In an extraordinary announcement on March 16, 2022, the US Consumer Financial Protection Bureau (“CFPB” or “Bureau”) unveiled a broad expansion of its supervisory procedures to include examining supervised entities for discriminatory conduct that the agency alleges could constitute unfair practices in violation of the Dodd-Frank Act. Going forward, it appears that every exam for unfair, deceptive or abusive acts or practices (“UDAAP”) is likely to include an assessment of a company’s antidiscrimination programs as applied to all aspects of all consumer financial products or services, regardless of whether that company extends any credit or would otherwise be subject to the Equal Credit Opportunity Act (ECOA). In recent months, the Bureau has been laser focused on issues of fair lending and racial equity in the consumer credit market, including redlining, pricing and algorithmic bias. With this change, the CFPB will be broadening its racial equity focus to cover every aspect of the consumer financial services sector.
The federal Equal Credit Opportunity Act (“ECOA”) prohibits discrimination by lenders. Under ECOA, it is unlawful for a creditor to treat an applicant less favorably than other applicants because of their race, color, religion, national origin, sex (including gender identity and sexual orientation), marital status, age (as long as the applicant is old enough to enter into a contract) or the fact that they receive money from any public assistance program or are exercising their rights under certain consumer protection laws. The CFPB is the primary enforcer of ECOA, and the CFPB examines creditors for compliance with this antidiscrimination provision.
Separately, the CFPB has authority to enforce the Dodd-Frank Act’s general prohibition on UDAAPs in the consumer financial services sector. Institutions subject to CFPB supervisory authority are generally examined for potential UDAAP issues, along with compliance with other applicable federal laws.
While acknowledging that ECOA only applies to extensions of credit, the CFPB’s press release and blog post suggest that discrimination may meet the criteria for “unfairness” by causing harm to consumers that they cannot reasonably avoid. The Bureau put supervised entities on notice that it has updated the UDAAP section of the examination manual to include a review for discriminatory conduct. In the press release, the CFPB stated that it will look for discrimination across the spectrum of activities over which the Bureau has supervisory authority, including activities such as advertising, pricing, servicing, collections, consumer reporting, payments, remittances, deposits and algorithms. The CFPB’s announcement also suggests that the Bureau may be expecting supervised entities to perform testing to identify and correct unfair discrimination outside of the credit context. Specifically, the CFPB stated that it will “require supervised companies to show their processes for assessing risks and discriminatory outcomes” and that the Bureau will be reviewing “how companies test and monitor their decision-making processes for unfair discrimination.”
The CFPB’s revised UDAAP examination procedures describe how the agency believes discrimination may meet the standard for unfairness, which is when an act or practice (i) causes or is likely to cause substantial injury to consumers, (ii) the injury is not reasonably avoidable by consumers and (iii) the injury is not outweighed by countervailing benefits to consumers or to competition. The revised UDAAP examination procedures state that discriminatory conduct may cause substantial injury in the form of foregone monetary benefits, denial of access to products or services, or dignitary harms, and that consumers cannot reasonably avoid discrimination.
The updated UDAAP examination procedures direct examiners to identify potentially discriminatory acts or practices with respect to virtually any consumer financial product or service and include new language regarding potential indicators of disparate treatment and disparate impact in various sections. The Bureau provides the following example:
A discriminatory act or practice is not shielded from the possibility of being unfair, deceptive or abusive even when fair lending laws do not apply to the conduct. For example, not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit accounts, may be an unfair practice even in those instances when ECOA does not apply to this type of transaction.
But the scope of the new discrimination-focused UDAAP examination procedures goes far beyond this simple example.
The updates to the examination procedures also focus on conduct that targets or excludes certain groups, offers different terms or conditions, or provides different levels of customer service and any other practice that results in differential treatment or disproportionate adverse impacts on particular groups. Examiners are directed to request from supervised entities information about how they test and monitor the decision-making process for potential discrimination and documentation regarding the use of models and algorithms used in connection with consumer financial products and services. Notably, the updated UDAAP examination procedures do not reference the specific prohibited bases that examiners will consider during a UDAAP review of potentially discriminatory conduct (nor does the phrase “prohibited basis” even appear in the revised guidance), so it is unclear whether such a review will consider all of the prohibited bases under ECOA, some narrower subset or some other undefined “customer demographic.”
Although this broad expansion of the Bureau’s UDAAP worldview may come as a surprise to many, Director Rohit Chopra’s statements while he was at the Federal Trade Commission (FTC) foreshadowed this development. While he was at the FTC, then-Commissioner Chopra stated that practices that have a disparate impact may also meet the standard for unfairness under the FTC Act (which has the same elements as unfairness under the Dodd-Frank Act). He also took the position that disparate impact analysis is an important tool to detect discrimination and suggested that it may be appropriate to use disparate impact analysis even outside of the credit context.
In light of this broad expansion of the CFPB’s self-proclaimed UDAAP authority, it is important to note that the Bureau’s examination manual does not directly or formally impose any independent legal obligations on supervised entities. It does, however, reflect the Bureau’s supervisory expectations and has wide-ranging real-world impact for companies subject to the CFPB’s supervisory—and even enforcement—authority. Indeed, the Bureau expects companies to rely on the examination manual to understand the nature of the CFPB’s compliance expectations.
The Dodd Frank Act expressly authorizes the CFPB to issue rules that identify specific acts or practices as unfair, deceptive or abusive. Such rules, of course, have to be promulgated through notice-and-comment rulemaking under the Administrative Procedure Act so that impacted parties have a chance to be heard and the agency can consider comments it receives. Given that the Bureau’s revisions to its examination manual—which essentially proclaims the Bureau’s view that discriminatory conduct not otherwise subject to ECOA or any other express legal prohibition is unlawful—have potentially wide-reaching implications, it seems likely that these changes will be challenged as an attempt to circumvent the required notice-and-comment rulemaking process. But for now, supervised entities should review the updated UDAAP exam procedures and consider the potential ramifications for their business.