(Illustration by Katelyn Perry / Unsplash+)
The Trump administration is taking aim at a little-known but powerful provision that allows banks and other lenders to address historic disparities in access to credit due to race, gender or national origin.
In an order dated March 25, the Federal Housing Finance Agency directs Fannie Mae and Freddie Mac to terminate all purchases of residential mortgages made under special purpose credit programs. The National Association of Mortgage Brokers has called these programs “critical tools” for increasing access to homeownership.
As government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac purchase residential mortgages from lenders on the secondary market, allowing lenders to scale up their operations and reach many more borrowers than they would if they had to wait up to 30 years for the loans to be repaid. Through their secondary purchasing, Fannie Mae and Freddie Mac support 70% of all residential mortgage lending across the country.
Under a special purpose credit program, banks and other private lenders can, for example, use more flexible underwriting criteria to approve loans for “economically disadvantaged” customers, like someone who might otherwise be denied a loan because they have a credit score reflecting historic racism or lacks any credit history because they just moved here from overseas.
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“Special purpose credit programs have been a proven tool to get capital to people who deserve it,” says Brookings Institution senior fellow Andre Perry, whose forthcoming book “Black Power Scorecard” strongly recommends more special purpose credit programs.
“They have met court muster and they provide loan products to people who are doing everything right, but simply need capital to jumpstart their American dreams,” he says. “We know that many individuals have not received intergenerational wealth transfers that enable them to start businesses and purchase homes. Why not make loan products for them?”
Special purpose credit programs are authorized under the Equal Credit Opportunity Act of 1974 and also governed by what’s known as Regulation B from the Consumer Financial Protection Bureau. The new order, posted on X by the agency’s director, states that the Federal Housing Finance Agency believes support for these programs is “inappropriate.”
For those who’ve spent years addressing historic and systemic racism, this is just the latest of many moves by the Trump administration that threaten to undermine their work.
“A resource that has been set aside for those that have been most harmed by systematic racism is being eliminated,” says Nikki Beasley, executive director of Richmond Neighborhood Housing Services. “It’s gonna require banks to double down and be true to their commitment that — even without the ability to sell their loans to the GSEs — they’re still going to be committed to making their wrongs, right.”
How banks will be affected by the order
It’s not clear how many lenders the March 25 order actually affects. There is no centralized monitoring of how many banks and other lenders have established special purpose credit programs, and until recently, very few lenders have been operating any type of special purpose credit program.
Fannie Mae and Freddie Mac only deal with residential mortgages, but some special purpose credit programs are for small business loans or commercial real estate. Lenders aren’t required to have support from these government-sponsored enterprises to create special purpose credit programs for residential mortgage lending.
“The concern is that this sends a strong signal that the administration is anti-special purpose credit programs,” says Jesse Van Tol, CEO of the National Community Reinvestment Coalition. News of the order came out on the heels of the coalition’s annual conference, which brings together more than 2,000 people working in fair housing, community development and banking across the country.
Inclusive finance leaders say terminating Fannie Mae and Freddie Mac’s support for special purpose credit programs may slow down existing programs that rely on Fannie and Freddie. It could also stifle interest from lenders who are considering whether to create new special purpose credit programs that would have relied on Fannie and Freddie’s secondary purchasing.
“That means you now have to hold those loans in your portfolio and most banks aren’t gonna want to hold a 30-year note,” Beasley says. “There might be some pushback but there has to be compromise. Maybe you committed to $500 million, and now without Fannie and Freddie, I understand why that’s no longer possible. But can you still do $100 million?”
The growth of special purpose credit programs
Van Tol says he’s aware of at least 30 banks that have established special purpose credit programs, for everything from mortgage lending to small business, comemercial real estate and community development. The majority of them — including Chase, Bank of America, Citibank and Wells Fargo — have emerged over the past five years.
“It’s been a huge boom,” Van Tol says. “Most of them pre-date Fannie Mae and Freddie Mac’s support for special purpose credit programs.”
