Special purpose credit programs (SPCPs) offer banks a tool to help households that have faced discrimination in consumer credit markets access homeownership. Lender participation in mortgage SPCPs has recently increased, spurred in part by guidance released from the Consumer Protection Financial Bureau that calls for lenders to create a “written plan” demonstrating the need for such a program and identifying who the program seeks to benefit through a “broad analysis” rooted in evidence and data.
To assist lenders building their case for an SPCP, the Urban Institute recently released a toolkit presenting data from various public sources. In addition to helping lenders meet regulatory requirements for SPCPs, our tool can inform the design of more focused and effective programs. To illustrate the tool’s potential, we explore how lenders could justify the implementation of an SPCP to serve Black households, who have one of the lowest homeownership rates of any racial or ethnic group in the US.
1. Demonstrating the need for an SPCP
The Black-white homeownership rate gap is wider now than it was before the passage of the Fair Housing Act, and this gap remains even after controlling for key indicators like income and education. Racist policies that denied homeownership opportunities to households of color initially created this gap, but predatory lending in the 21st century hampered progress toward closing the gap, as households of color were more likely to lose their homes during the Great Recession.
As a result, Black households continue to experience disparities across the three Cs of mortgage underwriting: collateral, capacity, and credit. Urban’s data toolkit shows, for example, that Black households and households of color overall have lower net worths than white households. A lender establishing a down payment assistance SPCP for Black borrowers could highlight this disparity to document need in their written plan.
The toolkit provides more than 20 data points broken out by race/ethnicity groups, nationally and for the largest 50 metro areas, that lenders can use to make a compelling empirical case for special purpose mortgage credit. Resources also include a sample written plan that includes these data points.
2. Identifying who an SPCP would benefit
In addition to documenting need, successful SPCPs establish clear eligibility criteria. The most direct way to link a program with the group it aims to support is to use people-based criteria, such as borrower race or other individual characteristics.
But some lenders are using criteria dependent on where a household lives, or a “place-based” approach, which offers an alternative SPCP design. When pursuing place-based approaches, lenders must be intentional that the characteristics they select link back to the group they intend to serve—a goal that is further complicated by the idiosyncrasy of regional US housing markets.
A frequently discussed place-based criteria for race-focused SPCPs is areas that were formerly redlined, a process that denied access to federal loans to predominately communities of color. Let’s assume, for example, that a lender designates formerly redlined neighborhoods as their SPCP basis criteria and uses the toolkit’s interactive Excel document to quantify how those criteria would affect the program’s reach.
One measure the tool provides is the share of Black renting households in the metro area that would be eligible to apply for a loan under given program criteria. Put another way, the measure shows the program’s potential coverage. Using our “formerly redlined area” criterion for five large metropolitan areas, we see large variation in place-based policy efficacy. In the greater Boston metro area, 68 percent of Black renting households would be eligible to apply, compared with just 8 percent of households in the greater Atlanta metro.
The tool can also show how many households that are eligible to apply come from outside the intended population. That is, the measure shows how effectively focused the program would be. In Boston, the “formerly redlined” criteria would cover a lot of Black renting households, but it would also cover a lot of white renting households, such that only 16 percent of eligible households are Black. In Atlanta, however, nearly half of eligible households are Black.
If we compare both measures, we can see significant variation in the efficacy of this criterion by market. In Memphis, the criterion would be focused (nearly 75 percent of the renters living in the qualifying areas are Black), but it would cover only a small share (less than 20 percent) of all Black renters in the metro area. This criterion might make for a useful pilot strategy or be an effective alternative in areas where resources are limited. Conversely, in Cleveland, the definition would cover a greater share of Black renters (64 percent), but a smaller share of the eligible households are Black (52 percent).
For most metro areas, using the formerly redlined criterion is not as effective on either dimension as other criteria could be. This example illustrates how evaluating criteria for an intended market can help ensure SPCPs are reaching the borrowers they intend to serve.
More data can better target SPCP assistance
SPCPs are a crucial instrument in leveling the playing field for households that have historically been excluded from fair access to credit. Urban’s toolkit can streamline the process for lenders entering the SPCP arena by facilitating compliance with regulatory standards for defining need and for shaping program criteria. Grounding SPCPs in data ensures lenders are thoughtful about meeting borrowers’ needs and building more effective programs.
Tune in and subscribe today.
The Urban Institute podcast, Evidence in Action, inspires changemakers to lead with evidence and act with equity. Cohosted by Urban President Sarah Rosen Wartell and Executive Vice President Kimberlyn Leary, every episode features in-depth discussions with experts and leaders on topics ranging from how to advance equity, to designing innovative solutions that achieve community impact, to what it means to practice evidence-based leadership.