Alston & Bird Consumer Finance Blog

Fair Housing Act

DEI in Lending: Are Special Purpose Credit Programs About to DIE?

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For the last several years, federal agencies, including the Consumer Financial Protection Bureau (“CFPB”), have been strongly encouraging financial institutions to implement and offer targeted credit assistance to historically underserved communities as one way to remedy the effects of redlining. Not surprisingly, in accordance with the prior Administration’s Combatting Redlining Initiative, every one of the 16 settlements by the CFPB and the U.S. Department of Justice (“DOJ”) against both bank and non-bank lenders have mandated that these lenders offer targeted credit assistance based on the race or ethnicity of the borrowers or the predominant race or ethnicity of their neighborhoods. To satisfy the terms of these settlements, the lenders often work with state and local agencies to help market and administer their targeted loan subsidies to eligible borrowers based on protected characteristics. And still more redlining cases, brought by fair housing organizations that receive funding through the U.S. Department of Housing and Urban Development (“HUD”) Private Enforcement Initiative (“PEI”), have been resolved via partnerships with federal- and state-funded entities to provide preferential treatment to Black and Hispanic borrowers and neighborhoods. However, given the current Administration’s stated goal of abolishing preferential treatment in favor of “colorblind equality,” it seems that preferential treatment in lending – even where beneficial to underserved and historically redlined communities – is on the chopping block.

DEI in the Current Political Climate

Only a couple of weeks into the new Administration, the message is clear: diversity, equity, and inclusion (“DEI”) initiatives are out. On January 22, 2025, President Trump signed an Executive Order terminating DEI initiatives in the federal workforce and in federal contracting and spending. Specifically, the Executive Order directs all departments and agencies to take strong action to end private sector “DEI discrimination,” including civil compliance investigations, and requires the Attorney General and the Secretary of Education to issue joint guidance regarding the measures and practices required to comply with the U.S. Supreme Court’s June 2023 decision in Students for Fair Admissions v. Harvard. As a reminder, the Supreme Court’s decision in Harvard effectively ended race-conscious admission programs at colleges and universities across the country.

Shortly after the President’s Executive Order, on January 31, 2025, Texas governor Greg Abbott issued his own Executive Order directing all Texas state agencies to eliminate any forms of DEI policies and to treat all people equally regardless of race. In particular, the Executive Oder requires all state agencies to comply with a “color-blind guarantee,” including by ensuring that “all agency rules, policies, employment practices, communications, curricula, use of state funds, awarding of government benefits, and all other official actions treat people equally, regardless of race.” Similarly, West Virginia governor Patrick Morrisey issued his own Executive Order prohibiting DEI efforts by any entity receiving state resources, and there are likely more of such state executive actions to come.

Are SPCPs a form of DEI?

The above federal and state executive actions cast significant doubt on the current legality and permissibility of special purpose credit programs (“SPCPs”), which have been recognized for years as an exception to the Equal Credit Opportunity Act (“ECOA”) prohibition on differential treatment in lending. SPCPs, by definition, provide credit assistance to borrowers via some preferential treatment, often on the basis of borrower race or ethnicity or the predominant race or ethnicity of the residents in the neighborhood. While there may be no agreed-upon definition of DEI, it is safe to say that a SPCP that provides credit assistance, or more favorable credit terms, to borrowers based on race or ethnicity is a form of DEI.

To that end, where the requirement for a lender to implement a SPCP is baked into the terms of a settlement with a federal government agency, and such agency conducts ongoing monitoring of the lender’s activities to ensure the SPCP is being properly carried out, one could argue that the government is effectively mandating differential treatment based on race or ethnicity – in violation of the new DEI prohibition. The same could be said where state agencies and non-profit organizations that receive federal and state funds assist lenders in marketing and administering their SPCPs. Even the HUD-funded Fair Housing Initiatives Program, which includes the PEI program, could be problematic from a White House perspective, given that federal and/or state funds are currently being spent on furthering alleged redlining remediation through differential treatment.

It is even possible that SPCPs offered voluntarily and proactively by lenders may be scrutinized, particularly if the lender receives any government funding or grants. Currently, both Fannie Mae and Freddie Mac offer SPCPs where borrowers receive down payment or closing cost assistance grants from both the government-sponsored enterprise (“GSE”) and the lender. It is unclear whether such GSE programs would fall within the scope of the President’s Executive Order.

