On March 16, 2022, the Consumer Financial Protection Bureau (CFPB) announced that it will examine whether institutions engage in the ‘unfair’ practice of discrimination, expanding its anti-discrimination efforts to cover a wide range of non-credit consumer products. Recognizing that fair lending laws such as the Equal Credit Opportunity Act (ECOA) may not apply to these products, the CFPB has made it clear that it intends to rely on the Consumer Financial Protection Act (CFPA) Prohibition on Unfair, Deceptive, and Abusive Acts or Practices, or UDAAP, to reach “all consumer credit markets,” including collections, services, consumer reports, payments, remittances and deposits.
This does not mean, however, that the CFPB focuses only on non-credit products. By referring to “credit” in the listing, the announcement also suggests that the CFPB will apply this theory where fair lending laws still apply, increasing the risk to lenders. With this announcement, the CFPB has also updated its UDAAP exam manualwhich details the CFPB’s approach, including compliance management expectations related to this theory.
The ECOA, over which the CFPB has authority, prohibits discrimination based on, among other things, race and ethnicity. With this week’s announcement, the CFPB suggests that discrimination may be “unfair” and a violation of the CFPA because consumers are unable to avoid harm from discriminatory practices – and may suffer substantial harm under the form of lost monetary benefits or denial of products or services. The CFPB also added “dignitary harm” to the list of potential harms that do not result in actual harm but may, at least in the opinion of the bureau, represent or contribute to the demonstration of substantial harm sufficient to substantiate a legal allegation of “injustice”. .”
The CFPB gave examples of practices that may be “unfair” because they are discriminatory, particularly in connection with the offer of non-credit products and services, such as:
- Give inferior terms to one demographic group of customers compared to another demographic group.
- To offer or provide more products or services to one customer demographic group than to other customer demographic groups.
- Treat customers of certain demographic groups less favorably, or provide additional assistance or exceptions to customers of a certain demographic group in customer service interactions.
- Target advertising or marketing in a discriminatory manner.
The CFPB also indicates in the updated manual that examiners will look to regulated entities to:
- Documentation concerning the use of models, algorithms and decision-making processes used in the context of offering financial products and services to consumers.
- Information that an institution collects, maintains, or uses regarding customer demographics, including a breakdown of demographic usage of products, fees associated with those products, and sources of revenue and costs associated with them.
- Demographic research and analysis related to the marketing or advertising of consumer financial products or services.
- Evidence of processes implemented to prevent discrimination throughout the product development and implementation cycle, and periodic monitoring of decision-making processes to detect potential discrimination.
The CFPB does not address the issue of how institutions should assess this information when they are not collecting demographic or other information regarding a consumer’s protected status. In many cases, this will require institutions to resort to test proxies that in recent years have come under increasing question as to their reliability, including Bayesian Enhanced Surname Geocoding (BISG) analysis. ).
What does this mean for you?
The CFPB announcement is not a binding interpretation of the “unfairness” standard under the CFPA, but it certainly signals a significant shift in how the bureau intends to review financial products and services that are not subject at ECOA. To this end, financial service providers may consider:
- Review non-credit offerings, such as deposit and payment products, and assess whether there is a risk of discrimination in the way the products are offered or administered.
- Create a non-discrimination policy and implement procedures for non-credit products, or expand existing fair lending policies to cover non-credit products.
- Work with marketing partners to assess whether marketing strategies and practices exclude certain consumer groups from product offerings.
- Provide fair and responsible banking training to employees who offer products other than credit.
- Management of a test program aimed at assessing the risk of discrimination in the offer or administration of products other than credit.
- Monitor complaints closely for signs of unfair treatment or potential discrimination.
Since the CFPB is not the only entity empowered to prohibit unfair practices – the Federal Trade Commission and state attorneys general also have their own authority, and many states grant private rights of action to consumers for such practices – institutions should also be aware of the increased litigation and enforcement risks created by the announcement.