Two leaders of the CFPB’s Fair Lending Office – Patrice Ficklin, Fair Lending Director, and Charles Nier, Senior Fair Lending Counsel – recently published an article advocating for broader use of special purpose credit programs (“SPCPs”) by creditors. The article, entitled “The Use of Special Purpose Credit Programs to Promote Racial and Economic Equity” and framed as an essay, can be found in the Poverty & Race Research Action Council’s (“PRRAC”) May 2021 edition of its series on new directions in racial justice in housing finance and is available here. PRRAC is a civil rights law and policy organization based in Washington, D.C.
The authors explain that in the aftermath of George Floyd’s death, which resulted in greater calls for racial equity and social justice as well as historic financial commitments by the banking industry to address those issues, there has been renewed interest in SPCPs. Although SPCPs have been available under ECOA for 45 years, financial institutions have been reluctant to use them because of regulatory uncertainty concerning compliance and the potential for examination criticism. The authors view SPCPs as a “significant and unheralded tool” to address “historical injustices,…systemic racism in the credit markets and, more broadly,…racial wealth inequity.”
The article traces the historical underpinnings of racial wealth inequity, noting great disparities between wealth accumulation and homeownership between African American and non-Hispanic white households. The authors point out that since few people have the financial resources to purchase a home without obtaining financing, a critical step in achieving home ownership (and thus building wealth) is fair and equitable access to credit. By providing access to credit on favorable terms and conditions, the authors argue that SPCPs represent “one potentially powerful restorative tool in the struggle to redress credit discrimination and racial inequity.”
The article goes on to describe SPCP requirements under ECOA and Regulation B, and clarify the different requirements for SPCPs non-profit and for-profit organizations, as described in Regulation B. The CFPB leaders note that one of the most frequent SPCP questions the CFPB receives is how a creditor can determine that an SPCP “will benefit a class of persons who would otherwise be denied credit or would receive it on less favorable terms” under Regulation B. Regulation B indicates that the determination can be based on a broad analysis using the creditor’s own research or data from outside sources, including governmental reports and studies. As we previously reported, in December 2020, the CFPB issued an advisory opinion, which is an interpretive rule (“IR”), clarifying that for-profit organizations may rely on a wide range of research or data already in the public domain, such as HMDA data and other governmental or academic reports/studies exploring historical and societal causes and effects of discrimination to establish compliant SPCPs.
The article concludes by stating that SPCPS are a “central priority” for the CFPB’s efforts to address racial equity. The authors state that “[c]reditors implementing special purpose credit programs are encouraged to discuss this essay, the IR, or any aspect of these programs with the CFPB or other regulators.” The authors further state that the CFPB looks forward to advancing the use of SPCPs on behalf of economically disadvantaged groups and to address racial wealth inequity.
In our view, the article does not plow new ground, but its publication demonstrates that the CFPB is actively encouraging broader use of SPCPs, which are specifically authorized by ECOA and Regulation B. However, the article does not address the fact that the Fair Housing Act does not explicitly permit SPCPs, which creates regulatory uncertainty about whether such programs can be offered under the Fair Housing Act. (However, the authors’ reference to creditors potentially consulting “other regulators” about SPCPs seems to be a nod to HUD, which primarily administers and enforces the Fair Housing Act, or the prudential regulators.) As a result, any lender that wishes to develop and offer a mortgage product as an SPCP must carefully analyze the legal issues presented under the Fair Housing Act before doing so. Although it is our understanding that the federal regulators are beginning to look at this issue, there is certainly no regulatory resolution yet concerning whether SPCPs may be offered under the Fair Housing Act.