Special Purpose Credit Programs
for Mortgage Lenders
Special Purpose Credit Programs
for Mortgage Lenders
for Mortgage Lenders
for Mortgage Lenders
This Toolkit has been provided as a mission service of the Mortgage Bankers Association and National Fair Housing Alliance, in partnership with the Homeownership Council of America.
This Toolkit is intended to facilitate mortgage lenders as they take on the process of considering and building Special Purpose Credit Programs. The Toolkit provides examples of SPCPs from leading Banks as well as other examples of SPCPs in the market. In addition, the Toolkit provides a host of resource information on the background and need for SPCPs, guidance and examples on the data analysis required, and other useful links to aid mortgage lenders in their work to bring more SPCPs to market. Homeownership is the greatest source of wealth for most people, and SPCPs are a critical tool in narrowing the racial wealth and homeownership gaps that persist in America.
Thank you for taking the time to review SPCPs and for seeking solutions that you can implement to increase your lending to underserved and economically disadvantaged populations.
Legal Disclaimer: The information provided in this Special Purpose Credit Program Toolkit does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. As with any lending program, designing and implementing a SPCP raises a number of legal, compliance, and operational considerations, decision points, and risks. Readers of this Toolkit should contact their attorney to obtain advice with respect to any particular legal or regulatory matter. This Toolkit may contain links to other third-party websites. Such links are only for the convenience of the reader; the authors of this Toolkit do not recommend or endorse the contents of the third-party sites.
SPCPs are targeted lending products designed to specifically advantage an economically disadvantaged group of people. SPCPs can be created to benefit designated protected classes of people.
SPCPs are not new at all. They were made allowable in 1974 as a provision of the Equal Credit Opportunity Act to counteract centuries of unfair laws and policies that deprived millions of consumers the right and opportunity to access fair mortgage and credit opportunities. Those unfair laws and policies created many inequities and barriers in our housing and lending markets that still impact millions of consumers. SPCPs are a way of providing these consumers access to the quality, affordable, sustainable credit they need to live successful, thriving lives. Regulation B, which implements the Equal Credit Opportunity Act, provides more context for SPCPs.
SPCPs are explicitly permitted by statute. The Equal Credit Opportunity Act (ECOA), first passed in 1974, prohibits discrimination in credit on the basis of race or national origin, among other factors. 15 U.S.C. § 1691(a)(1). However, ECOA also states that it does not constitute discrimination for a for-profit organization to refuse to extend credit offered pursuant to a special purpose credit program in order “to meet special social needs” or for a nonprofit to administer a “credit assistance program” for its members or an “economically disadvantaged class of persons” (collectively “SPCPs”). Id. at § 1691(b)-(c). Congress ensured that these programs permit consideration of prohibited bases such as race, national origin, or sex in order to “increase access to the credit market by persons previously foreclosed from it.”
Regulation B contains the official regulations that implement ECOA. Regulation B prescribes different standards for three types of SPCPs, those that are:
Programs authorized by law or provided by non-profit organizations must be “for the benefit of an economically disadvantaged class of persons” or for members of the not-for-profit organization. 12 C.F.R. § 1002.8(a)(1)-(2)
In contrast, SPCPs offered by a for-profit organization (or in which a for-profit participates) must be offered to “meet special social needs” and they must be established to extend credit to a group of people who:
The CFPB issued an Advisory Opinion that provides detailed agency guidance regarding the content that a for-profit organization should include in a SPCP written plan.
HUD issued guidance that confirms that SPCPs that conform with ECOA and Reg B generally do not violate the Fair Housing Act (“FHA”).
The OCC, Board of Governors of the Federal Reserve System, FDIC, NCUA, CFPB, HUD, the U.S. DOJ, and FHFA issued a joint statement that “encourage[s] 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.”
HUD’s Office of Fair Housing and Equal Opportunity issued an accompanying statement “encourag[ing] lenders to seriously consider establishing [SPCPs] that are consistent with the antidiscrimination and affirmative provisions of the [ECOA], Regulation B, and the [FHA].”
