Special purpose credit programs foster greater financial inclusion

On February 22, 2022, the National Credit Union Administration (NCUA) issued Letter to Credit Unions 22-CU-03 to advise federally insured credit unions about special purpose credit programs (SPCPs).

SPCPs are credit assistance programs for economically or socially disadvantaged consumers and commercial enterprises that fall under a narrow exception to the Equal Credit Opportunity Act (ECOA) prohibition against discriminating against an applicant on a prohibited basis and Regulation B’s prohibition against considering “race, color, religion, national origin, or sex … in any aspect of a credit transaction.”

Under the SPCP exception, transactions under certain types of credit programs are permissible when the record clearly demonstrates that the affected members would be denied credit absent such a program. SPCPs target classes of individuals based on their status as economically disadvantaged as determined by data analysis, not simply their race or national origin. SPCPs reach these borrowers by offering special purpose credit either directly to them (people-based) or in places where many of them live (place-based). For example, a lender might design a new loan product to reach those members who would not meet the credit union’s traditional standards of creditworthiness due to such factors as credit inexperience or the use of credit sources that may not report to consumer reporting agencies.

The credit union must determine that the SPCP would benefit a class of people who would otherwise be denied credit or would receive it on less favorable terms. The credit union could review Home Mortgage Disclosure Act (HMDA) data along with Census demographic data within its assessment area to determine if there is a need for a SPCP. Other excellent data sources include Small Business Administration and Federal Reserve Board small business credit surveys, and government reports or academic studies describing historical causes and effects of discrimination.

SPCPs provide a tool for credit unions to be proactive in pursuing efforts to increase homebuying opportunities for economically disadvantaged members and communities within their fields of membership by offering special underwriting or pricing for economically disadvantaged groups. SPCPs can be established to promote equity and inclusion, build wealth, and remove obstacles that have contributed to financial inequities, housing instability, and residential segregation.

The NCUA’s letter outlines the February 2022 interagency statement titled “Interagency Statement on Special Purpose Credit Programs Under the Equal Credit Opportunity Act and Regulation B.” This interagency statement was issued by several federal agencies, including NCUA, to remind lenders of the ability under the ECOA and Regulation B to establish SPCPs designed to meet the credit needs of economically or socially disadvantaged consumers and commercial enterprises.

The interagency statement explains that ECOA and Regulation B allow creditors to extend special purpose credit to specific classes of persons in the communities they serve (e.g., the elderly, low-income minorities, and minority- or disabled-owned small businesses) under the following programs:

• Any credit assistance program expressly authorized by federal or state law for the benefit of an economically disadvantaged class of persons;
• Any credit assistance program offered by a not-for-profit organization (which includes credit unions) for the benefit of its members or an economically disadvantaged class of persons; or
• Any special purpose credit program offered by a for-profit organization, or in which such an organization participates to meet special social needs, if it meets certain standards prescribed in regulations by the CFPB.

While credit unions, as not-for-profit organizations, fall under the second category, some credit union programs may also qualify under the first category.

Non-profits, such as credit unions or Community Development Financial Institutions (CDFIs), have less stringent requirements for establishing SPCPs because the program need only benefit their members or an economically disadvantaged class of persons and do not need to follow for-profit standards requiring a written plan or evaluation of customary standards of creditworthiness. Note that both non-profits and for-profits must observe similar evidentiary predicates when establishing a program and could require all program participants to share one or more common characteristics such as race, sex, or national origin so long as the program is not established and is not administered with the purpose of avoiding the requirements of the ECOA or Regulation B.

The following resources can assist credit unions interested in researching and establishing SPCPs.

The statement references the advisory opinion issued by the CFPB in December 2020 https://www.govinfo.gov/content/pkg/FR-2021-01-15/pdf/2020-28596.pdf that indicates all for-profit institutions must include a written plan for the establishment of any SPCPs under the regulation and the December 2021 HUD guidance https://www.hud.gov/sites/dfiles/GC/documents/Special_Purpose_Credit_Program_OGC_guidance_12-6-2021.pdf that concludes that SPCPs established in accordance with the ECOA and Regulation B generally do not violate the FHA.

Also, in June the National Fair Housing Alliance (NFHA) and Mortgage Bankers Association (MBA) announced a new online toolkit https://spcptoolkit.com to assist mortgage lenders with the process of considering and building SPCPs. The online toolkit, which was developed with technical assistance from the Homeownership Council of America (HCA) and input from the Urban Institute, provides background information, best practices and guidance, industry examples, data, and other useful links to aid mortgage lenders in their work in developing SPCPs.