Other Uses of DEI in Lending

Setting aside SPCPs, which are often imposed on lenders by the government as a way to remediate alleged redlining, federal and state agencies essentially expect lenders to engage in race-based action and differential treatment in an effort to manage fair lending risk. Indeed, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas. These federal agencies also consider a lender’s failure to specifically target neighborhoods based on race or ethnicity to be evidence of potential redlining. In other words, the government’s approach to date has not been “colorblind.” It will be interesting to see whether the agencies’ approach to redlining cases will change as a result of this shift away from DEI.

Takeaways for Lenders

Lenders that offer their own SPCPs or participate in GSE SPCPs should ensure that their written plans continue to meet the requirements of Regulation B, which implements ECOA. As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs.

More importantly, lenders that are worried about their fair lending compliance or are subject to a government inquiry for potential redlining should consult with counsel regarding the best approach for presenting evidence of their minority-area lending. These lenders also should strongly consider whether a government-mandated SPCP is the best way forward. While an SPCP, such as loan subsidies or other pricing or underwriting flexibilities may benefit underserved communities and likely expedite settlement of an enforcement matter, the risk of running afoul of DEI prohibitions is not immaterial.

Appraisal Bias Settlement: Potential Roadmap

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What Happened?

The lender and consumers reached a settlement in an appraisal bias case, Nathan Connolly and Shani Mott v. Shane Lanham, 20/20 Valuations, LLC, and loanDepot.com, LLC, filed in Maryland District Court, that gained the attention of the CFPB and DOJ. While some of the terms in the settlement are already industry standard, there appear to be some newer obligations that could be a template for other lenders to follow.

Why it Matters?

The settlement is important – both for what it does and what it doesn’t do. Unfortunately, the settlement does not address the question of whether a lender is responsible for the actions of an appraiser who is neither an employee nor an agent of the lender.

By way of background, in response to the Great Financial Crisis, the Dodd-Frank Act established new rules to ensure appraisal independence and address issues of inflated appraisals or overvaluation. More recently, however, partially due to changes in the market, consumers have lodged complaints of undervaluation, alleging that discrimination resulted in the appraisal coming in too low.

Given this increase in complaints and the Administration’s focus on racial equity, regulators have been grappling with how best to address and eliminate appraisal bias. Prior to the settlement, the CFPB and DOJ jointly made arguments in a statement of interest that would hold lenders liable for the actions of an appraiser who is neither an employee nor an agent of the lender.

In response, the MBA issued an amicus brief requesting that the Court recognize that there is no existing legal authority to hold a lender liable for the alleged actions of an independent appraiser. The resulting settlement is silent on this point.

The settlement does, however, impose several obligations on the lender and its and appraisal management companies (AMCs), providing insight into what the mortgage industry could do to combat appraisal bias.

In particular, the settlement requires mortgage loan applications be provided with information on how to raise concerns with a valuation sufficiently early in the valuation process so that issues or errors can be resolved before a final decision on the application is made, including:

  • The right to request a reconsideration of value (ROV) as soon as possible;
  • A description of the process to obtain an ROV (which may not create unreasonable barriers or discourage applicants from making ROV requests) and a description of the lender’s evaluation process;
  • If the ROV is denied or the value is unchanged, a written explanation of the lender’s evaluation of the submitted material;
  • The standards that trigger a second appraisal; and
  • The applicant’s right to file a complaint with the CFPB or HUD, as part of the ROV process.

Further, the settlement requires the lender to:

