I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued an Advisory Opinion (AO) to address regulatory uncertainty regarding Regulation B, which implements the Equal Credit Opportunity Act (ECOA), as it applies to certain aspects of special-purpose credit programs designed and implemented by for-profit organizations to meet special social needs. Specifically, the AO clarifies the content that a for-profit organization must include in a written plan that establishes and administers a special-purpose credit program under Regulation B. In addition, the AO clarifies the type of research and data that may be appropriate to inform a for-profit organization’s determination that a special-purpose credit program is needed to benefit a certain class of persons.
The AO was effective on January 15, 2021.
II. special-purpose credit programs
The ECOA and its implementing regulation, Regulation B, provide a means for banks and other for-profit institutions to reach a class of people that otherwise would be denied credit or receive it on less favorable terms. The ECOA permits a for-profit institution to offer a special-purpose credit program to meet special social needs under standards prescribed in regulations issued by the CFPB.
A special-purpose program must meet two standards related to its establishment and administration. The first standard is a written plan that identifies the class of persons that the program benefits and sets forth the procedures and standards for extending credit. The second standard is for the program to extend 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 the other applicants applying to the organization for a similar type and amount of credit. The CFPB’s official interpretations of Regulation B clarify that an institution can base the required determinations on a broad analysis that uses the institution’s own research or data from outside sources, including governmental reports and studies.
III. WRITTEN PLAN
A for-profit organization must establish and administer a special purpose credit program pursuant to a written plan. The plan must contain information that supports the need for the program, including:
• The class of persons that the program is designed to benefit;
• The procedures and standards for extending credit pursuant to the program;
• Either (i) the time period during which the program will last or (ii) when the program will be reevaluated to determine if there is a continuing need for it; and
• A description of the analysis the organization conducted to determine the need for the program.
A. Class of Persons
The class of persons that a special purpose credit program is designed to benefit must consist of those “who would otherwise be denied credit or would receive it on less favorable terms.” A written plan must explain whether the class of persons will be required to demonstrate a financial need and/or share a common characteristic. Such a class could be defined with or without reference to a characteristic that is otherwise a prohibited basis under the ECOA.
B. Procedures and Standards
A written plan must also set forth the procedures and standards for extending credit pursuant to the special purpose credit program. Those procedures and standards must be designed to increase the likelihood that a class of persons “who would otherwise be denied credit” will receive credit pursuant to the program, or that a class of persons who “would receive [credit] on less favorable terms” will receive credit on more favorable terms pursuant to the program. To accomplish these goals a creditor may, for example, introduce a new product or service, modify the terms and conditions or certain eligibility requirements for an existing product or service, or modify policies and procedures related to certain loss mitigation programs, such as loan modifications. For example, a creditor may offer a new small business loan product for woman-owned businesses by relaxing its customary standard of requiring three years of experience in the industry to one year, if the creditor has determined that this requirement would probably prevent woman-owned businesses from qualifying for small business financing. The written plan must describe the procedures and standards adopted and explain how they will increase credit availability with respect to the identified class of persons. If the class of persons the program is designed to benefit will be required to share a common characteristic, the written plan may also explain whether the organization will request and consider information that would otherwise be prohibited under the ECOA.
C. Program Duration/Reevaluation
The written plan must provide “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.” If an organization opts for the latter approach, reevaluation could be made contingent on a certain set of circumstances or simply a set date. The written plan could also adopt a combined approach - for example, the special purpose credit program could end on a set date, or when a pre-established origination volume has been reached, whichever occurs earlier. If an organization extends the program beyond what is set forth in its written plan, it must document the terms of that extension in order to ensure the program continues to be administered pursuant to a written plan.
D. Description of Analysis
A special purpose credit program must be “established and administered” to benefit a class of people who would otherwise be denied credit or would receive it on less favorable terms, as determined by a “broad analysis,” and it must be “established and administered pursuant to a written plan.” The Official Interpretations to Regulation B further provide that a written plan “must contain information that supports the need for the particular program.” Thus, a for-profit organization’s written plan must describe or incorporate the analysis that supports the need for the program.
IV. DETERMINATION OF NEED FOR A SPECIAL PURPOSE CREDIT PROGRAM
A. Permissible Sources of Data and Research
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. This determination can be based on a broad analysis using the organization’s own research or data from outside sources, including governmental reports and studies.
For-profit organizations may rely on a wide range of research or data to analyze whether a special purpose credit program is needed to benefit a class of persons who would otherwise be denied credit or would receive it on less favorable terms. A for-profit organization’s analysis might consider research or data that are already in the public domain.
B. Nexus to the Organization’s Customary Credit Standards
While a for-profit organization may permissibly rely on a broad range of research or data - including historical and societal information - in determining whether a special purpose credit program is needed, the organization’s analysis must show how “a class of people would otherwise be denied credit or would receive it on less favorable terms” under the organization’s customary credit standards. The for-profit organization must be able to show a connection between the research or data informing its analysis and the fact that, under the organization’s customary standards of creditworthiness, a class of persons probably would not receive credit or would receive it on less favorable terms than are ordinarily available to other applicants applying to the organization for a similar type and amount of credit.
C. Requests for and Use of Information
The Bureau notes that pursuant to Regulation B, “[i]f participants in a special purpose credit program . . . are required to possess one or more common characteristics (for example, race, national origin, or sex) and if the program otherwise satisfies the requirements of [Regulation B], a creditor may request and consider information regarding the common characteristic(s) in determining the applicant’s eligibility for the program.” If no special purpose credit program has yet been established, however, a creditor may use statistical methods to estimate demographic characteristics, but it cannot request demographic information that it is otherwise prohibited from collecting, even to determine whether there is a need for such a program. Moreover, while a for-profit organization may rely on a broad swath of research and data to determine the need for a special purpose credit program - including the organization’s own lending data - it may not violate Regulation B’s prohibitions on the collection of demographic information exclusively to conduct this preliminary analysis before establishing a special purpose credit program.
Once a special purpose credit program has been established, a creditor may then request and consider information regarding common characteristic(s) if needed to determine the applicant’s eligibility for the program. For example, if a creditor establishes a special purpose credit program that requires that an applicant resides in an area that is designated as a low-to-moderate income census tract and is Black, Hispanic, or Asian, a creditor could request race or ethnicity information from applicants to confirm eligibility for the program.