It is important to consult with in-house or outside counsel to understand the risks as they relate to a particular company's circumstances and the facts relevant to any specific SPCP.
With that in mind, there are three broad areas of liability to consider and be aware of:
1) The first is the possibility that a government enforcement or regulatory action would come from an SPCP in their federal oversight. Currently, the relevant federal regulators have expressed strong support for SPCPs, when designed properly, and have invited interested regulated entities to contact them to discuss how to best implement an SPCP. It would therefore seem unlikely that they would take action against a good faith SPCP that was well-designed, particularly after the program was previewed with the appropriate regulators. Finally, there is some concern that a change in political control would raise SPCP risk. This is a consideration worth monitoring but is mitigated by Constitutional due process and fair notice requirements as well as the fact that a properly designed SPCP is time-limited to some degree. It is also mitigated by intersectional broad-based support from the financial services, real estate, fair housing, and other non-profit communities.
2) The next area of liability risk would come from investors or purchasers of loans under their program requirements or purchase agreements. For GSEs and FHA loans, the relevant regulatory agencies (HUD and FHFA) are very supportive of SPCPs. The GSEs will likely release guidance on SPCPs soon. The relevant depository regulators are also supportive and will likely offer assistance for those that wish to hold these loans on portfolio. Privately securitized SPCP loans raise interesting questions around the design of the SPCP, as well as the representations around the sale and securitization of the loans.
3) The final general area of liability is a challenge from a private litigant who was denied the opportunity to participate in the SPCP. SPCPs are permissible under ECOA and Regulation B, and the CFPB has issued an Advisory Opinion interpreting these provisions. There is a strong safe harbor in the statute for conduct done in good faith reliance on an interpretation or regulation even if the interpretation or regulation is later amended, rescinded, or deemed invalid. ECOA also contains language around preemption of certain state credit laws, though careful analysis of the framework in any state where the SPCP is active is prudent. Liability under the Fair Housing Act is perhaps a higher risk than ECOA, but the recent HUD opinion offers a useful rationale to suggest why such liability is inappropriate. Finally, though some uncertainty around the application of 42 USC §§ 1981 and 1982 to SPCPs remains, all the arguments that apply in the analysis of why Congress intended for them to be permitted under the Fair Housing Act would apply and weigh in favor of the conclusion that SPCPs would also not violate Sections 1981 or 1982. Note that the design of the SPCP can also limit this risk and is an excellent area for discussion with counsel.
Hopefully this can guide some discussions with appropriate legal counsel on how to gauge liability under an SPCP. All lending entails some level of risk, SPCPs included, that need to be measured and appropriate guardrails must be put in place in order to appropriately design and focus SPCPs. Other areas of this toolkit hopefully help in the development of these guardrails.
Finally, we are happy to help with this discussion! Please reach out to Justin Wiseman, Managing Regulatory Counsel at MBA at JWiseman@mba.org or Morgan Williams, General Counsel at NFHA at email@example.com with questions.
This Special Purpose Credit Program Toolkit focuses on federal law. A review of all 50 state laws is beyond the scope of this toolkit.
That said, Regulation B codifies agency determinations that specific state laws are preempted to the extent they would prohibit requesting and considering information required for eligibility for SPCPs. 12 C.F.R. part 1002, Supp. I, 1002.11(a)-1, -2. Accordingly, a SPCP that meets the requirements of ECOA and Regulation B would likely not violate state law because ECOA and Regulation B should preempt state laws that prohibit credit discrimination but do not contain explicit provisions for SPCPs.
For more information on the interplay between SPCPs and state law, please see the section of this toolkit on SPCPs & Anti-Discrimination Laws and Regulatory Guidance on SPCPs. You should also consult with counsel to analyze the application of specific state credit discrimination laws to a SPCP.
You can choose to create an SPCP targeted by race or ethnicity, and by geography based on majority-minority, greatest disparities, and greatest need. Monitoring the program will provide data and feedback to ensure it reaches the intended beneficiaries, which would include race and/or ethnicity among other program data.