  • Conduct statistical analysis tracking appraisal outcomes by protected class and neighborhood demographics including whether the loan was denied, whether a second appraisal was ordered, and whether there was a change in the valuation as a result of the ROV process. Such analysis must track individual appraisers including appraisal outcomes, ROV requests, and bias complaints.
  • Not utilize appraisers who, according to the statistical analysis, received multiple complaints from minority applicants in minority neighborhoods alleging appraisal bias, or who have a pattern of undervaluing homes owned by minority applicants or homes in minority neighborhoods, or who have been found to have discriminated in an appraisal.
  • Clearly outline internal stakeholder roles and responsibilities for processing an ROV request.
  • Ensure that ROV requests of valuation bias or discrimination complaints across all relevant business channels are escalated to the appropriate channel for research or a response.
  • Adhere to ROV timelines for certain milestones.
  • Review appraiser response to ROV requests for completeness, accuracy, and indicia of bias and discrimination.
  • Establish standards for offering a second appraisal which at a minimum must include when the first appraisal has indicia of bias or discrimination is otherwise defective.
  • Ensure that the applicant’s interest rate will remain locked during the ROV process.
  • Ensure that ensure applicants are not charged for the cost of an ROV or second appraisal.
  • Include on its website educational information on how to understand an appraisal report and contact information for questions on the appraisal report.
  • Update its fair and responsible lending policy to explicitly prohibit discrimination in violation of state and federal fair lending laws on the basis of race, color, religion, sex, familial status, national origin, disability, marital status, or age.
  • Provide training annually and for new employees on discrimination in residential mortgage lending and appraisals, and on all policies related to the ROV process, appraisal reviews, and the use of value adjustments.
  • Not utilize appraisers who previously were found by a regulatory body or court of law to have discriminated in an appraisal.

Finally, the settlement requires that AMCs and appraisers doing business with the lender contractually agree to:

  • Represent that appraisers will receive fair lending training; and
  • Certify that appraisers have not been subject to any adverse finding related to appraisal bias or discrimination, or list or describe any findings.

What to do now?

Lenders should carefully review the settlement and compare it to existing policies and procedures. While the settlement is only binding on the parties to the agreement, others should take interest. Historically, lenders conduct fair lending statistical testing for underwriting, pricing, and redlining risk. It might be time to consider adding appraisal risk.

Appraisal Bias Focus Continues in 2024

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What Happened?

Building on the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”) and a series of federal agency actions in the intervening months, 2024 brings new efforts at the state and federal levels to address appraisal bias and promote fair valuations.  Notably, a new version of the Uniform Standards of Professional Appraisal Practice (“USPAP”) is in effect, prohibiting discrimination.

Why Is It Important?

USPAP:

As of January 1, the amended USPAP (the operational standards that govern real property appraisal practice) includes updates to the Ethics Rule that expressly prohibit appraisers from engaging in both unethical discrimination and illegal discrimination.  An appraiser cannot engage in illegal discrimination, which includes acting in a manner that violates or contributes to a violation of applicable anti-discrimination laws or regulations, including, but not limited to, the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and the Civil Rights Act of 1866.

The prohibition also encompasses unethical discrimination – developing an opinion of value based or with bias with respect on an actual or perceived protected characteristic of any person, “upon the premise that homogeneity of the inhabitants of a geographic area is relevant for the appraisal,” or using a characteristic to attempt to conceal a bias in the performance of an appraisal assignment.

OCC Hearing on Appraisal Bias:

On February 13, the Office of the Comptroller of the Currency (“OCC”) held the fourth of the Appraisal Subcommittee’s public hearing on appraisal bias.  Representatives of the Federal Financial Institutions Examination Council (“FFIEC”) regulatory agencies (the Federal Reserve Board, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, National Credit Union Administration, and OCC), the U.S. Department of Housing and Urban Development, and the Federal Housing Financial Agency took questions from individuals speaking on behalf of the Appraisal Foundation, the Mississippi and Texas state appraiser regulatory boards, and the appraisal profession.

The discussion focused on efforts to combat appraisal bias, including through diversification of the appraisal profession.

FFIEC Statement on Valuation Bias:

On February 14, the FFIEC on behalf of its member entities outlined consumer compliance and safety and soundness examination principles to “promote credible appraisals” and mitigate risk from valuation practices due to potential discrimination. Through this guidance, the FFIEC encourages institutions to establish a formal valuation program “to identify noncompliance with appraisal regulations, USPAP, inaccuracies, or poorly supported valuations.”

The guidance identifies: (a) ECOA, the FHA, the Truth in Lending Act, and the Federal Trade Commission Act as the applicable consumer protection laws; and (b) Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and USPAP as safety and soundness requirements.

Under the guidance, the consumer compliance examination principles focus primarily on compliance with consumer protection requirements and prohibitions on discrimination relating to valuation practices.  The FFIEC designed these principles to ensure that an institution’s board and management oversight, third party risk management and compliance management program (including policies and procedures, training, monitoring and/or audit, and consumer complaint handling) are commensurate with the size of the institution and appropriate to identify potentially discriminatory valuation practices or results.

