Black Homeownership: Using Data to Navigate the Road to Equity
On September 1, 2021, the National Fair Housing Alliance (NFHA), in partnership with Urban Institute and the Mortgage Bankers Association (MBA), hosted a virtual forum on Special Purpose Credit Programs (SPCPs). This event was intended to provide the audience with an overview of SPCPs and a clear understanding of the barriers to credit access and who is most affected by those barriers. SPCPs were outlined with leading market research, design and implementation proposals, and the legal and regulatory framework under which such programs can exist and thrive. Three panels of leading industry experts shared their experience and knowledge with an audience of housing-related stakeholders interested in how SPCPs can help mitigate inequities in lending.
Increasingly, lenders are interested in pursuing proactive efforts to increase homebuying opportunities for people of color, whose communities have been historically — and systematically — excluded from the housing market. These well-intentioned efforts, however, must be undertaken in compliance with prohibitions in the Equal Credit Opportunity Act (ECOA) and its implementing regulation (Regulation B) against considering a prohibited basis, such as race or ethnicity, in any aspect of a credit transaction. Notwithstanding this prohibition, ECOA and Regulation B permit creditors to create “special purpose credit programs” in order to extend credit to applicants who meet certain eligibility requirements. Pursuant to such a program, lenders may offer special underwriting or pricing for economically disadvantaged groups.
De facto and de jure segregation, intentional and unintentional bias in appraisals, and disparities in access to flood insurance and FHA loans all have played a role in limiting the opportunities for Black families to accumulate wealth above and beyond access to credit.
– Dave Uejio, Acting Director of the Consumer Financial Protection Bureau (CFPB)
After a welcome from the partner organizations’ CEOs — Lisa Rice with NFHA, Sarah Rosen Wartell with Urban Institute, and Bob Broeksmit with MBA — the audience heard recorded remarks from Dave Uejio, Acting Director of the Consumer Financial Protection Bureau (CFPB). Acting Director Uejio emphasized the important role homeownership plays in wealth accumulation for Black families and stated that he is pleased that efforts are being made to discuss the potential of using SPCPs to promote fair and equitable access to credit and homeownership. Mr. Uejio also stated how critical it is to “address the web of related issues that too often suppress the financial value of homeownership for Black families.” He went on to describe how “De facto and de jure segregation, intentional and unintentional bias in appraisals, and disparities in access to flood insurance and FHA loans all have played a role in limiting the opportunities for Black families to accumulate wealth above and beyond access to credit.” He further shared how the pandemic has disproportionately affected homeowners of color, as evidenced by delinquencies and forbearance statistics. Finally, he expressed concern for these communities in post-pandemic foreclosure activity and described the CFPB’s efforts to prevent avoidable foreclosures through outreach to struggling homeowners, rulemaking, and supervision and enforcement work with mortgage servicer.
The first panel titled, “What Does the Research Tell Us?” focused on data surrounding barriers to credit access and how SPCPs can help move the country towards a place of equitable homeownership opportunity. Moderated by Pam Perry of Freddie Mac, the panelists — Jung Choi with Urban Institute, Svenja Gudell with Zillow, and Mike Fratantoni with MBA — offered statistics and industry trends. Ms. Perry invited the mortgage lending community to bring SPCPs forward to the GSEs as they are looking for opportunities to scale and support those programs by providing a secondary market take out. Ms. Choi presented data on Black homeownership demonstrating that this population has the lowest homeownership rate and has experienced the greatest decline in homeownership since the Great Recession. Aside from historic discriminatory policies, the primary barriers today include lack of credit access, specifically high denial rates for reasons of debt-to-income ratio, lack of collateral, and credit history. Mike Fratantoni walked the audience through several trends from the lending perspective that are critical to understand when considering building an SPCP. He shared that experts are predicting a rise in interest rates over the next couple of years and that, while credit availability has been tight due to the pandemic, they expect to see those restrictions loosen as the market returns to a pre-pandemic state. Unfortunately, these challenges coupled with inventory issues, create obstacles for first-time buyers. Mr. Fratantoni also noted that people of color overwhelmingly represent the highest percentage of FHA borrowers, so accessibility to these programs is crucial. Finally, Ms. Gudell revealed statistics on record-setting recent home price and rent appreciation, supply and demand trends, and market velocity, and echoed Mr. Fratantoni’s sentiment on how those circumstances have combined to create complications for a significant portion of the homebuying market.
