Earlier this week, the U.S. Department of Housing and Urban Development (HUD)’s Office of General Counsel (OGC) published guidance on the Fair Housing Act’s treatment of Special Purpose Credit Programs (SPCPs). An SPCP is a tool that lenders can use to target underserved communities without violating the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B’s anti-discrimination provisions. The SPCP provisions of ECOA and Regulation B expressly permit lenders to consider otherwise-prohibited characteristics, such as race and national origin, if they are providing “special purpose credit” to meet special social needs or to benefit economically disadvantaged persons.
One year ago, the CFPB released an Advisory Opinion to clarify the requirements for SPCPs. To qualify for the protections of an SPCP under ECOA and Regulation B, a for-profit lender must develop and implement a written plan that identifies the class of persons the SPCP is designed to benefit and sets forth the lender’s procedures and standards for extending credit under the program. For a program to qualify as an SPCP, its purpose must be to extend credit to a class of persons who, under the lender’s customary standards of creditworthiness, probably would not receive such credit or would receive it on less favorable terms than are ordinarily available to other applicants applying to the lender for a similar type and amount of credit. The Advisory Opinion provided additional detail regarding how lenders can satisfy these requirements in implementing an SPCP.
Despite clarification and encouragement from the CFPB, some mortgage lenders have remained hesitant about implementing SPCPs because the Fair Housing Act does not contain an analogous SPCP concept for mortgage lending. Since the Fair Housing Act does not specifically address SPCPs, and HUD had previously been silent on this issue, some mortgage lenders have been concerned about potential regulatory risk under the Fair Housing Act in creating an SPCP.
Now, for the first time, HUD OGC has provided confirmation that SPCPs that are carefully tailored and targeted to meet ECOA and Regulation B’s requirements generally will not constitute discrimination under the Fair Housing Act. The OGC’s primary reasons for reaching this conclusion are described below:
- Purpose of FHA. The OGC explains that the Fair Housing Act not only prevents discrimination but includes an affirmative provision requiring the federal government to take a proactive role in redressing longstanding housing discrimination. The Fair Housing Act specifically requires HUD and other agencies to administer programs “affirmatively to further the purposes” of the Fair Housing Act. Thus, one of HUD OGC’s justifications for concluding that SPCPs generally do not violate the Fair Housing Act is Congress’s purpose in enacting the Fair Housing Act.
- Harmonious Co-Existence. The OGC references a rule of statutory construction, which states that two statutes that regulate the same topic should be interpreted in a manner that harmonizes them so that they are both given their fullest effect. In this case, the Fair Housing Act and ECOA both prohibit certain discriminatory mortgage lending practices. Furthermore, since FHA and ECOA have harmoniously co-existed for more than forty years, the OGC concludes that these texts should be read together and operate in complementary ways.
- Legislative History. In support for its position that SPCPs do not violate the Fair Housing Act, the OGC delves into the legislative history of the Fair Housing Act and ECOA. Congress first passed the Fair Housing Act in 1968, and it later enacted ECOA in 1974. The OGC emphasizes that Congress enacted ECOA within the context of an already existing Fair Housing Act statute. When Congress amended ECOA in 1976, the OGC argues that Congress recognized that the Fair Housing Act and ECOA provided overlapping protections in certain credit transactions. In the ECOA amendment, Congress explicitly prohibited a party from recovering for a violation based on a single transaction under both ECOA and the Fair Housing Act. OGC surmises that Congress intended the Fair Housing Act and ECOA to co-exist and complement each other rather than create additional conflict.
- US Department of Justice’s Enforcement of the Fair Housing Act and ECOA. The OGC points to how the U.S. Department of Justice (DOJ), an agency charged with the enforcement of both the Fair Housing Act and ECOA, has treated SPCPs as a way to remedy the alleged exclusion of communities of color, rather than as a form of discrimination under the Fair Housing Act. The OGC points to a DOJ redlining settlement agreement in which the target bank agreed to establish at least one SPCP to benefit residents of majority-minority tracts. The OGC indicates that this settlement is an example of harmonious enforcement of the Fair Housing Act and ECOA, which—according to the OGC—is consistent with Congress’s purpose for the two federal fair lending statutes.
HUD’s guidance is a positive step in providing lenders who wish to implement SPCPs additional regulatory assurance. In connection with the release of the OGC guidance, HUD’s Office of Fair Housing and Equal Opportunity (FHEO) also published a memorandum affirming OGC’s guidance and specifically encouraging lenders to “seriously consider establishing Special Purpose Credit Programs that are consistent with the antidiscrimination and affirmative provisions of the Equal Credit Opportunity Act, Regulation B, and the Fair Housing Act.”
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If you are interested in setting up an SPCP, please don’t hesitate to contact us for assistance.