Similarly, the FFIEC’s safety and soundness examination principles focus on financial condition and operations relating to the review and assessment of an “institution’s practices for identifying, monitoring and controlling the risk of valuation discrimination or bias.” Such assessments are similar to the consumer compliance examination principles, but also include an evaluation of the collateral valuation program and valuation review function, credit risk review function, and consideration of materiality in relation to the institution’s overall lending activities.

New Jersey Anti-Discrimination Initiative: 

Following other states (such as Texas) that have stepped up anti-discrimination efforts, the New Jersey Office of the Attorney General and Division on Civil Rights provided guidance on their enforcement of the state’s Law Against Discrimination (“LAD”) in home appraisals.

The guidance clarifies that LAD applies not only to appraisers, but also to “’any person’ who is involved in the ‘furnishing of facilities or services’ or ‘involved in the making or purchasing of any loan or extension of credit,” and thus encompasses bank and non-bank mortgage lenders, appraisal management companies (“AMCs”), insurance companies, and others.

The guidance also expressly prohibits subject individuals and entities from: (a) engaging in disparate treatment of individuals (e.g., borrowers) based on protected characteristics; (b) maintaining policies or practices that have unlawful disparate impacts; or (c) submitting or relying on an appraisal that is known (or should be known) to be discriminatory.

What Do I Need to Do?

While the above actions will impact lenders, appraisers, and AMCs differently, overall they indicate regulators’ continued (and increased) attention to fair valuations matters.  Lenders and AMCs should ensure that their in-house appraisal processes prohibit engagement in discriminatory valuations, their compliance management programs are well documented and working appropriately, and that they have escalation processes in place to address any alleged issues that may arise.  (We routinely provide compliance management system readiness reviews.)  Appraisers need to keep abreast not only of the new USPAP requirements, but also of changes to state continuing education requirements that implicate fair valuations.

New Florida Law Restricts Foreign Nationals’ Land Ownership

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What Happened?

In a development that is becoming a trend in state legislatures, effective July 1, 2023, the Florida Senate passed a bill that restricts certain foreign nationals from acquiring property in the state.

Why Is It Important?

Florida Senate Bill 264 (“SB 264”), codified at Florida Statutes 692.201-204, restricts the conveyance of real property in Florida to individuals and entities associated with certain foreign countries.  Notably, subject to limited exceptions, it prohibits the sale of any real property to Chinese nationals.

SB 264, which became effective on July 1, 2023, contains three primary components prohibiting the conveyance of real property in Florida.  First, subject to limited exceptions, SB 264 prohibits individuals and entities designated as “foreign principals,” from “foreign countries of concern,” from acquiring agricultural land in Florida.  The impacted countries are the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, and the Syrian Arab Republic.

Second, SB 264 prohibits foreign principals from owning or acquiring any interest in real property within 10 miles of any military installation or critical infrastructure in the state.  Third, subject to limited exceptions, SB 264 prohibits Chinese entities and nationals who are not citizens or lawful permanent residents of the U.S. from purchasing or acquiring any interest in real property in the state.

Notable Exceptions

SB 264 contains notable exceptions. First, foreign principals and Chinese nationals may continue to own real property acquired before the July 1, 2023 effective date; however, they had until January 1, 2024 to register the property ownership by with the designated Florida regulatory authority.  Second, a foreign principal or Chinese national may purchase up to one residential real property not exceeding two acres, as long as the parcel is not within five miles of any military installation.

SB 264 also creates exceptions for ownership through a publicly traded company that is either: (a) less than 5% interest, or (b) is a non-controlling interest in an entity controlled by a non-foreign entity registered with the SEC as an investment adviser.  Further, the legislation permits a “foreign principal” to acquire interest by devise or descent, enforcement of security interests, or collection of debt on or after July 1, 2023; however, the party must sell the property within three years of acquisition.

 Penalties

SB 264 requires the buyer of real property to sign an affidavit under penalty of perjury to his/her compliance with the law.  While a failure to obtain or maintain the affidavit does not affect the title or insurability of the title for the real property, SB 264 provides that “if any real property is owned or acquired in violation of this section, the real property may be forfeited to the state.“ Further, a foreign principal that fails to timely file a registration is subject to a civil penalty of $1,000 for each day that the registration is late.