Eligibility can be based on demographic (e.g., racial or ethnic) status of the borrower themselves. Alternatively, eligibility could be place-based—meaning based on the racial/ethnic composition of a borrower’s or property’s geographic location. The determination whether to base a program on individual characteristics or geographic characteristics depends in part on the data demonstrating the need for the program, in part on the specific goals of the lender, and in part on the lender’s risk tolerance.
A lender instituting a place-based program should consider monitoring through its HMDA data the race and national origin of SPCP borrowers to guard against gentrification risks by ensuring that benefits are not disproportionately being afforded to non-target populations. Lenders should also take steps to ensure the applicant pool is diverse, for example through affirmative marketing and partnering with local housing groups likely to reach target populations. Finally, a lender might consider designing eligibility criteria to focus on the geographic location of the applicant’s residence prior to purchase, rather than the geographic location of the dwelling securing the loan. This design could expand housing choice, allowing borrowers to choose to move to high-opportunity areas.
The lender also will need to decide the scope of eligibility—in other words, should the SPCP be open to all borrowers of color, or limited to some subset (e.g., Black borrowers only, Black and Hispanic borrowers, etc.; or majority-Black, majority-Black and/or Hispanic, etc. census tracts). If comparable disparities exist for borrowers in different groups, a lender might include all such groups in the program. Relatedly, the lender might instead tailor a program more specifically to certain identified disparities.
In addition to demographic eligibility, other eligibility criteria might be included, with an eye towards ensuring responsible lending and identifying a group of borrowers most likely to benefit from the SPCP. Such limitations may be particularly helpful to counteract some concerns about gentrification or to help establish that the program will benefit borrowers who otherwise would not have access to credit, or would not have access to credit on favorable terms. Wealth and income disparities exist within protected classes, and access to credit can vary based on credit score and other borrower characteristics.
Depending on the specifics of the program and the need to be filled, as well as the “nexus” the lender has shown with its own credit standards, it could be appropriate to include income limitations (which need not map on to income limits for LMI programs) or other eligibility criteria to target the SPCP within potentially eligible populations.
A lender may choose to establish additional eligibility criteria, such as limiting its SPCP to buyers who will occupy the home as their primary residence, first-time or first-generation homebuyers, or particular property types (including or excluding multi-unit properties, for example). These are criteria that should be clearly defined in the written plan and easily accessible to potential borrowers. While ECOA and Regulation B do not require SPCPs to incorporate any of these criteria, doing so can help to demonstrate the need for the program and ensure that the benefits reach the intended class of persons.
Properly documenting your SPCP and communicating it to your regulators beforehand may provide some protection. Always be ready and able to show your written plan and defensible rationale for your specific SPCP. There is no need to serve one specific race or ethnicity over another or a need to serve all/more than one race/ethnicity. Your design should relate to the population's needs in your service area.
The process of building an SPCP begins with assessing the need for such a program, primarily using the public data sources of HMDA, ACS and US Census. Below is a high-level guide to support your planning process. Timeline feedback was gathered from SPCP example providers to give insight into what other lenders have seen while building their SPCPs.
