Lenders tread carefully around targeted lending programs

Lenders fear increased compliance risk in implementing special purpose credit programs


Last week’s announcement from the Department of Housing and Urban Development cleared the way for lenders to adopt targeted lending programs, but so far, they are treading carefully.

The pronouncement was more than 40 years coming, and arrived after both the Consumer Financial Protection Bureau and the Federal Housing Finance Agency had publicly weighed in on the issue.

“The pieces are coming together,” said Bob Broeksmit, president of the Mortgage Bankers Association.

Special purpose credit programs allow lenders to target loan products to benefit protected classes without running afoul of fair lending law. There is a lot of excitement, the MBA said, but the trade association estimates it will be several months before lenders can operationalize the programs. Earlier this year, the MBA, together with the National Fair Housing Alliance, wrote a letter to HUD to urge clarification of SPCPs under the Fair Housing Act.

But in the wake of HUD’s announcement, some lenders have, privately, grumbled that there are not sufficient incentives to develop the programs. Properly documenting and targeting the programs could be costly. Some lenders fear documenting that their current lending practices are insufficient could inadvertently expose them to regulators hunting for evidence of redlining.

Whether lenders choose to make the targeted lending programs is entirely optional, although doing so could help depositories meet their Community Reinvestment Act requirements. The programs could also help lenders give force to the promises they made in the wake of last year’s George Floyd protests.

“Many lenders made bold proclamations wanting to take strong action in pursuit of racial justice,” said Nikitra Bailey, senior vice president of public policy at the National Fair Housing Alliance.

Broeksmit said he hoped to see lenders take the first step, by designing a program and floating it to the GSEs. Other lenders could then see their success, implement a similar program, and the effect would snowball.

“I’m quite sure [the GSEs] would be open to lenders saying, ‘Can we try this in this market and see how it works,’” Broeksmit said.

That will be a gradual process. Without a clear incentive — or a template to follow — few expect lenders to adopt SPCPs en masse.

There are two ways federal policy could dramatically change that calculus. In the short-term, the government-sponsored enterprises could weigh in. In the long-term, banking agencies could overhaul the Community Reinvestment Act.

The first scenario is much more enticing for lenders. Fannie Mae and Freddie Mac could spur lenders to create SPCPs by committing to buy such loans. They could introduce pilot programs to help develop the targeted programs. SPCPs could even be factored into the GSEs’ equitable housing finance plans the Federal Housing Finance Agency expects the GSEs to submit by the end of this year.

Affordable housing advocates are hopeful. So far, the GSEs have been noncommittal on whether the equity plans will say anything about SPCPs.

“Hopefully we will see swift guidance from the GSEs,” said Bailey. “I think the equity plans will tell us a lot about what we can expect in terms of how the GSEs will use liquidity to push for SPCPs.”

FHFA raised the possibility of including SPCPs in the equitable housing finance plans in September, when it ordered the GSEs to produce them.

The agency asked, “Could special purpose credit programs … be included in the Enterprises’ plans? How should such programs be structured?”

But at the time, HUD still had not clarified whether SPCPs would run afoul of the Fair Housing Act. The all-clear came three months later, just weeks before the GSEs’ plans are due.

Still, FHFA Acting Director Sandra Thompson is pitching targeted lending programs. In a statement this week, Thompson urged the GSEs to “consider SPCPs as a powerful tool to advance equitable outcomes and ensure fairness in the housing finance system.”

“In addition to contemplating SPCPs of their own, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks can impact the availability of these programs by providing liquidity and support for existing and future SPCPs, within the umbrella of safety and soundness,” Thompson said.

Depositories could also be compelled to make SPCPs if the Community Reinvestment Act — the anti-redlining statute — got a serious update. While the statute was crafted to address redlining, it never included language specifically referencing race. The process to overhaul the statute is already underway.

An uncoordinated Community Reinvestment Act reform process was definitively scrapped this month when the Office of the Comptroller of the Currency issued a final rule rescinding its effort. The final rule set the stage for multi-agency reform.

Marshaling that process is Federal Reserve Board Gov. Lael Brainard, who was recently elevated to the number two position at the central bank. In an October 2020 advanced notice of proposed rulemaking, she signaled that the reform process would take race into consideration.

Guidance from the GSEs and Community Reinvestment Act could encourage lenders to craft SPCPs. But Bailey cautions that the targeted programs are not a panacea, and SPCPs will not, alone, solve inequality.

“But that doesn’t mean this isn’t substantial and significant,” Bailey said. “It has the potential to make a huge impact.”

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