage Disclosure Act (HMDA) data, the Federal Reserve Board’s small business credit survey, or other government or academic reports.

For example, a creditor could review the HMDA data of all lenders in its assessment area. If only a small number of residential mortgages were originated to Hispanic consumers, it could conduct further research to determine why. If the research revealed, for example, that applications were disproportionately denied because applicants’ credit scores were below the minimum cutoff, the creditor could consider creating an SPCP targeting these consumers using alternative credit data to qualify them. Lenders can review the 2019 Interagency Statement on the Use of Alternative Data in Credit Underwriting and the Federal Reserve Board’s Consumer Affairs letter 19-11 for more information.²⁵ 

Nexus to the Organization’s Customary Credit Standards

A key aspect of the written plan is establishing that “a class of persons would otherwise be denied credit or would receive it on less favorable terms” under the creditor’s existing credit standards.²⁶  The plan must show a connection between the research or data showing the need for an SPCP and that a class of persons would not likely qualify under existing standards or would qualify on less favorable terms than those offered to other applicants.

To use the prior example, the creditor might find after reviewing its adverse action notices that its credit score minimum of 700 for purchase mortgage originations disproportionately resulted in denials of applications from Hispanic applicants, and that using alternative credit data would likely increase the number of approvals.

The AO included this additional example: A creditor identifies a class of applicants without enough savings to qualify for a mortgage loan (or qualify on less favorable terms) and will offer them down payment assistance funds under an SPCP. The plan could document that it previously denied mortgage applications to members of the targeted class because they had insufficient cash, so the SPCP would make them more likely to qualify.

Requests for and Use of Information

As noted previously, creditors may be concerned that collecting prohibited basis information on a targeted group (e.g., Hispanics in low-income census tracts in Pennsylvania) could violate the ECOA and the FHA. The AO addresses this issue:

If participants in a special purpose credit program … are required to possess one or more common characteristics (for example, race, national origin, or sex) and if the program otherwise satisfies the requirements of [Regulation B], a creditor may request and consider information regarding the common characteristic(s) in determining the applicant’s eligibility for the program.²⁷ 

However, if the SPCP has not yet been established, a creditor cannot request demographic information that it is otherwise prohibited from collecting.²⁸  Instead, the creditor may use statistical methods to estimate demographic characteristics. Similarly, before the SPCP is established, the creditor may not collect demographic information for the preliminary analysis.

Once the SPCP is established, a creditor may collect information about common characteristic(s) to determine the applicant’s eligibility for the program. The AO provides this example: A creditor’s SPCP requires an applicant to reside in a low- to moderate-income census tract and be Black, Hispanic, or Asian. The creditor could request race or ethnicity information from applicants to confirm eligibility for this program.²⁹ 

Discrimination Among Members of the Targeted Class of Persons Prohibited

While an SPCP may target a class of persons on a prohibited basis, it cannot discriminate on a prohibited basis among members of that class. For example, it could not charge different interest rates to members of the targeted class, based solely on their gender.³⁰ 

Notice Requirements for Action Taken

As noted previously, a creditor may deny an application because the applicant is not a member of the class of persons that the SPCP targets.³¹  However, the creditor is still required to provide an adverse action notice to the applicant.³² 

SPCP Examples

Following the Bureau’s guidance on the requirements for a compliant SPCP, HUD’s guidance on the FHA and SPCPs, and the interagency statement, several banks have recently announced SPCPs. These include:

• eliminating a down payment requirement and closing costs for first-time home buyers in certain markets with large populations of Blacks and Hispanics.³³ 
• allowing low down payments, eliminating mortgage insurance requirement, and increasing lender-paid assistance programs in majority Black and Hispanic census tracts in Los Angeles. The same lender has another SPCP to make it easier for small businesses owned by women, minorities, and veterans to qualify for loans by lowering its threshold for credit scores and other underwriting variables and by relying more heavily on cash flow analysis, an alternative credit data tool.³⁴ 
• identifying existing minority mortgage home borrowers with the bank who would benefit from refinancing their loan at a lower rate.³⁵ 
• providing a $5,000 lender credit and more flexible underwriting standards for mortgage loans in Black and Hispanic communities the bank serves.³⁶ 