1) Assess data and determine the needs of the economically disadvantaged underserved population(s) and/or areas. Engage counsel in legal review early in the process as you begin the analysis and planning for your SPCP. Using both public data from the market and your own production data, determine if an SPCP is needed or if you can solve for increased lending to the population another way. If an SPCP is determined to be needed, continue the process. Timeline: 3-4 Weeks
2) Design credit intervention for SPCP. Based on what you as a lender and your investors will allow, determine what credit interventions and enhancements can be made to create a Special Purpose Credit Program product that will increase the likelihood of approval-for or access-to the designated credit product(s). See our sample credit interventions in the FAQs for ideas. Timeline: 2-4 Weeks
3) Build a written plan to support your SPCP. Document your plan from the analysis, through the credit intervention design, the product, how you'll originate and deliver the program, the timeframe for the product(s) and how you will monitor and measure the program. This written plan facilitates your next steps in bringing an SPCP to market. Timeline: 3-4 Weeks
In accordance with Regulation B, the written plan should contain information supporting the need for the program, including:
4) Legal review and internal approval process. Now that you have a documented plan with well-prepared data-based analysis, go through your internal approval process for new credit products including legal review. Feedback from our focus groups showed that specialty external counsel was helpful to lenders going through this process. Your process will likely also include sales/marketing, operations, credit policy, compliance, IT, training, and other internal departments that facilitate the successful delivery and monitoring of your credit products. Document any changes or additions to your SPCP written plan as you complete the internal review and approval process. Timeline: 4-8 Weeks
5) Regulator review of your SPCP plan. While there is no specific approval by a regulator of any particular SPCP, it is best practice to review your plan with your appropriate regulatory agencies. Consider this from a federal perspective as well as any applicable state regulatory agencies. Timeline: 4-6 Weeks (varies by lender type and location)
6) Train sales and operations staff on new product(s) and your SPCP plan as you prepare for a successful launch and program delivery. Training is critical, especially in the mortgage industry, and SPCPs may have additional or new steps for your staff in successfully delivering and monitoring the program. Timeline: 2-4 Weeks
An effective SPCP should be dovetailed with a fair housing marketing plan to ensure the program will be successful and reach requisite consumers and communities. Without a thoughtful, well-constructed, directed marketing plan, SPCPs can be ineffective and fallow. The team developing the SPCP should consult with fair lending and fair housing experts to ensure marketing plans are robust and comply with the law. This guide from NFHA on responsible advertising can be a useful resource.
7) Delivery and monitoring period. Now it's time to make the impact you planned on! Monitor your program delivery with active reporting and metrics that track the effectiveness of your SPCP. Should you find that the program is not reaching the intended populations or areas, document and perform iterative changes or enhancements to the program as needed. Timeline: 12-36 Months
Having a diverse sales and operations staff makes a big difference in achieving diverse lending goals. The industry has a host of initiatives that you can get involved with to recruit a diverse staff and reach underserved communities.
Working with nonprofit partners is a great way to reach underserved communities. See the link below for more information and useful links to HUD intermediaries, nonprofits, and trade associations that can help you reach diverse and underserved communities.
Below are some sample credit interventions to aid in your SPCP planning:
Finding: Population has significantly lower savings and cash-assets than others in the same geographic area.
Desired Intervention: Overcome down payment and closing cost barrier to mortgage credit for home purchase.
Sample Credit Policies:
Finding: Racial/ethnic group(s) found to have higher debt to income ratios at application, leading to higher denial rates.
Desired Intervention: Increase ability to approve mortgage loan for particular identified groups, while current product standards have lower DTI thresholds.
Sample Credit Policies:
Finding: Racial/ethnic group(s) found to have lower rates of application for a mortgage than other populations in a geographic area.
Desired Intervention: Increase applications from minority group within specified geography.
Sample Credit Policies:
Finding: Areas or populations are found to have higher declines than others nearby due to collateral or home condition.
Desired Intervention: Facilitate the necessary rehabilitation of properties with minority borrowers or areas to increase likelihood of approval for credit.
Sample Credit Policies:
Finding: Credit and DTI are shown to be the highest reasons for decline with increased likelihood for specific racial or ethnic groups.
Desired Intervention: Provide a program that breaks the cycle of higher cost lending and allows for more applications to be approved.
Sample Credit Policies:
Federal regulators play an important role in combating predatory lending under their duties to assess compliance with and enforce federal civil rights laws among lending institutions. Under these duties, regulators are careful to monitor any SPCP program to ensure it is not designed to obfuscate otherwise discriminatory and predatory lending practices, and instead that it properly advantages participants in design and through implementation.
A lender can create a SPCP that otherwise complies with GSE guidelines and requirements, perhaps by lifting overlays specific to the lender. In this case no variance or advance notice is required as the loan is within the GSE credit box and complies with general delivery requirements. If the SPCP design contemplates extending credit beyond the current GSE credit box or includes a product feature not currently allowed than a variance is likely required and must be requested.
