In keeping with its twin goals of protecting consumers and empowering them to be able to protect themselves, the Consumer Financial Protection Bureau (CFPB) put financial institutions on notice that it is stepping up enforcement of anti-discrimination laws. CFPB Director Richard Cordray explained that in a recovering economy, “[w]e cannot afford to tolerate practices that either price out or cut off segments of the population.” All financial institutions under CFPB supervision—banks and nonbanks alike—will be monitored for potential fair lending violations including practices with unlawful discriminatory effects.

The CFPB said it will use “all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against consumers.” To that end, the Bureau issued CFPB Bulletin 2012-04 reaffirming its commitment to the Equal Credit Opportunity Act (ECOA), which it enforces jointly with the Justice Department. The Bureau emphasized the problem of disparate impact, which occurs when a lender’s practices or policies are facially neutral but have discriminatory effects; the Bureau has made it clear it will pursue actions against lenders even when discrimination is unintentional. One example of this kind of policy that can cause discriminatory effects is giving loan officers broad discretion to determine how much to charge borrowers. However, the CFPB said it would afford institutions some flexibility. Practices that have a discriminatory effect but meet a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact will be permissible.

Industry observers are not surprised by the CFPB’s latest move and had long expected the Bureau to join the Justice Department in aggressively pursuing fair lending cases. The CFPB itself had already said it planned to examine disparate impact claims under the ECOA in its supervision exam manual released last year. Disparate impact was the basis for a major settlement in a case brought by the Justice Department against Bank of America. In December 2011, Bank of America was forced to pay more than $335 million to settle claims of discriminatory lending against Latino and black borrowers at its Countrywide mortgage lending unit.

Unlike other regulatory agencies, the CFPB has independent litigating authority, meaning it can bring its own cases against lenders in federal court. It can also hold adjudication proceedings before the Bureau’s own administrative judges, who can issue cease and desist orders and penalties , and provide equitable relief for borrowers. However, the CFPB must still refer fair lending violations to the Justice Department when there is evidence of a pattern or practice of discrimination. 

But the CFPB is also aware of the limits of its reach. To that end, the Bureau is educating consumers about their fair lending rights and equipping them with the information they need to spot the warning signs of discrimination on their own.