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Most banks are ignoring what could be a key tool to give equal credit access to people of color and narrow racial wealth gaps, a new report by the Boston-based nonprofit Partnership for Financial Equity argues.
To address the systemic discrimination and exclusion that has long prevented people of color from accessing credit on equal terms, “special purpose credit programs” (SPCPs) were legalized by Congress under revisions to the Equal Credit Opportunity Act in 1976. They are intended to provide targeted credit and financial services to borrowers of color and promote financial inclusion.
“Despite this initial promise of Reg B, however, the implementation and effectiveness of Special Purpose Credit Programs has been disappointing,” the report stated. “Overall, far too few SPCPs have been set up since 1976 and many have been too limited in scope. A tool that holds so much promise has largely been left in the toolbox undisturbed.”
While only a handful of banks have created their own special credit programs in recent years – such as JPMorgan Chase, KeyBank, M&T Bank and the most recent, Webster Bank – the report recognized Eastern Bank’s Equity Alliance for Business, which was launched in May, and the $2.5 million Lift Up Homeownership program the Federal Home Loan Bank of Boston started in June.
The report noted that special purpose credit programs can be both “people-based” and “place-based,” but it argued that people-based special purpose credit programs can be a more effective and direct way to close the homeownership gap between Black-white or Latino-white borrowers as it is directing a program toward Black and Latino borrowers, compared to place-based programs. Part of this comes down to demographics: The report’s authors cite Urban Institute data showing that Black people are the third-largest racial group, behind whites and Latinos, in formerly redlined areas.
“Black and Latino borrowers consistently face large denial rate gaps. Our recent Mortgage Lending Matters report with the Woodstock Institute underscores this persistent trend. In 2021, white borrowers had a 9.5 percent denial rate in the Commonwealth while Black borrowers were denied a mortgage loan 18.2 percent of the time and Latino borrowers 15.4 percent. In the city of Boston, the gap was even more pronounced with whites having a denial rate of 7.5 percent, Black borrowers at 21.8 percent, and Latino borrowers at 18.3 percent,” the report further noted.
As a people-based program, the report described Eastern’s Equity Alliance for Business as aiming to provide capital access to business owners with 51 percent or greater ownership by women or people of color, and those who identify as LGBTQIA+, veterans or disabled, and who may not qualify for capital access through traditional underwriting standards.
An example of a place-based program, the report stated that the Lift Up Homeownership is a pilot program that provides down-payment and closing cost assistance to people of color in purchasing their first home in any of the six New England states.
“SPCPs, [when] properly funded, can be an integral tool to narrow racial wealth gaps in our region,” Thomas Callahan, executive director of the Partnership for Financial Equity, said in a statement.