Note that in some instances down payment assistance is allowable without variance by the GSEs, particularly those provided by non-profits or government actors. For questions on variance requirements related to lender-provided DPA as part of SPCP plan, lenders are encouraged to reach out to their Account Representative at the appropriate GSE.
A determination that a SPCP will benefit a class of people who would otherwise be denied credit or receive it on less favorable terms can be based on a “broad analysis using the organization’s own research or data from outside sources, including governmental reports and studies.” See CFPB for this section.
This determination is often largely based on publicly available information. Moreover, SPCPs do not imply the lender’s practices to date have been unlawful or even unique in the industry: According to the CFPB: “The fact that a for-profit organization identifies a need for a special purpose credit program based on an analysis of its own data does not, by itself, create an inference or presumption that the organization has engaged in unlawful credit discrimination.” That said, the CFPB makes clear that there should be a “nexus” between the identified need and the lender’s standards.
In other words, “[t]he for-profit organization must be able to show a connection between the research or data informing its analysis and the fact that, under the organization’s customary standards of creditworthiness, a class of persons probably would not receive credit or would receive it on less favorable terms.”
While banks may act as their own investors, IMBs will need to work within the credit box agreed to with their investor channels. We look forward to adding GSE guidance to this toolkit when released and remind lenders that they have a range of options available today within the credit box for building a SPCP.
This toolkit has a SPCP Sample Needs Analysis Checklist and several slide decks on data analysis for SPCP planning as well as a Straw-Lender and Sample Market sample analysis. In general, the analysis looks at areas, products, and people pertinent to the given lender; determining needs and who/what areas will benefit from the SPCP, along with the interplay of the products and offerings of that lender as they relate to those needs.
The CFPB's Loan Originator Compensation rule forbids varying compensation or payments based on the loan's terms and conditions, including a loan product that is understood to be a "bundle" of terms and conditions. The rule does not contain any exemptions for a loan originated pursuant to a Special Purpose Credit Program.
Lenders should consult with counsel regarding the availability of options for enhancing lending to underserved communities, including considering incentives based on geography or income and increasing the presence of community loan officers.
Recent data should not be an impediment, and you can use the most recently available data sets in your analysis and planning. In addition, there are good vendors and platforms with software that can easily update your data for tracking. Ensure your systems are capturing the necessary data to effectively monitor your program.
You will use your real-time loan production and performance data during the monitoring phase to ensure your SPCP is effective and sustainable. Your SPCP plan should include the Key Performance Indicators (KPI) that you will be tracking to ensure your program is effective and reaching the intended disadvantaged populations.
Sample KPIs that can be helpful in tracking your program's impact include:
*Tracking how use of alternative data impacts underwriting would be worthwhile.
Program monitoring should be done frequently with real-time production data related to your SPCP. Consistent monitoring of an SPCP will give you the data feedback required in order to modify the program if needed to achieve your desired SPCP outcomes.
As a lender, you would work through any loan default as you would any other delinquent loan. A lender of an SPCP should follow all the standard servicing requirements as required by the investor or GSEs, unless otherwise agreed to specific to your SPCP.
In addition, all SPCPs should be QM and ATR-compliant.
Mortgage Bankers Association represents and serves its members to successfully deliver fair, sustainable, and responsible real estate financing within ever-changing business environments.
National Fair Housing Alliance is the only national organization dedicated solely to ending discrimination in housing, and provider of the Keys to Unlock Dreams Initiative nationally.
Homeownership Council of America is a national solutions and technical assistance provider dedicated to increasing equitable access to credit for America's underserved communities.
Urban Institute is a nonprofit research organization that provides data and evidence to help advance upward mobility and equity, providing facts that inspire solutions.
Relman Colfax PLLC is a national civil rights law firm dedicated to protecting civil rights and enforcing our nation's civil rights laws.