Although Congress is likely to include funding for several housing programs in the Build Back Better Act that will provide federal assistance for first-generation homeownership, these federal funds are only one of many steps needed to close the racial wealth gap. One of the most important next steps is for policymakers to encourage mortgage lenders to embrace the use of special purpose credit programs (SPCPs). SPCPs, which allow a for-profit organization to extend credit to people who might not be marketed to or eligible for credit under the organization’s customary marketing and underwriting processes. Although the Equal Credit Opportunity Act (ECOA) generally prohibits lenders from considering race, national origin or sex for credit approval, SPCPs are compliant with not only ECOA, but other fair lending laws. According to section 701(c)(3) of ECOA, as long as a creditor can demonstrate that its program provides credit for protected class members who would otherwise probably not receive such credit or would receive it on less favorable terms than other applicants, the loan is not considered to be discriminatory.
Although SPCPs have been allowed under federal law since 1976, mortgage lenders have been slow to adopt them out of fear that they will violate the Fair Housing Act (FHA). The opportunity created by the imminent passage of the Build Back Better Act should compel regulators to provide strong guidance that will stimulate more lenders to develop and offer SPCPs.
By promoting SPCPs, both policymakers and mortgage lenders could greatly accelerate expansion of affordable and inclusive homeownership. The Department of Housing and Urban Development (HUD) should clearly state, as other federal agencies already have, that mortgage lenders may consider race, national origin, or sex in connection with an SPCP in full compliance with the FHA. In turn, mortgage lenders should drive the adoption of SPCPs by funding down payment assistance for eligible applicants, giving a second look to applicants who would have otherwise been rejected under standard underwriting criteria and marketing credit to underserved communities that may not have been the focus of previous targeted advertising by the mortgage lender. Mortgage lenders would benefit from SPCPs not only by giving back to the communities they should be serving, but also by diversifying their long-term client base.
Glaring racial wealth gaps underscore the urgency of the moment – and the role that homeownership can play in addressing racial economic inequality makes clear that SPCPs can improve lives. Homeownership is the primary means that one generation passes wealth on to the next generation, and owning a home is even a greater component of wealth for Black families. The homeownership gap between Blacks and Whites remains stagnant, with Black homeownership at 42%, about where it was 50 years ago, and White homeownership at 72.4%.
As the Consumer Financial Protection Bureau (CFPB) recognized in its Advisory Opinion on SPCPs in December 2020, inequities in credit availability and in the terms and conditions of credit appear to have led to income inequality. The CFPB has consistently found that housing program subsidies and mortgage lending programs with special rates and terms for underserved markets do not violate fair lending laws. Furthermore, when other federal agencies concerned with the supervision and enforcement of fair lending laws have considered SPCPs, they have supported their use in mortgage lending. The Department of Justice incorporated SPCPS in their settlements, a host of regulators cited SPCPs favorably in the Federal Financial Institution Examination Council examination procedures and both the Federal Reserve Bank and the CFPB in their official commentary on ECOA provided examples of SPCPs related to homeownership.
It’s time for the mortgage lending community and HUD to be aligned on expanding homeownership to communities of color. The Biden Administration directed HUD on January 26, 2021, to “take steps necessary to redress racially discriminatory federal housing policies that have contributed to wealth inequality for generations.” With Congress on the brink of passing a once-in-a-generation support to extend homeownership to a greater cross-section of our population, the mortgage lending community and HUD should seize the opportunity to close the wealth gap even further through SPCP homeownership assistance in the private sector.
Brad Blower is NCRC’s General Counsel.