Two years after regulators encouraged lenders to begin making loans under a federal provision aimed at increasing credit to disadvantaged groups, banks and others are taking the lending initiatives nationwide.
Banks and other lenders revived special-purpose credit programs as a way to expand credit to historically underserved groups since protests stemming from the death of George Floyd in 2020 prompted them to reexamine their services for minority customers. The goal is to make loans to people and businesses who otherwise may not have qualified for credit. Each of the country's four largest banks have said this year that they would develop or expand their version of the program.
JPMorgan Chase last month
Wells Fargo, which makes more mortgages than any other U.S. bank, in April said it would develop a program to assist minority borrowers refinance their mortgages. And Citigroup plans to enhance its efforts to provide borrowers in low- and moderate-income communities with low down payments.
Financial institutions had for years stayed away from the programs, which are outlined in the federal Equal Credit Opportunity Act of 1974. Lenders feared charges of discrimination for favoring one race or income group over the other.
But in recent years, regulators have assured banks that programs developed with federal anti-discrimination laws in mind wouldn't raise concerns. Last December, the Department of Housing and Urban Development said that special-purpose credit programs generally do not violate the Fair Housing Act. This February, regulators issued a joint statement confirming that the proper use of special-purpose credit programs doesn't break the law.
"Lenders have decided that the societal benefits outweigh the concerns over the risks, so they've pushed forward," said Richard J. Andreano, Jr., leader of the mortgage banking group at the law firm Ballard Spahr.
The two types of lenders most interested in implementing special-purpose credit programs in recent years have been large banks and specialty lenders such as community development financial institutions, Andreano said.
Lenders will likely judge the success of their programs by looking at the share of loans that were made to targeted groups as well as the share of applications received from designated areas.
Banks that successfully increase lending to minority groups could benefit when it comes time for regulators to review their compliance with the Community Reinvestment Act.
"CRA assessments typically do look at the extent to which a bank is serving its assessment areas, particularly the low- to moderate-income individuals in those areas," Andreano said. "Certainly, a successful special-purpose credit program is going to be helpful in terms of a bank's CRA rating."
When many of the programs currently being expanded were being developed, interest rates on loans from mortgages to business loans were near record lows.
The Federal Reserve's strategy of consistent rate hikes for much of this year has boosted rates on all manner of loans, especially mortgages. The average rate on a 30-year fixed-rate mortgage stood at 6.27% last week, according to Freddie Mac. That is well above the 3.05% recorded a year ago.
"We still have seen a really good response even with rising interest rates," said Michelle Swindell, senior business development manager at Bank of America, who helps measure the effectiveness of the bank's programs designed to increase lending to low- to moderate-income customers.
Bank of America this year also launched a special-purpose program that allows certain first-time homebuyers to qualify for a mortgage without a minimum credit score and pays for closing costs.
"It's still a good time to have this product in market," Swindell said.