SPCPs and the Community Reinvestment Act

The Community Reinvestment Act (CRA) does not currently address whether an SPCP loan could qualify for CRA credit. However, in the CRA interagency rulemaking proposal issued in June 2022, the agencies solicited comment on this issue in Question 106: “Should special purpose credit programs meeting the credit needs of a bank’s assessment areas be included in the regulation as an example of loan product or program that facilitates home mortgage and consumer lending for low- and moderate-income individuals?”³⁷ 

SPCPs and the GSEs

Freddie Mac and Fannie Mae, the two government-sponsored enterprises, recently published their plans to develop and implement SPCPs, including purchasing loans from lenders issued under an SPCP.

Freddie Mac

Freddie Mac announced its “commitment to fully explore the use of the Special Purpose Credit Program framework to expand access to mortgage funding for traditionally underserved minority communities.”³⁸  This includes:

• purchasing SPCP loans
• offering a Freddie Mac SPCP, and
• developing a geotargeted approach to SPCPs, such as targeting majority–minority census tracts.³⁹ 

Fannie Mae

Fannie Mae announced in its Equitable Housing Finance Plan⁴⁰  that it is planning the following SPCP activities:

• Announcing its “objective to make our purchase of SPCP loans as routine as any other loans we currently buy.”⁴¹ 
• Launching three-to-five SPCP pilots that include:
  • expanding its down payment assistance program;
  • exploring ways to reduce hurdles for lenders to participate in SPCPs;
  • creating SPCP pilots to reduce borrower closing costs for Black home buyers via appraisal products, appraisal reimbursements, and/or title products; and
  • testing add-on features for SPCP pilots aimed at strengthening borrower stability to address unexpected expenses or temporary disruptions to income.

The Fair Housing Act and SPCPs

HUD’s Office of General Counsel Guidance

As noted previously, SPCPs have not been widely implemented despite their availability since 1976. This reflects two possible concerns: 1) creditors want greater clarity about the requirements under §1002.8 for implementing a compliant SPCP to ensure they do not violate the ECOA, and 2) creditors are uncertain if SPCPs comply with the Fair Housing Act, which prohibits discrimination in housing on a prohibited basis.⁴²  The concern is that while the ECOA specifically permits SPCPs, the FHA is silent on this issue.

HUD issued an Advisory Opinion in December 2021 to specifically clarify that the FHA generally does not prohibit an SPCP that complies with the ECOA.⁴³  In support, the opinion noted the rule of construction that similar statutes should be interpreted similarly. Since both the ECOA and the FHA are laws prohibiting “certain discriminatory conduct and encouraging affirmative conduct to address long unmet needs and disparities,” the opinion concluded they should be interpreted harmoniously. The opinion also noted that the U.S. Department of Justice, which is charged with enforcing both laws, has approved the use of SPCPs to remediate discrimination in enforcement actions for violations of both laws. The opinion therefore concluded that:

While the [FHA] and ECOA regulate overlapping but different types of credit activity and entities, the statutes are complementary and should generally be harmonized. Accordingly, a nonprofit organization’s Special Purpose Credit Program established to serve an economically disadvantaged class of persons or a for-profit institution’s Special Purpose Credit Program designed and implemented in compliance with ECOA and Regulation B generally do not violate the Act.⁴⁴ 

After HUD’s general counsel confirmed that the SPCPs do not generally violate the FHA, HUD’s Office of Fair Housing and Equal Opportunity (FHEO) issued guidance encouraging lenders to use SPCPs:

With those legal concerns addressed, FHEO encourages lenders to seriously consider establishing Special Purpose Credit Programs that are consistent with the antidiscrimination and affirmative provisions of the Equal Credit Opportunity Act, Regulation B, and the Fair Housing Act. Such programs, if constructed thoughtfully and in accordance with the Bureau’s regulations and guidance, can be a significant step towards bridging the racial and ethnic homeownership and wealth gaps that exist throughout the United States.⁴⁵

