QUESTION
Your recent FAQ on
Limited English Language Proficiency mentions Special Purpose Credit Programs.
We are not that familiar with them. In the last few days, we have been considering
your views as part of our marketing and compliance plans.
We would like to know more about these credit programs, because a few years ago our company was cited for favoring one class of loan applicants over another. This set off alarm bells here. It is our understanding that these programs could be a good way to improve our community relations.
What are Special Purpose Credit Programs? What are the procedures to roll them out?
ANSWER
The FAQ article you
refer to, Limited English Language Proficiency, mentions the Special Purpose
Credit Program (“SPCP”) in the context of the CFPB’s recent issuance,
entitled Statement Regarding the Provision of Financial Products and
Services to Consumers with Limited English Proficiency”[i]
Let’s step back a little for some historical analysis.
The Equal Credit Opportunity Act (ECOA) states that it is unlawful for any creditor to discriminate on the basis of sex, marital status, age, race, color, religion, national origin, receipt of public assistance benefits, and exercise of rights under the Federal Consumer Credit Protection Act (“prohibited bases”).
At the same time, the ECOA clarifies[ii] that discrimination under the statute does not include refusal “to extend credit offered pursuant to…any special purpose credit program offered by a profit-making organization to meet social needs which meets standards prescribed in regulations by the [CFPB].”
By permitting the consideration of a prohibited basis in connection with a SPCP, Congress protected an array of programs specifically designed to prefer members of economically disadvantaged classes, such as government-sponsored housing credit subsidies for the aged or the poor and programs offering credit to a limited clientele such as credit union programs and educational loan programs.
According to the CFPB, various persons have expressed interest in developing SPCPs but raised concerns about how to do so consistent with Regulation B, ECOA’s implementing regulation. This suggested that regulatory uncertainty might inhibit broader creation of these programs by creditors.
In response, in December 2020, the CFPB issued an advisory opinion to address the regulatory uncertainty “in the hope that broader creation of special purpose credit programs by creditors will help expand access to credit among disadvantaged groups and will better address special social needs that exist today.”
So, with that brief historical context, let us consider how to go about implementing a compliant SPCP. To begin, a financial institution must prepare and follow a written plan that supports the need for the program.[iii]
The written plan must address:
The class of persons the program will benefit.
This class must consist of those “who would otherwise be denied credit or would receive it on less favorable terms.” The plan must explain whether the class of persons must demonstrate a financial need and/or share a common characteristic. The creditor may define the class with or without reference to a characteristic that is otherwise a prohibited basis under ECOA. For instance, if the lender appropriately determined need (as I’ve described in the last bullet point below), the written plan might identify a class of persons as minority residents of low-to-moderate income census tracts, operators of small farms in rural counties, minority- or woman-owned small business owners, consumers with limited English language proficiency, or residents living on tribal lands.
The procedures and standards for extending credit under the program.
The procedures and standards must be designed to increase the likelihood that a class of persons “who would otherwise be denied credit” will receive credit under the program or that a class “who would receive [credit] on less favorable terms” will receive credit on more favorable terms under the program. To this end, a creditor might introduce a new product or service, modify the terms and conditions or eligibility requirements for an existing product or service, or modify policies and procedures related to loss mitigation programs.
For example, a creditor might offer a new small business loan product for woman-owned businesses by relaxing its customary standard of requiring 3 years of experience in the industry to one year, if the creditor has determined that this requirement probably prevented woman-owned businesses from qualifying for small business financing. The written plan must describe the procedures and standards and explain how they will increase credit availability for the identified class of persons. If the class of persons the program is designed to benefit will be required to share a common characteristic, the written plan may also explain whether the creditor will request and consider information that ECOA would otherwise prohibit.
Either the time period the program will last or when the financial institution will reevaluate the program to determine if the need for it continues.
If the creditor opts for the latter approach, reevaluation could be contingent on a certain set of circumstances or simply set a date. The written plan could adopt a combined approach. An example here might be where the program could end on a set date, or when a pre-established origination volume has been reached, whichever first occurs. If the creditor extends the program beyond the date set forth in the plan, it must document the terms of the extension to be sure the program continues to be administered pursuant to a written plan.
A description of the analysis the financial institution conducted to determine the need for the program.
The program must be established and administered pursuant to a written plan to benefit a class of people who would otherwise be denied credit or receive credit on less favorable terms, as determined by a “broad analysis” using the financial institution's own data and research or data from outside sources, such as governmental reports or studies.
The Regulation B Commentary[iv] provides two examples of classes that might be benefited:
(1) a creditor might design new products to reach consumers who would not meet, or have not met, its traditional standards of creditworthiness due to factors such as credit inexperience or the use of credit sources that may not report to consumer reporting agencies; or
(2) a creditor could review HMDA data along with demographic data for its assessment area and conclude that a need exists for a special purpose credit program for low-income minority borrowers. In the case of small business lending, a creditor might consider the Small Business Administration’s or Federal Reserve Board’s Small Business Credit Surveys. A creditor might consider other governmental or academic reports and studies exploring the historical and societal causes and effects of discrimination.
The creditor must show a connection between the research or data informing its analysis and the fact that, under customary standards of creditworthiness, a class of persons probably would not receive credit or would receive credit on less favorable terms than ordinarily available to other applicants applying to the creditor for a similar type and amount of credit.
For example, a creditor who identifies a class of applicants who do not have sufficient savings to meet mortgage loan requirements (or who receive those loans on less favorable terms) could offer down payment assistance funds pursuant to an SPCP. In this example, the creditor could demonstrate that under its own standards of creditworthiness, either: (1) “insufficient cash” is listed as a principal reason for denial of similar mortgage loan applications among the identified class of applicants frequently enough to indicate they probably would not receive credit; or (2) requirements regarding minimum amounts of cash to close or liquid assets will probably impair access for the identified class of applicants.
If no SPCP has yet been established, a creditor may use statistical methods to estimate demographic characteristics but it cannot request demographic information that it is otherwise prohibited from collecting, even to determine whether a need for the program exists. While a creditor may use a wide swath of research and data to determine the need for a special purpose credit program, including its own lending data, it may not violate Regulation B’s prohibitions on the collection of demographic information exclusively to conduct this preliminary analysis before establishing an SPCP.
The CFPB’s advisory opinion noted that it applies solely to certain aspects of SPCPs designed and implemented by for-profit organizations to meet special social needs under Regulation B and ECOA. The opinion does not apply to credit assistance programs expressly authorized by federal or state law for the benefit of economically disadvantaged classes of persons, or to any credit assistance program offered by a not-for-profit organization, for the benefit of its members or for the benefit of an economically disadvantaged class of persons.Once an SPCP has been established, the creditor may then request and consider information regarding common characteristic(s) if needed to determine the applicant’s eligibility for the program. For example, if the creditor establishes an SPCP that requires an applicant to reside in an area designated as 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 the program.
[i] Statement
Regarding the Provision of Financial Products and Services to Consumers with
Limited English Proficiency, Bureau of Consumer Financial Protection, 86 FR
6306-6313, January 21, 2021
[ii] § 701(c)
[iii] Equal Credit Opportunity (Regulation B); Special Purpose Credit Programs, Bureau of Consumer Financial Protection, 86 Federal Register 3762 (Jan. 15, 2021)
[iv] See Regulation B, 12 C.F.R. § 1002.8, and related Commentary
