Special Purpose Credit Programs Remain On Solid Legal Ground Despite Supreme Court’s Affirmative Action Decision

After the Supreme Court issued its decision in Students for Fair Admissions, Inc., some in the lending community began to ask whether they should continue to develop and implement Special Purpose Credit Programs (SPCPs) to facilitate access to credit for persons who would otherwise not receive it. These lenders appear to be concerned that the Supreme Court decision striking down affirmative action programs in education would provide a legal basis for challenging SPCPs as unconstitutional because these lending programs could consider an applicant’s race and other protected class characteristics in determining eligibility. 

Lenders should rest a little easier. Although no one can stop a litigious group from filing a legal challenge, the legal foundation for the constitutionality of SPCPs is strong. 

Congress determined almost 50 years ago that there was a compelling government interest to support SPCPs. Such programs, if implemented following a few basic ground rules provided by federal regulators, would meet the Supreme Court’s strict scrutiny standard under the Equal Protection Clause

Crucial to understanding why SPCPs remain constitutionally permissible in the wake of Students for Fair Admissions, Inc. is the reason Congress legally sanctioned them in the first place. In 1976, Congress amended the Equal Credit Opportunity Act (ECOA) to provide that it was not discrimination for a “profit-making organization to meet special social needs” by offering SPCPs which follow standards prescribed by regulation. The legislative history of the amendment made it clear that Congress intended to allow credit programs that preferred disadvantaged classes to expand access. This history includes favorable references to for-profit lending programs targeted to persons in protected classes who had traditionally been denied access to credit. In 1977, the Federal Reserve Board (FRB) outlined a few basic requirements for an SPCP in ECOA’s implementing Regulation B, namely, (1) that the program must be established and administered pursuant to a written plan “that identifies the class of persons that the program is designed to benefit and sets forth the procedures and standards for extending credit pursuant to the program,” and (2) the program is established to provide credit “to a class of persons, who, under the organization’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[.]” In its commentary, the FRB also required that SPCPs must state a “specific period of time for which the program will last or contain a statement regarding when the program will be reevaluated to determine if there is a continuing need for it.” 

These legislative and regulatory details set SPCPs fundamentally apart from the substance and logic of the Court’s recent ruling. The purpose of SPCPs is to redress discrimination, rather than to promote diversity, which was the interest at issue in the affirmative action case. The educational affirmative action programs challenged in Students for Fair Admissions, Inc. did not have Congressional findings and detailed regulatory requirements that support their continued constitutional viability. SPCP’s do. Congress determined there was a compelling government interest in SPCPs to expand access to credit for the disadvantaged. Subsequent regulations and regulatory guidance have mandated that such programs must be documented, supported by data and limited in duration as part of their design and monitoring — thus fully meeting the Supreme Court’s strict scrutiny standard. That standard, as recently reiterated by the Court, is that there must be a compelling government interest and that the government action must be “narrowly tailored” to achieve that interest. 

Strong regulatory support for SPCPs spanning both Republican and Democratic administrations also signals these programs are here to stay. The Consumer Financial Protection Bureau (CFPB), the agency responsible for overseeing Regulation B since the passage of the Dodd Frank Act, provided an advisory opinion in support of SPCPs’ viability and importance to fair lending compliance. Further, HUD issued guidance that SPCPs are compliant with the Fair Housing Act (FHA). And the Department of Justice, the agency responsible for enforcing both ECOA and the FHA for the federal banking regulatory agencies, has repeatedly included SPCPs as part of remediation required in the settlement of redlining cases brought against mortgage lenders during both the Trump and Biden administrations.

In addition to being legally sound, SPCPs are also a good business practice. Lenders should continue to support SPCPs because there are strong safety and soundness and compliance reasons to do so (minimizing both fair lending and Community Reinvestment Act (CRA) risk) and because lenders will benefit economically by expanding and diversifying their customer base. Recent statements by Michael Hsu, the Acting Comptroller of the Office of the Comptroller of the Currency, and Michael Barr, the Vice Chairman for Supervision at the FRB, highlighted the importance of fairness as a safety and soundness concern and explicitly describe SPCPs as an important part of a strong fairness compliance program. And this week, federal regulators are convening a round table of industry leaders, advocates, academics and government agencies to discuss the importance and continued development of SPCPs.

Further, significant stakeholders in the mortgage lending industry have collaborated on implementing policies and tools to facilitate for-profit lenders’ implementation of SPCPs. So there are templates and procedures for making it easier and more affordable to quickly kick-start these programs. The National Fair Housing Alliance partnered with the Mortgage Bankers Association and worked with the Homeownership Council of America (HCA) to develop and manage a toolkit that lenders can use to facilitate greater access to mortgage loans for the disadvantaged through SPCPs. HCA has applied the toolkit and further enhanced best practices for SPCPs in working with roughly one-third of mortgage lenders who have implemented compliant SPCPs.  

Despite these ample and sturdy supports for SPCPs in law, regulation and practical business terms, some lenders have remained ambivalent about developing an SPCP to enhance their compliance and business profile – even before the Court’s recent ruling sparked some broader, headline-grabbing chaos. These lenders should get off the fence. Not only are these programs constitutionally viable, ECOA even provides a safe harbor for lenders who develop and implement SPCPs in reliance on guidance provided by the federal regulators. In the unlikely event such programs are deemed years from now to be invalid – whether on constitutional or other grounds – lenders cannot be held liable if they in good faith relied on the SPCP guidance in effect at the time of their program. Section 1691e(e) of ECOA provides that if a lender relies in good faith upon the CFPB’s interpretation of ECOA and Regulation B, including its determination that SPCPs are compliant with ECOA and part of a sound fairness compliance program, and that guidance, rule or regulation is later “amended, rescinded, or determined by judicial or other authority to be invalid for any reason” the lender is not liable. Although this is not bulletproof protection for lenders, it is about as close as you can get. And lenders can protect themselves even further, if they are averse to even the slightest of litigation risk, by developing their SPCPs to serve disadvantaged groups who are defined by living in underserved geographies, or are first-time homebuyers or first-generation homebuyers in their families. These eligibility criteria are less likely to invite attention than race-based criteria for federal programs which recently invoked the ire of one federal district court judge in the context of a federal small business contract program.

And what would be the worst-case scenario for a lender? There is the very slight chance that you might get sued by a political group with an agenda. But you’d very likely win such a case, given the solid legal and regulatory language described above and ECOA’s safe harbor would shield you from liability for damages based upon your good faith reliance on regulatory guidance. 

And in the interim, you have improved your business and compliance practices, decreased your fair lending and CRA risk, increased your relevance and importance in the communities you serve and helped to expand access to credit for those who are disadvantaged – which is what Congress wanted the for-profit sector to step up and do. And by the way, you will have increased your revenue and profitability for years to come.

Brad Blower is an advisor to the National Community Reinvestment Coalition and the Homeownership Council of America.

Photo courtesy of Thomas Hawk via Flickr.

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