Clarifying Regulations

SB 264 is self-implementing, but the legislation requires certain Florida regulatory agencies to adopt rules to implement certain sections of the legislation. On September 20, 2023, the Florida Department of Commerce released its initial set of proposed rules for implementing SB 264.   Shortly thereafter, the Florida Real Estate Commission followed suit with proposed rules containing the form buyer’s affidavits. Further, the Florida Department of Agriculture and Consumer Services is drafting rules related to the interests of foreign ownership of agricultural land in Florida.

What Do You Need to Know?

In May 2023, litigation challenging the constitutionality of the legislation was brought in the U.S. District Court for the Northern District of Florida.  The plaintiffs contend that SB 264 violates the Fourteenth Amendment’s Equal Protection and Due Process Clauses, the Supremacy Clause, and the Fair Housing Act.  It is unclear whether this and other possible litigation challenging the enforceability of the law will be meritorious.

In addition to Florida, nearly 20 other states (including Missouri ,Pennsylvania, Tennessee, Virginia, and Wisconsin) have adopted or are considering foreign ownership restrictions which are similar but generally less onerous.

Affirmative Action in Lending: The Implications of the Harvard Decision on Financial Institutions

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Early this summer, the U.S. Supreme Court’s ruling in Students for Fair Admissions v. President and Fellow of Harvard College effectively ended race-conscious admission programs at colleges and universities across the country. Specifically, the Supreme Court held that decisions made “on the basis of race” do nothing more than further “stereotypes that treat individuals as the product of their race, evaluating their thoughts and efforts—their very worth as citizens—according to a criterion barred to the Government by history and the Constitution.”

In particular, the Supreme Court reasoned that “when a university admits students ‘on the basis of race, it engages in the offensive and demeaning assumption that [students] of a particular race, because of their race, think alike.’” Such stereotyping purportedly only causes “continued hurt and injury,” contrary as it is to the “core purpose” of the Equal Protection Clause. Ultimately, the Supreme Court reminded us that “ameliorating societal discrimination does not constitute a compelling interest that justifies race-based state action.”

In the context of lending, federal regulatory agencies expect and encourage financial institutions to explicitly consider race in their lending activities. While the Community Reinvestment Act has required banks to affirmatively consider the needs of low-to-moderate-income neighborhoods, regulatory enforcement actions over the last few years have required both bank and nonbank mortgage lenders to explicitly consider an applicant’s protected characteristics such as race and ethnicity—conduct plainly prohibited by fair lending laws.

Could the impact of the Supreme Court holding extend beyond education to lending and housing? Will the Harvard decision serve to undercut federal regulators’ legal theories for demonstrating redlining and present a challenge for special purpose credit programs that explicitly consider race or other protected characteristics?

Fair Lending Laws Prohibit Consideration of Race

The Equal Credit Opportunity Act (ECOA) prohibits a creditor from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). Similarly, the Fair Housing Act prohibits discrimination against any person in making available a residential real-estate-related transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.

In March 2022, the Consumer Financial Protection Bureau (CFPB) went as far as to update its Examination Manual to provide that unfair, deceptive, or abusive acts and practices (UDAAPs) “include discrimination” and signaled that the CFPB will examine whether companies are adequately “testing for” discrimination in their advertising, pricing, and other activities. When challenged by various trade organizations, the U.S. District Court for the Eastern District of Texas ruled that the CFPB’s update exceeded the agency’s authority under the Dodd–Frank Act. This decision is limited, however, and enjoins the CFPB from pursuing its theory against those financial institutions that are members of the trade association plaintiffs. It is also unclear if the verdict will be appealed by the CFPB.

Despite federal prohibitions, regulators such as the CFPB and the U.S. Department of Justice (DOJ) expect, and at times even require, lenders to affirmatively target their marketing and lending efforts to certain borrowers and communities based on race and/or ethnicity.

Race-Based Decisions Are Encouraged and Even Required by Regulators

CFPB examiners often ask lenders to describe their affirmative, specialized efforts to target their lending to minority communities. If there have been no such explicit efforts by the institution, the CFPB penalizes these lenders for not explicitly considering race in their marketing and lending decisions. For example, in the CFPB’s redlining complaint against Townstone Financial, the CFPB alleged that “Townstone made no effort to market directly to African-Americans during the relevant period,” and that “Townstone has not specifically targeted any marketing toward African-Americans.”