That growth has been due in part to organizations like the National Community Reinvestment Coalition working with policymakers and the banking industry to promote awareness of the Equal Credit Opportunity Act’s provision for special purpose credit programs.
“The reason it’s legal, the reason why actually it’s constitutional, is the fact that it’s a form of remediation,” Van Tol explains. “It allows a bank or mortgage companies to look at the lending data and say, hey, here’s where we have gaps. And because we have gaps, we can develop an affirmative approach, a special approach, more flexible underwriting, other terms and conditions that may be different about the mortgage product, or affirmative marketing to a particular combination of groups.”
In 2022, the Mortgage Bankers Association and National Fair Housing Alliance created a toolkit for mortgage lenders interested in developing Special Purpose Credit Programs. Regulators have even issued multiple advisory statements and other documentation clarifying their stance on the appropriateness of special purpose credit programs.
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“Our coalition has really prioritized special purpose credit programs in the last few years as we’ve come to understand more about them,” says Kevin Stein, an NCRC board member and deputy director of California-based NCRC member Rise Economy.
The Community Reinvestment Act of 1977 empowers federal banking regulators to evaluate banks’ track records of meeting community needs when considering applications for mergers, branch openings or branch closings.
NCRC members often leverage the Community Reinvestment Act as a platform to get banks to negotiate post-merger community benefit plans with commitments to finance first-time homeowners, affordable housing, small businesses or community development in low-income communities. More and more, those community benefit plans are starting to include the creation or expansion of special purpose credit programs.
“When we’re talking with financial institutions, we are always talking about special purpose creative programs amongst many other issues, but this is very important to our membership,” Stein says. “Over the years, a number of institutions have been moving along the continuum, from thinking about it to having something at least in the early stages.”
How banks set up special purpose credit programs
Back in 1993, California-based Union Bank created its special purpose credit program for small business and commercial real estate lending. It’s one of the longest-running examples of this type of program.
To access Union Bank’s special purpose credit program, prospective borrowers simply checked a box on the bank’s standard small business loan application to self-identify that they are a business whose ownership and management are at least 51% women, people of color or veterans. The bank verifies the self-identification later.
“We’re able to approve more loans when a person of color, woman or veteran checks that box,” Frank Robinson, who ran Union Bank’s special purpose credit program for nearly 20 years, told Next City in 2022. “Sometimes that check is the difference between them having a loan and not.”
Robinson said as of 2022 about a third of Union Bank’s small business loan portfolio fell under its special purpose credit program, and that those loans don’t default at any higher rates than loans approved conventionally.
Banks do not require regulatory approval to establish special purpose credit programs, but they are required to inform regulators when they establish them. It’s really more of an informal process. The required documentation doesn’t need to be extensive — Union Bank’s special purpose credit program plan was typically only seven to 10 pages long — but there are three main requirements.
First, the special purpose credit program plan must identify at least one category of borrowers facing discrimination because of race, gender, disability status or other federally recognized categories. Some banks have created special purpose credit programs to offer home mortgage loans to individuals using only Individual Taxpayer Identification Numbers instead of social security numbers or permanent residency documents. Banks can use public data sources to show that certain borrowers still don’t have the same access to credit as other borrowers.
Second, the special purpose credit program plan must clearly outline the program design, including the proposed loan criteria or terms, a marketing plan, and a commitment to set aside extra loan loss reserves.
Third, the special purpose credit program plan must provide a timeline for reevaluating the program and whether there is still a need for it. Starting in 1993, Union Bank typically set a two-year reevaluation period, and sometimes adjusted underwriting criteria on an annual basis to make the program more or less flexible in response to overall economic conditions.
Union Bank has since been acquired by U.S. Bank, which made a pledge as part of the acquisition approval process to continue the former Union Bank’s special purpose credit program and even extend it across the bank’s larger footprint across more than two dozen states.
“Our sense in conversations with banks is that they really feel good about these, that they feel like they are meeting a need, that special purpose credit programs are helping them reach customers that they have for whatever reason been unable to reach effectively, that the products are performing well and people are repaying the loans,” Stein says.
“It’s a win-win situation.”