On December 21, 2020, the CFPB issued an advisory opinion that addresses regulatory uncertainty related to certain aspects of special purpose credit programs (“SPCPs”) designed and implemented by for-profit organizations. The advisory opinion was issued as an interpretive rule that will be published in the Federal Register and therefore is exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act.
In the preamble, the CFPB noted that issuance of the advisory opinion was prompted by stakeholder comments received in response to the Bureau’s recent Request for Information (“RFI”) on the Equal Credit Opportunity Act (“ECOA”) and Regulation B, some of which advocated for further industry guidance on compliant implementation of SPCPs. The CFPB stated that it was issuing the advisory opinion to address regulatory uncertainty “with 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.” We have seen a significant increase in creditor interest in SPCPs in 2020, and we believe the Bureau has become aware of this interest and wishes to make it easier for creditors to translate that interest into real-world programs.
Because SPCPs are relatively uncommon, let’s start with some brief background. Although the ECOA and Regulation B prohibit discrimination on certain prohibited bases in any aspect of a credit transaction, and indeed prohibit asking for most protected class information in a credit application, it is permissible for creditors to provide SPCPs designed to meet special social needs, and to ask for and use protected class information to qualify applicants to participate in the program. For example, a SPCP could be open only to members of a certain racial, ethnic, gender or age group. While Regulation B provides creditors with general guidance about implementing ECOA-compliant SPCPs, the Bureau does not determine or provide preapproval regarding whether individual programs qualify for SPCP status. Instead, the creditor offering the SPCP must determine the status of its own program, and then hope that the program passes muster in a later regulatory examination. If it does not, then the creditor will almost automatically be deemed to have violated ECOA by using a protected characteristic to qualify applicants for the program. Indeed, creditors have sometimes received regulatory criticism for the way they designed and implemented SPCPs. This, in turn, has led to reluctance by the industry to offer them.
The CFPB’s advisory opinion provides a comprehensive set of guidance on implementing an SPCP, often citing to existing interpretations of Regulation B. Specifically, the Bureau seeks to clarify the content that a creditor must include in a written plan that establishes and administers an SPCP. In addition, the Bureau clarifies the type of research and data that may be appropriate to inform a creditor’s determination that an SPCP would benefit a certain class of people.
Although the advisory opinion repeats some principles found in Regulation B and existing interpretations concerning SPCPs, some of the CFPB’s additional guidance is quite useful to creditors. Specifically, the Bureau offers guidance on how a creditor can: (i) determine the class of persons the SPCP is designed to benefit; (ii) request and consider information regarding common characteristics in determining an applicant’s eligibility for an SPCP; and (iii) better understand the type of research and data that can be leveraged to demonstrate the social need for an SPCP.
As a threshold matter, the CFPB explains that, under section 1002.8(a)(3)(i) of Regulation B, a creditor must establish and administer an SPCP pursuant to a written plan, and the plan must contain information supporting 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 the time period during which the program will last or when the program will be evaluated to determine if there is a continuing need for it (or both); and
- A description of the analysis conducted by the creditor to determine the need for the program.
Of particular interest, the CFPB further explains how a creditor can determine a class of persons for an SPCP based on demonstration of a financial need and/or sharing a common characteristic. According to the CFPB, such a class could be defined with or without reference to a characteristic that is otherwise a prohibited basis under the ECOA. The Bureau cites as examples of a class of persons minority residents of low-to-moderate (“LMI”) income census tracts, residents of majority-Black census tracts, small farm owners in rural countries, minority- or woman-owned small business owners, consumers with limited English proficiency, and residents living on tribal lands.
Notably, the Bureau discusses how a creditor can request and consider information regarding common characteristics in determining an applicant’s eligibility for an SPCP. If a creditor has not yet established an SPCP, it can use statistical methods to estimate demographic characteristics, but it cannot request demographic information that it is otherwise prohibited from collecting, even for the purpose of determining whether there is a need for an SPCP. Once an SPCP has been established, a creditor may then request and consider information regarding common characteristics if needed to determine an applicant’s eligibility.
The CFPB also addresses how creditors can best demonstrate need for an SPCP by examining permissible sources of data and research. In designing an SPCP, a creditor must determine that the program will benefit a class of people who would otherwise be denied credit or would receive it on less favorable terms using the creditor’s customary credit standards. The Bureau explains that this determination can be based on an analysis using a “wide range of research or data,” including the creditor’s own research or data from outside sources, including governmental reports and studies (including HMDA data and SBA or the Federal Reserve’s Small Business Credit Surveys as potential sources). The creditor must be able to show a connection between the research or data informing the analysis and the fact that, under the creditor’s customary standards of creditworthiness, a class of persons probably would not receive credit or would receive it on less favorable terms than similarly situated applicants.
In the press release accompanying the advisory opinion, Director Kathleen Kraninger states that the CFPB “is committed to creating real and sustainable changes in our financial system so that all consumers have equal opportunities to build wealth and close the economic divide.” She further states that “[t]his action is an important step toward clarifying [Regulation B] and ensuring that traditionally economically disadvantaged groups and communities have equitable access to credit.” With the issuance of this helpful guidance for the financial services industry, the Bureau may have begun achieving that goal.