The next panel explored the legal and regulatory framework behind SPCPs. Panelists included Patrice Ficklin with the CFPB, Sasha Samberg-Champion with the U.S. Department of Housing and Urban Development (HUD), and Donna Murphy with the Office of the Comptroller of the Currency (OCC). It was moderated by NFHA board chair, Kenneth Scott with Citigroup. Mr. Scott began with some introductory explanations of the federal regulations that allow for the creation of SPCPs, namely Regulation B of ECOA, the Federal Housing Administration (FHA)’s role, and how the three panelists’ agencies intersect in this space. Ms. Ficklin gave a deeper explanation of SPCPs, the implementing regulations, and the requirement that such programs must benefit socially and economically disadvantaged individuals. More details can be found here. Ms. Murphy described the unique position of the OCC in that the agency doesn’t interpret the Fair Housing Act or ECOA, but instead supervises national banks and federal savings associations to ensure compliance with applicable laws and regulations, including fair housing and fair lending. She encouraged lending institutions to engage with their regulators on SPCPs and talked a little about Project REACH, which began in 2020 as a multi-industry partnership to explore specific barriers that prevent individuals and small businesses from fully participating in the nation’s economy. Mr. Samberg-Champion indicated that HUD is interested in hearing from lending institutions about their plans and intentions surrounding SPCPs. Ms. Murphy added that SPCPs have the potential for Community Reinvestment Act (CRA) consideration if structured properly.
The panel then went on to discuss some of the specifics surrounding crafting an SPCP and what regulators will be looking for in their evaluations. Ms. Ficklin pointed the audience to an interpretive rule that the CFPB issued in December of 2020 in response to a request for information from the lending community on SPCPs. This rule clarifies the type of research and analysis that a for-profit lending institution must provide as part of a SPCP proposal. She also emphasized that these programs must be created intentionally and rooted in need and that lenders may not apply an SPCP label to a program retroactively. While the CFPB does not formally approve SPCP programs, a dialog is important to make sure that critical standards are being met and that the Bureau has a comfort level with the proposal. Ms. Ficklin offered additional information by way of an essay published in a PRRAC May 2021 publication (page 52) that describes in detail the relevant data lenders can use to establish SPCPs. Mr. Samberg-Champion shared that HUD is aware that many institutions are looking to HUD for guidance on what the FHA will have to say about SPCPs and that the agency is studying the issue very closely.
Ms. Ficklin touched on some of the requirement differences under ECOA between for-profit and non-profit organizations. Non-profits, such as credit unions or Community Development Financial Institutions (CDFIs), have looser requirements in that SPCPs need only benefit their members or an economically disadvantaged class of persons and do not need to follow for-profit standards requiring a written plan or evaluation of customary standards of creditworthiness. However, both non-profits and for-profits need to adhere to similar evidentiary predicates when establishing a program and could require participants to possess one or more common characteristics such as race, sex, or national origin. Panelists described the data that institutions can consider when identifying underserved groups for an SPCP. They need not limit themselves to their own proprietary data or past lending patterns. Factors including credit inexperience or use of credit sources that don’t report to credit agencies can be used to identify individuals who are being denied or not accessing loan programs, and this can be used as a factual basis for creating an SPCP. Banks can also use government Home Mortgage Disclosure Act (HMDA) data along with Census demographic data from their assessment areas to demonstrate need. Furthermore, Small Business Administration (SBA) and Federal Reserve Board small business credit surveys are excellent data sources for small business SPCP program creation. Government reports or academic studies describing historical causes and effects of discrimination may also be considered to establish the basis for an SPCP. The panel closed by noting that loan servicers can use SPCPs to fulfill legal requirements to assist borrowers with pandemic protections and are flexible enough to support loss mitigation efforts such as loan modification programs, provided they are compliant with overarching requirements.
The final panel of the day was titled, “Considerations for Designing a Successful SPCP.” It was moderated by Brian Kreiswirth of Chase who was joined by Cerita Battles, also with Chase, Gabe del Rio of the Homeownership Council of America, Debra Still with Pulte Financial Services, and Stephen Hayes with the Relman Colfax law firm. These organizations discussed their efforts surrounding designing and implementing SPCPs and best practices for marketing, with the hope of inspiring and educating other lenders to do the same. By way of introductory remarks, Mr. Kreiswirth mentioned the widespread industry interest in implementing SPCPs to increase racial equity and support affordable housing and conceded that the reticence many institutions have around SPCPs is that they are largely untested, both from a regulatory and judicial perspective.