The Interagency Statement on SPCPs

After the Bureau and HUD issued their SPCP guidance, the federal banking agencies, Bureau, and other federal agencies issued an interagency statement encouraging the use of SPCPs: “As creditors consider how they may expand access to credit to better address special social needs, the agencies encourage creditors to explore opportunities to develop special purpose credit programs consistent with ECOA and Regulation B requirements as well as applicable safe and sound lending principles.”⁴⁶ 

Conclusion

SPCPs provide a framework for financial institutions to create credit programs to help address special social needs while complying with federal fair lending laws. SPCPs have not been widely implemented because of creditors’ regulatory concerns. Now that the Bureau and HUD have issued guidance addressing these specific concerns, and an interagency statement has been issued encouraging creditors to consider offering SPCPs, creditors may consider revisiting these programs. While regulators cannot approve or provide a safe harbor for any particular program, we welcome you to raise specific questions and concerns with your primary regulator.

ENDNOTES

¹  Aditya Aladangady and Akila Forde,“Wealth Inequality and the Racial Wealth Gap,” Federal Reserve Board, October 21, 2021; Ana H. Kent, Nikki Lanier, David F. Perkis, and Claire James, “Examining Racial Wealth Inequality,” Federal Reserve Bank of St. Louis, March 2022; Benjamin Harris and Sydney Schreiner Wertz, “Racial Differences in Economic Security: The Racial Wealth Gap,” U.S. Department of the Treasury, September 15, 2022.

²  See ECOA: 15 U.S.C. §1691(a); 12 C.F.R. §1002.4(a); FHA: 42 U.S.C. §§3604-3606; 24 C.F.R. Part 100.

³  See 12 C.F.R. §1002.6(b)(9). The preamble to the Federal Register notice clarified this requirement: “[I]f creditors cannot inquire about or note applicants’ personal characteristics, such as national origin or race, they are less likely unlawfully to consider the information in connection with a credit transaction.” See 68 Federal Register 13144, 13147 (March 18, 2003).

⁴  See 12 U.S.C. §1691(c); 12 C.F.R. §1002.8(b)(2).

⁵  See Comment 8(c)-1: “This section permits a creditor to request and consider certain information that would otherwise be prohibited by §§1002.5 and 1002.6 to determine an applicant’s eligibility for a particular program.”

⁶  See 15 U.S.C. §1691(c): “It is not a violation of this section for a creditor to refuse to extend credit offered pursuant to … [an SPCP] if such refusal is required by or made pursuant to such program.” (Emphasis added); S. Rept. 94–589, 94th Congress, 2nd Session, reprinted in 1976 U.S.C.C.A.N. 403, 408. “[Subsection 701(c) makes it clear that denials of credit to persons ineligible for those programs does not violate this Act.”

⁷  See Equal Credit Opportunity Act Amendments of 1976, Pub. L. 94-23, 90 Stat. 251, March 23, 1976.

⁸  See “FHEO’s Statement by HUD’s Office of Fair Housing and Equal Opportunity on Special Purpose Credit Programs as a Remedy for Disparities in Access to Homeownership,” December 7, 2021: “But very few [SPCPS] have been established [since 1976] to create homeownership opportunities for affected communities.”

⁹  See Endnote 8, p. 2–3: “When asked why they have not previously established Special Purpose Credit Programs, some lenders told HUD and other federal agencies that they are willing to establish such Programs to improve homeownership opportunities for racial and ethnic groups who have been underserved historically, but that they are worried that those Programs may run afoul of the Fair Housing Act and other federal anti-discrimination laws.”

¹⁰  See 86 Federal Register 3762, 3763 (January 15, 2021).

¹¹  See “Interagency Statement on Special Purpose Credit Programs Under the Equal Credit Opportunity Act and Regulation B,” February 22, 2022.

