Bank of America is causing a bit of a stir with the launch of a new program that provides loans to "lower-income," first-time homebuyers in select cities and, in particular, black and Latino neighborhoods within those markets.
The company launched its Community Affordable Loan Solution program earlier this week. It will offer mortgages that require neither down payments, closing costs, nor minimum credit scores. The lender, per Bloomberg, would also provide down payment grants of up to $15,000. These loans will go to homebuyers in the Dallas; Los Angeles; Charlotte, North Carolina; Detroit; and Miami metro areas.
The announcement has sparked a backlash from mostly right-wing Twitter users and news sources that have declared the new program "explicitly racist," likely illegal, and a certainly unwise expansion of credit to unqualified borrowers.
First, this seems kind of illegal.
But theoretically, will Pantone swatches be involved? "Must be this dark to apply."
How many quanta of blood are we talking? 'One drop'? Quadroon? Octoroon?
— Kmele ???? (@kmele) September 1, 2022
Seems illegal. https://t.co/oAY9anOgPD
— Cernovich (@Cernovich) September 1, 2022
What about middle class white families? https://t.co/KMbrcEB3jo
— Brigitte Gabriel (@ACTBrigitte) September 1, 2022
Former adviser to Donald Trump Stephen Miller even dangled the possibility that his public interest law firm, America First Legal, might sue over the new program.
To seek legal aid reach out to us at Equality@AFLegal.org https://t.co/Adt25PSBqo
— Stephen Miller (@StephenM) September 1, 2022
Fueling this backlash is an unhelpful, since-modified headline from NBC News declaring that the Bank of America program would provide loans to black and Hispanic homeowners—the easy implication being that you have to be black or Hispanic to qualify for a loan.
That's not the case. A Bank of America spokesperson told Reason that an applicant need not be black or Hispanic to get one of these loans or down payment grants. A Bank of America executive also told Bloomberg that applicants wouldn't have to disclose their race and that U.S. Census Bureau data would be used to determine the black and Hispanic neighborhoods that would receive loans.
That would seem to absolve it of the charge that it's "explicitly" racist. Its targeting of neighborhoods by their racial makeup is also, perhaps surprisingly, likely on firm legal footing.
While the federal Fair Housing Act generally bans housing discrimination on the basis of race, sex, national origin, age, and disability, other federal laws and regulations do allow for financial institutions to operate race-based loan programs under certain conditions.
These are known as Special Purpose Credit Programs (SPCP) first created by the Equal Credit Opportunity Act. That law, and subsequent regulations implementing it, allows banks to set up credit programs that require eligible beneficiaries to have "one or more common characteristics (for example, race, national origin, or sex)" provided the program is being used to expand credit to previously excluded groups.
Bank of America's new loan program is a Special Purpose Credit Program.
The concern that the extension of easy credit to homebuyers will saddle people with unaffordable loans is reasonable. No down payment loans generally perform worse. Borrowers lack equity in their homes and, therefore, have more incentive to walk away from them when prices slump. Bank of America's down payment grants are supposed to mitigate that risk.
The legal and credit risk issues aside, a major problem with the program as designed seems to be that it would be a gentrification-acceleration machine that cuts against the stated goal of getting low-income people in neighborhoods long discriminated against by the financial system into homeownership.
For starters, anyone with an income of 150 percent of an area's median income would qualify for Bank of America's program.
Typically, housing affordability programs require "low-income" people to have incomes of 80 percent of the area median income or less. But Bank of America's Community Affordable Loan Solution program will go to people earning almost double that. In a place like Los Angeles—the most expensive city Bank of America is trying out its program in—a single-person household earning a little less than $100,000 per year could participate.
The odds are that Bank of America's loans will generally go toward people at the higher bound of its income limit, as they're the ones who can afford a larger loan and will be more likely to qualify for credit. (Bank of America says it will vet applicants, not by credit score but by some nontraditional credit rating features like their history of timely rent, utility bill, phone, and auto insurance payments.)
We have evidence of the gentrification accelerating effects of other banks' loan programs that are targeted at lower-income areas.
The federal Community Reinvestment Act (CRA) gives banks credits for making loans in low-income neighborhoods. Those credits are then considered by bank regulators when evaluating banks' applications to open new branches or merge with other banks.
Research from the Cato Institute's Diego Zuluaga has shown that that setup incentivizes banks to loan to the most qualified buyers in those neighborhoods—who are typically higher-income people moving into low-income neighborhoods. It's an effective subsidy for gentrification.
Banks have promised to expand Special Purpose Credit Programs when seeking regulatory approval for mergers in the past. Bank of America's new program also follows the federal government's explicit urging of banks to create Special Purpose Credit Programs. The various federal credit regulating entities issued joint regulatory guidance in February this year encouraging the use of SPCPs to meet the needs of "underserved communities."
So, while Bank of America's new loan program falls short of being "explicitly racist" or illegal, it is downwind of federal regulatory incentives that have worked to subsidize gentrification. We can expect similar results here.