What’s more, if enforcement culminates in a consent order, the CFPB and DOJ effectively impose race- based action by requiring lenders to fund loan subsidies or discounts that will be offered exclusively to consumers based on the predominant race or ethnicity of their neighborhood. In the CFPB/DOJ settlement with nonbank Trident Mortgage, the lender was required to set aside over $18 million toward offering residents of majority-minority neighborhoods “home mortgage loans on a more affordable basis than otherwise available.”

And in the more recent DOJ settlement with Washington Trust, the consent order required the lender to subsidize only those mortgage loans made to “qualified applicants,” defined in the settlement as consumers who either reside, or apply for a mortgage for a residential property located, in a majority-Black and Hispanic census tract. Such subsidies are a common feature of recent redlining settlements, which have been occurring with increased frequency since the DOJ announced its Combating Redlining Initiative in October 2021.

Not only do the CFPB and DOJ encourage, and in certain cases, even require, race-based lending in potential contravention of fair lending laws, but federal regulators also expect some degree of race-based hiring by lenders. This expectation is based on the stereotypical assumption that lenders need racial and ethnic minorities in their consumer-facing workforce to attract racial and ethnic minority loan applicants. In the Townstone complaint, for example, the CFPB chastised the lender for failing to “employ an African-American loan officer during the relevant period, even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group.”

Ultimately, all the recent redlining consent orders announced by the CFPB and DOJ impose at least some race-based requirement, which would seem to run afoul of fair lending laws and Supreme Court precedent.

Racial Quota-Based Metrics Used by Regulators

Further, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas, specifically majority-minority census tracts (MMCTs). Then the regulators compare such rates or percentages of the lender’s loan applications or originations in MMCTs to those of other lenders. For example, in its complaint against Lakeland Bank, the DOJ focused on the alleged “disparity between the rate of applications generated by Lakeland and the rate generated by its peer lenders from majority-Black and Hispanic areas.” The agency criticized the bank’s “shortfalls in applications from individuals identifying as Black or Hispanic compared to the local demographics and aggregate HMDA averages.”

Undoubtedly, this approach utilizes nothing more than a quota-based metric, which the Supreme Court in Harvard squarely rejected. Indeed, the Supreme Court reasoned that race-based programs amount to little more than determining how “the breakdown of the [incoming] class compares to the prior year in terms of racial identities,” or comparing the racial makeup of the incoming class to the general population, to see whether some proportional goal or benchmark has been reached.

While the goal of meaningful representation and diversity is commendable, the Supreme Court emphasized that “outright racial balancing and quota systems remain patently unconstitutional.” And such a focus on racial quotas means that lenders could attempt to minimize or even eliminate their fair lending risk simply by decreasing their lending in majority-non-Hispanic-White neighborhoods—without ever increasing their loan applications or originations in majority-minority neighborhoods. Of course, this frustrates the essential purpose of ECOA and other fair lending laws.

Potential Constitutional Scrutiny of Race-Based Lending Efforts

If race-based state action, including the use of racial quotas, violates the Equal Protection Clause, it is possible that the race-based lending measures recently encouraged and even required by federal regulators may be constitutionally problematic. In addition to racially targeted loan subsidies and racially motivated loan officer hiring, regulators continue to encourage lenders to implement special purpose credit programs (SPCPs) to meet the credit needs of specific racial or ethnic groups. As the CFPB noted in its advisory opinion, “[b]y permitting the consideration of a prohibited basis such as race, national origin, or sex in connection with a special purpose credit program, Congress protected a broad array of programs ‘specifically designed to prefer members of economically disadvantaged classes’ and ‘to increase access to the credit market by persons previously foreclosed from it.’”

While SPCPs are explicitly permitted by the language of ECOA and its implementing regulation, Regulation B, as an exception to the statute’s mandate against considering a credit applicant’s protected characteristics, it is uncertain whether these provisions, if challenged, would survive constitutional scrutiny by the current Supreme Court.

Takeaways for Lenders

For the time being, lenders that offer SPCPs based on a protected characteristic should ensure that their written plans continue to meet the requirements of Section 1002.8(a)(3). As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs. And if faced with a fair lending investigation or potential enforcement action, lenders should consider presenting to regulators any alternate data findings or conclusions that demonstrate the institution’s record of lending in MMCTs rather than focusing on the rates or percentages of other lenders in the geographic area.