When a Who’s Who of regulatory entities issued an interagency statement on Special Purpose Credit Programs (SPCPs) in late February, it was tantamount to putting a nice big bow and ribbon on a gift.
In many ways, it was also unprecedented.
The gift is the SPCP legal provision, a tool that can be wielded to close racial/ethnic gaps in homeownership that have persisted since the days of the Home Owners Loan Corporation (HOLC) and its legalized redlining. We’ll unwrap this gift in a moment, but it’s noteworthy to explore the ways in which the interagency statement was unprecedented.
First, I can’t recall a time in my 30-plus years in banking, mortgage finance and affordable housing when a statement was jointly released by all federal bank and credit union regulators, the enforcers of fair housing and anti-discrimination laws, the nation’s lead consumer protection agency, and the conservator of the government-sponsored enterprises (GSEs). Second, I can’t recall a time when so many regulatory entities signed onto an interagency statement that, for all practical purposes, encourages lenders and investors to use specific provisions of federal law to achieve social good. Third, I can’t recall a time when an interagency statement stepped through the legal and regulatory framework that had come together through time in a clear attempt to lessen lenders’ fear of compliance and enforcement actions.
This all seems unprecedented, making the point even more clear – the federal government wants lenders to introduce SPCPs to address racial equity issues in homeownership in a manner that achieves the law’s intended outcomes. In other words, they view the SPCP provision under the Equal Credit Opportunity Act (ECOA) and Regulation B as a gift and they want lenders to open it.
How SPCPs work
ECOA and Reg B, which became law in 1974, prohibit discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. However, the law includes a provision for SPCPs which allows creditors to offer unique programs targeting people sharing a “common characteristic” (e.g., race, country of origin, sex, etc.). In order to offer such a program, the creditor must develop a written plan detailing a) how its existing programs fail to suitably meet the credit needs of the target population, b) the features of its SPCP (e.g., underwriting criteria, down payment assistance, pricing, etc.), and c) the duration of the program.
A lender can expect that fair lending regulators will closely inspect the written plan, assess its impact, and identify if the lender has achieved its objective and if continuing the program is warranted. Regulators will also evaluate if the lender’s offering of the SPCP has disparately impacted any protected class. Though ECOA permitted SPCPs nearly 50 years ago, the provision only recently became a point of focus for policymakers and lenders with growing awareness of how systemic racism has impacted racial equity. As a result, there isn’t a playbook for navigating how best to structure and offer an SPCP – yet.
The interagency statement chronicled the efforts of policymakers to clear a path for broader use of the legal provision. It references the advisory opinion issued December 21, 2020, by the Consumer Financial Protection Bureau (CFPB) that details how a lender should approach introducing an SPCP within the confines of the law. And it mentions the December 6, 2021, advisory guidance issued by the U.S. Department of Housing and Urban Development (HUD) that concludes that ECOA and Reg B are harmonized with the Fair Housing Act such that a lender which operates within the confines of one law can expect that it is compliant with the other.
Producing intended outcomes
While there is excitement about using the legal provision, there is also hesitation. In its advisory guidance, HUD concluded that a lender’s SPCP “designed and implemented in compliance with ECOA and Regulation B generally [does] not violate the [Fair Housing] Act.”
The key word is “generally.” While implementing a program under ECOA’s SPCP provision, a lender must still be careful not to unwittingly create a disparate impact to a protected class as it intentionally tries to assist a target population that it is unable to adequately serve with its traditional product offerings. This is why the Urban Institute and other market observers suggest using geography as a common characteristic under the law to achieve the objectives of the SPCP provision without courting disparate impact. Such a place-based approach could focus on where people are buying, or where buyers are living at the time of application.
In Milwaukee, as we work with local leaders to advance the city’s Collective Affordable Housing Plan, targeted solutions in many instances will likely focus on geographic cohorts (e.g., majority-minority census tracts) as a means of concentrating our efforts on underserved Black and Latinx populations. As we participate in industry discussions regarding SPCPs, it is clear “great minds are thinking alike” as place-based targeting is quickly becoming a best practice in the SPCP playbook as it is being written.
A place-based approach can work two ways. It can serve the purpose of channeling investment to historically economically depressed areas, such as census tracts redlined on HOLC maps produced nearly 90 years ago; or it can help people who grew up in historically redlined neighborhoods to buy a home wherever they want. Both are noble goals, and the merits of each approach can be debated.
So what is the true objective of an SPCP? Clearly, it is to close the homeownership gaps that have persisted between minority and white households. But it is also to close the wealth gap, and this means that the focus must remain on sustainable, long-term, financially accretive homeownership.
As a private mortgage insurer, MGIC is not a creditor under ECOA. However, a core tenet of our affordable housing strategy is doing what we can to close homeownership gaps and increase racial equity in homeownership. To that end, we stand ready to work with lenders and the GSEs as they determine how to most effectively deploy the SPCP provision of ECOA and Reg B. Done right – with a focus on sustainable, long-term homeownership and wealth creation while applying prudential standards – the SPCP provision can be a gift that keeps on giving to the mortgage finance industry’s collective efforts to close racial/ethnic homeownership gaps and redress systemic racism which has contributed to the expansion of those gaps over time.