Using SPCPs to target prospective loan borrowers

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Last year, HUD officials announced that special purpose credit programs—through which creditors can lend to financially underserved populations—conform to federal law when certain guidelines are met. How can community banks best use SPCPs to target prospective loan borrowers?

By Mary Thorson Wright

Community bankers are keenly aware of the fair lending prohibitions of Regulation B, the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. It can cause bankers some uneasiness to create and offer a product or service that depends on what are typically described as “prohibited bases” as program qualifications, but special purpose credit programs (SPCPs) create a means by which creditors can better serve segments of their communities that may have been historically shut out or otherwise disadvantaged.

“There can be uncertainty about creating and offering SPCPs,” says Michael Marshall, director of regulatory legal affairs for ICBA. “Conventional thinking supports not treating people differently based on race or other prohibited bases; however, this is one case where lenders are being asked, in essence, to do just that. The point is to help fill needs where there may have been a wealth gap or homeownership gap, or an identifiable community that has been underserved.”

Regulation B states that a “creditor shall not consider race, color, religion, national origin or sex … in any aspect of a credit transaction.” These prohibitions apply not only to discrimination against racial and ethnic minority groups, but also to any consideration of race or ethnicity in a credit transaction. Section 1002.8 of Regulation B permits a creditor to extend special purpose credit to applicants who meet eligibility requirements under SPCP, even those defined as prohibited bases.

The program(s) must be for the benefit of an economically disadvantaged class of persons; applicable under section 501(c) of the Internal Revenue Code of 1954 for the benefit of its members or for the benefit of an economically disadvantaged class of persons; or to meet special social needs.

Special purpose credit program standards update

An SPCP must meet certain criteria, including:

  • A written plan. It must be 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 under the program.
  • A demonstrated need for the program. It must be 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.
  • Precludes discrimination on a prohibited basis. It must be established and administered so as not to discriminate against an applicant on any prohibited basis.

Regulators have heightened their focus on SPCP due in part to social trends, political influence and initiatives of Consumer Financial Protection Bureau (CFPB) director Rohit Chopra for access to credit, fair lending and discrimination. In July 2020, the CFPB published encouragement to both for-profit and not-for-profit creditors of the availability under ECOA and Regulation B of SPCPs to meet the credit needs of underserved communities. In December 2020, CFPB published an Advisory Opinion to clarify what a for-profit organization must include in a written plan to establish and administer a SPCP under Regulation B and the type of research and data that may be appropriate to support a for-profit organization’s determination that an SPCP is needed to benefit a certain class of persons.

“The more recent releases [on SPCPs] from regulatory agencies … reemphasize that these tools are available to lenders and how to create a written plan and set up such a program.”
—Michael Marshall, ICBA

Tailored terms and tools

In response to requests from lenders, stakeholders and other federal agencies, the U.S. Department of Housing and Urban Development (HUD) released guidance in December 2021, clarifying that SPCPs that conform with the Equal Credit Opportunity Act and Regulation B generally do not violate the Federal Fair Housing Act. The special purpose credit program provisions of ECOA and Regulation B provide a targeted means by which creditors can better serve communities who have been historically shut out or otherwise disadvantaged. While the Fair Housing Act does not speak directly to SPCP, HUD concluded that SPCPs, where instituted in conformity with ECOA and Regulation B, generally would not violate the Fair Housing Act.

“The more recent releases from regulatory agencies don’t bring significant changes to the table for special purpose credit programs but reemphasize that these tools are available to lenders and how to create a written plan and set up such a program,” observes Marshall. “The issuances encourage lenders to focus the programs on underserved groups who are of certain ethnicities or races. The purpose of the programs is to bring credit at more favorable terms than would be available through the traditional underwriting process.”

Community banks should take steps to evaluate whether the current SPCPs they offer are administered consistently with program requirements, including the guidance from HUD regarding the Fair Housing Act and the CFPB guidance about SPCP written plans, and that persons benefiting from the program are eligible. Marshall also suggests banks periodically confirm that there is a continuing need for the program, to demonstrate that there is or is not a need for the program, and to document their evaluation and conclusions.

Mary Thorson Wright is a writer in Virginia.