On March 16, 2022, the Consumer Financial Protection Bureau (CFPB) announced that it would use its enforcement authority under the Consumer Financial Protection Act to prohibit unfair, deceptive and abusive acts and practices (UDAAP) that are discriminatory in areas of banking other than lending. In its press release, the CFPB said that it would examine “advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.” In particular, the CFPB will determine whether acts and practices unfairly discriminate and leverage its enforcement and supervisory authority accordingly.
The CFPB’s announcement is both a significant expansion of its enforcement agenda, and it states the obvious: discrimination occurs in other areas of the financial marketplace and should be addressed. The announcement makes it clear that in areas like marketing, collections, payments and deposits, financial services providers will need to take note and if they have not already been doing so, take steps to demonstrate they do not tolerate discrimination.
The CFPB’s oversight of discriminatory behavior has traditionally been limited to the financial products that federal fair lending laws cover – credit. While access to credit is vital to ensuring that Americans can build wealth, there are other financial products and services that, when impacted by discrimination, can also cause significant financial harm. Federal fair lending laws – the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) – protect consumers from lending discrimination. However, these laws only cover credit and housing-related transactions. The CFPB only has the authority to enforce one of these laws, ECOA.
By contrast, the CFPB’s authority under UDAAP covers a much broader spectrum of financial services and products. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) codified UDAAP, and authorized CFPB to enforce it. In order for an act or practice to be unfair under UDAAP, the CFPB must find that it is (1) likely to cause substantial injury to consumers; (2) is not reasonably avoidable; and (3) not outweighed by countervailing benefits to consumers or competition.
In an influential article published a year ago, attorneys from the civil rights law firm Relman Colfax LLC, Stephen Hayes and Kali Schellenberg, highlighted that discrimination is unfair because (1) viable discrimination claims nearly always involve substantial injury to consumers, (2) discriminatory harms are generally unavoidable by consumers, and where there is steering, a consumer may not even know of the discrimination, and (3) intentional discrimination cannot be justified by countervailing benefits to competition or consumers.
The CFPB’s announcement makes it clear that it agrees with this interpretation. Financial services companies that have either intentionally discriminated, or turned a blind eye to discrimination outside their credit channels will no longer be able to do so. The risk of a technical violation of a regulation may not have been enough to deter bad practices. The added risk of a UDAAP violation will require a much more thorough review by a company’s legal and compliance teams. For example, in the CFPB’s December 2021 Supervisory Highlights Issue, it focused on two violations of Regulation E it found while conducting bank examinations: (1) misdirected payments and (2) remittance transfers. Regulation E focuses on electronic fund and international money transfers including but not limited to debit cards, overdrafts and direct deposit. Under the new interpretation, the CFPB will also examine if these actions are happening more often to members of communities of color and vulnerable populations. Thereby it will potentially bring forth a UDAAP discrimination charge alongside a finding of a violation of the regulation.
Some in the financial services community have responded to the CFPB’s announcement with complaints that this interpretation of ‘unfair’ is an overreach as the CFPB’s authority related to discriminatory acts and practices should only be confined to the scope of ECOA. They also assert that the CFPB oversteps in its interpretation of UDAAP by including areas such as targeted marketing, arguing that because ECOA only covers applicants for credit, the fair lending law does not include marketing, which occurs before a consumer applies for credit. These arguments are not well founded as discriminatory acts and practices by their very nature fall within the confines of the unfairness doctrine. Further, marketing is explicitly addressed by the language of ECOA’s implementing Regulation B, the CFPB’s examination manuals, and guidance not just by the CFPB but also other regulators.
Regulation B explicitly covers discriminatory marketing under its prohibitions against discouragement and even allows for affirmative marketing to address discrimination. Examination manuals on fair lending from the beginning of the CFPB’s existence include questions related to marketing as a potential form of discouragement prohibited under Regulation B. In addition, Federal Reserve Bank (FRB) staff provided guidance more than two years ago on how targeted marketing is covered by ECOA and could be discriminatory under ECOA. Given this explicit guidance from both the CFPB and the FRB, the inclusion of targeted marketing to ensure it is not unfair for other banking products is not an overreach. Finally, the CFPB’s advisory opinion on Special Purpose Credit Programs in December 2020 described some forms of targeted marketing that are excepted from Regulation B’s prohibitions against discouragement. If some forms of targeted marketing are excepted, there is the clear implication that other more pernicious forms of targeted marketing are not.
The CFPB included with its announcement a link to its updated exam manual on Unfair, Deceptive or Abusive Acts or Practices. The manual highlights that discrimination exists in other financial products and services and that bank examiners will focus on rooting out discrimination and ensuring compliance with all banking regulations. The examination manual states that a company’s compliance with a specific state or federal regulation does not necessarily insulate it from a UDAAP violation. Thus, a UDAAP violation based on discrimination may be found, for example, in bank account access even though the financial company is compliant with all other regulations regarding bank accounts. Financial institutions will need to show that they have “established policies and procedures to mitigate potential UDAAP concerns arising from the use of its decision-making processes, including discrimination.” The examination manual also states that there needs to be “appropriate training for customer service personnel to prevent discrimination.” Fair lending training at financial services companies that focuses solely on only ECOA and FHA will not be enough after the CFPB’s announcement. It must also cover discrimination outside of the credit and housing channels.
The announcement also exposes an uncomfortable tension within the financial services community. Banks, fintechs and other financial service companies understand that by law they cannot discriminate in the provision of credit or housing, but many have not extended the same level of oversight in other financial services – such as deposit accounts, remittances and debt collection by third parties, just to mention a few. Responsible business leaders understand they should not allow discrimination in any form. The announcement makes explicit what should have already been understood: financial services companies will need to raise the bar on their Compliance Management Systems (CMS) to cover a wider variety of products and services to ensure that they are not engaging in behaviors that could be found to disparately treat or impact protected classes and other members of vulnerable populations. Until the CFPB explicitly defines which groups of people fall into a protected status, financial services companies should as a prophylactic consider not only the protected classes under ECOA, but also those which are covered under other targeted laws such as the Fair Housing Act (which also includes disability) and the Military Lending Act (veterans and servicemembers). They should also immediately focus on intentional discrimination and disparate treatment outside the credit and housing channels to stop more blatant forms of discrimination. They should have been doing this already, but the CFPB’s announcement is a wake-up call.
Discrimination in any form causes long-lasting harm. Consumers are often not in a position to avoid this harm because many times they do not even realize that they are the victims of discrimination. The CFPB’s application of unfairness to discrimination, therefore, is not only a logical step, but addresses an undeniable truth – discrimination is not fair. Financial services companies should not be able to profit off of discrimination, whether they intend to or not. The CFPB’s announcement is a good step in rooting out discriminatory practices that have evaded exposure either through good compliance practices or enforcement because they were adjacent to the credit or housing markets. Not any more.
Brad Blower is NCRC’s General Counsel
Anneliese Lederer is NCRC’s Director of Fair Lending
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