MEETING THE CREDIT NEEDS OF THE COMMUNITY THROUGH SPECIAL PURPOSE CREDIT PROGRAMS Meeting the credit needs of the communities a bank serves is an ever-evolving challenge. Even financial institutions with strong fair lending compliance management programs can have lending disparities in minority communities when compared to non-minority communities. For decades, discrimination in mortgage lending has led to unequal access to credit for minorities. As financial institutions look for innovative ways to meet the credit needs of minority communities, focusing on recent interagency statements and enforcement actions could prove beneficial in addressing current lending disparities. In 2021, the Department of Justice (DOJ) launched a Combatting Redlining Initiative aimed at addressing modern-day redlining by aggressively enforcing fair lending laws.1 In the majority of redlining consent orders brought forward by the DOJ, financial institutions have been required to conduct a credit needs assessment to inform management of specific credit needs in Black and Hispanic communities. In concert with the Combatting Redlining Initiative, federal regulators recently issued an interagency statement2 encouraging financial institutions to explore opportunities to develop Special Purpose Credit Programs (SPCPs) to meet the credit needs of the communities they serve. Both actions — the requirement of a credit needs assessment and the encouragement of SPCPs — can be construed as what federal regulators perceive are the best solutions to address the reverberating effects of historical discrimination in minority communities. SPCPs are programs established and administered 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 other applicants.3 Through careful planning, institutions can proactively evaluate the need for SPCPs in their market areas and implement programs to meet the community credit needs. To establish an SPCP, Regulation B requires financial institutions to produce a written plan that outlines the implementation of the program. The written plan requires financial institutions to identify the demographic characteristics of the population the SPCP intends to serve, as well as conduct needs assessments to understand the barriers keeping underserved groups from accessing credit. Using publicly available market data as well as internal mortgage lending data, financial institutions can identify the demographic groups that would benefit the most from an SPCP, the barriers to credit access for these demographics, and the best way to market the SPCP to the community. The challenges financial institutions face when developing an SPCP program are many. Understanding the groundwork and the intricacies is paramount. Below are key steps to ensure an SPCP meets the credit needs of the community. Setting Up a Special Purpose Credit Program 1. Identify the Need Conduct thorough market research to identify the special needs within the community. Through internal research or the use of a third party to conduct a research-based market study, financial institutions can better understand the demographic and socio-economic conditions of the market area, what barriers residents face in accessing credit, other lending products in the market and what government programs are available, and then develop strategies to provide residential mortgage services to the community. 2. Engage Legal Counsel Involving legal experts early in the process is important to ensure full compliance with applicable laws and BY KEENAN NEAL, Manager, CrossCheck Compliance, LLC Utah Banker 16
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