¹²  Damon Smith, Office of General Counsel Guidance on the Fair Housing Act’s Treatment of Certain Special Purpose Credit Programs That Are Designed and Implemented in Compliance with the Equal Credit Opportunity Act and Regulation, December 6, 2021.

¹³  See 12 U.S.C. §1691(c): “It is not a violation of this section for a creditor to refuse to extend credit offered pursuant to … [an SPCP] if such refusal is required by or made pursuant to such program.” (Emphasis added).

¹⁴  See Senate Report 94–589, 1976 U.S.C.C.A.N. at 409.

¹⁵  See 12 C.F.R. §1002.8(a)(3).

¹⁶  See 12 C.F.R. §1002.8(a)(3); 86 Federal Register at 3764-65.

¹⁷  See Comment 8(a)-5.

¹⁸  See 86 Federal Register at 3765.

¹⁹  See 12 C.F.R. §1002.8(a)(3).

²⁰  See 87 Federal Register at 3765.

²¹  See 87 Federal Register at 3765.

²²  See 87 Federal Register at 3765.

²³  See Comment 8(c)-1.

²⁴  See Comment 8(a)-5.

²⁵  See CA 19-11: Interagency Statement on the Use of Alternative Data in Credit Underwriting

²⁶  See Comment 8(a)-5.

²⁷  See 86 Federal Register at 3764.

²⁸  See 86 Federal Register at 3766.

²⁹  See 86 Federal Register at 3764.

³⁰  See 12 C.F.R. §1002.8(b)(2). See United States v. Am. Future Sys., Inc., 743 F.2d 169, 175 (3d Cir. 1984) (finding lender’s SPCP violated ECOA because while it permissibly targeted a group of borrowers based on their age, it discriminated on a prohibited basis among members of that group).

³¹  See 12 U.S.C. §1691(c).

³²  See Comment 8(b)-1: “A creditor that rejects an application because the applicant does not meet the eligibility requirements (common characteristic or financial need, for example) must nevertheless notify the applicant of action taken as required by §1002.9.”

³³  See “Bank of America Introduces Community Affordable Loan Solution to Expand Homeownership Opportunities in Black/African American and Hispanic-Latino Communities,” August 30, 2022.

³⁴  See David Benoit and AnnaMaria Andriotisc, “Citigroup Joins Industry Effort to Lend to People Without Credit Scores,” Wall Street Journal, September 3, 2022; see also “The Forum File, 2022 Edition #4,” September 7, 2022, discussing Citi’s SPCPs. The use of cash flow analysis is discussed on p. 2 of the 2019 Interagency Statement on the Use of Alternative Data in Credit Underwriting: “The evaluation of a borrower’s income and expenses to help determine repayment capacity is a well-established part of the underwriting process. Improving the measurement of income and expenses through cash flow evaluation may be particularly beneficial for consumers who demonstrate reliable income patterns over time from a variety of sources rather than a single job. Cash flow data are specific to the borrower and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy.”

³⁵  See “Wells Fargo Expands Efforts to Advance Racial Equity in Homeownership,” April 13, 2022.

³⁶  See “TD Bank Introduces New Mortgage Loan Product Designed for Minority Communities,” March 2, 2022.

³⁷  See 87 Federal Register 33884, 33968 (June 3, 2022).

³⁸  See “Freddie Mac Announces Landmark Equitable Housing Finance Plan,” June 8, 2022.

³⁹  See Freddie Mac Equitable Housing Plan, p. 17.

⁴⁰  See Fannie Mae Equitable Housing Finance Plan, p. 10.

⁴¹  See Fannie Mae Equitable Housing Finance Plan, p. 10.

⁴²  See Endnote 11; Brad Finkelstein, “What’s Next for Special Purpose Credit Programs?” National Mortgage News, December 10, 2021.

⁴³  See Endnote 12.

⁴⁴  See Endnote 12.

⁴⁵  See Endnote 8, p.3.

⁴⁶  See CA letter 22-2: Interagency Statement on Special Purpose Credit Programs Under the Equal Credit Opportunity Act and Regulation B, February 22, 2022, p. 2.