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FOS Blog

18 Feb
2021

CFPB ISSUES ADVISORY OPINION ON SPECIAL PURPOSE CREDIT PROGRAMS

CFPB ISSUES ADVISORY OPINION ON SPECIAL PURPOSE CREDIT PROGRAMS

Under the Equal Credit Opportunity Act (ECOA) banking institutions are allowed to extend “special purpose credit” when the Bank intends to meet special social needs.  The plan must be written, identify the class of persons the program is designed to benefit, and establish the underwriting standards. Applicants would typically not qualify or would qualify on less favorable terms than ordinarily available to other applicants.  So, how does an institution know whether its Special Purpose Credit Program (SPCP) meets ECOA criteria?

The Bureau issued Advisory Opinion 2020-12 “to address this regulatory uncertainty in the hope that broader creation of special purpose credit programs by creditors will help expand access to credit among disadvantaged groups and will better address special social needs that exist today.”

First, it is not discriminatory for a creditor to refuse to extend credit offered under a legally compliant SPCP.  The creditor must designate qualifying criteria including identifying the special class of persons to whom it relates.  As part of the eligibility requirements, a creditor may request race and ethnicity information for qualification purposes.  So long as the program is not administered in a manner of evading the requirements of ECOA, the creditor is considered compliant.  Additionally, SPCPs may be initiated without the approval of the CFPB.

There are two basic criteria for creating a SPCP:

  • Determination of need based on research.
  • A written plan with criteria identified in ECOA and the Advisory Opinion.

Regarding need, the Advisory Opinion cites: “In designing a special purpose credit program, a for-profit organization must determine that the program will benefit a class of persons who would otherwise be denied credit or would receive it on less favorable terms.”  Research might be based on a Bank’s own research, governmental reports, or information in the public domain.  In designing its program, the Bank must show how a class of people would benefit and a connection between the research and the Bank’s program.

Although all creditors are subject to ECOA and the requirements of 1002.8 for Special Purpose Credit Programs, we have not heard whether the Bank regulators endorse the CFPB Advisory Opinion.  We recommend that you check with your regulator before forging ahead with any such program.

For additional information contact edehmey@fosaudit.com.

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