Ms. Still discussed recent efforts of Pulte, the nation’s largest homebuilder, to address the racial homeownership gap through a down payment assistance program to provide eligible buyers with incremental equity in their home and another program that includes selling homes at below market price. She touched on some of the challenges Pulte faced as a builder and a non-bank. The first challenge was with U.S. tax code provisions that prohibit sellers from directly funding buyer down payments. Pulte found a compliance solution by partnering with the nonprofit organization Homeownership Council of America. The second challenge is a government-sponsored enterprise (GSE) guideline which would otherwise make their charitable contribution an interested party contribution and would be a dollar-for-dollar sales concession. Pulte is asking that the contribution be considered an affordable community second [mortgage] much like depository institutions are allowed under the CRA. Ms. Still went on to discuss considerations for ensuring non-lender SPCPs are compliant with the Fair Housing Act and urged the GSEs to align regulations to make sure the loans are saleable. She also raised an important point that institutions and entities designing an SPCP need to be aware of any legal risk exposure that might come from using their own data to support an SPCP.
Cerita Battles continued by describing Chase’s SPCP that was introduced in January of 2021. Chase began planning by looking at HMDA data specific to Black, Hispanic, and majority-minority Census tracts to create a baseline for the direction of the program. Declination rates and areas with high loan-to-value ratios were also examined and found to be prevalent in majority Black and Hispanic Census tracts. Ultimately, Chase designed its programs around geography rather than attach them to racially explicit parameters. Recognizing that down payment and closing costs are often a barrier to homeownership, Chase opted to offer its assistance as a grant in 6,700 minority Census and lending tracts throughout the U.S. The program centers around purchased homes and is restricted by conforming loan limits instead of area median income. An interesting feature of Chase’s program is that any buyer meeting the terms of the program will automatically have access to the funds. It’s not dependent on a loan officer to introduce the program, and no special application process is needed. As of the date of the Forum, Ms. Battles reported that, on average, roughly 60% of the program recipients are Black and Latinx, although some regions have much higher rates of people of color using the program. She shared that Chase will constantly track and monitor the impact of the program to ensure that the funds reach the individuals and communities that most need it.
Next, Stephen Hayes with Relman Colfax, author of this white paper on SPCPs, described three main risk areas for organizations wanting to create their own program. The first is the interaction between ECOA and the Fair Housing Act. The major risk is that, while ECOA explicitly permits SPCPs, the Fair Housing Act does not. A program designed to comply with ECOA is unlikely to violate the Fair Housing Act, but additional guidance is needed from HUD. The next area to consider is that when designing an SPCP it needs to be at least as favorable as other programs the applicant might qualify for. The third area of concern is the written plan that establishes the foundational need for the program. An SPCP should demonstrate that it’s meeting the needs of individuals who probably wouldn’t qualify for credit or might qualify on worse than average terms. The CFPB interpretive rule specifies that a nexus must be created between the program and the entities’ own creditworthiness standards, and that can be done with historical data about declinations. However, there is no inference that an organization creating an SPCP has violated fair lending standards.
Finally, Mr. del Rio talked about best practices for creating an SPCP from the perspective of nonprofits and CDFIs. The first step is to ensure that the organization has institutional authorization to make a target market designation within the Treasury CDFI approval. This can broaden the income restrictions that ordinarily apply to CDFI institutions. Other best practices include installing alternative credit decisioning policies and product terms, and designating capital and fundraising to support the program. From a marketing perspective, community partnerships with other nonprofits working in the racial equity space are critical when facing potential pushback for a racially explicit program. Mr. del Rio calls out to all housing organizations to not shy away from marketing messaging that emphasizes racial disparities and discrimination because they are embedded in the history of this country. Another best practice is to package homebuyer counseling or education fees as those providers are often woefully under resourced. Essentially, nonprofits have a unique opportunity to lean into SPCPs as their standards for creating are less onerous.
The presenting partners hope that this Special Purpose Credit Programs Virtual Forum will be a step in the right direction towards using this decades-old lending structure to meaningfully address racial disparities in homeownership and wealth. We encourage for-profit, not-for-profit, government, and quasi-government entities alike to work together to create opportunities for credit and homeownership access for historically excluded individuals.
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