The Consumer Financial Protection Bureau (“CFPB”) issued a release on March 16, 2022 in order to announce changes to its supervisory operations with respect to discriminatory lending and servicing practices.
In its press release, the CFPB explains that it has changed its approach towards examination of banks and non-banks in order to more closely “scrutinize” discriminatory practices. The CFPB’s announced changes are significant—as under the CFPB’s newly updated exam manual for evaluating unfair, deceptive, and abusive acts and practices (UDAAPs), both unintentional discriminatory practices and practices that fall outside of the scope of the Equal Credit Opportunity Act (ECOA) now may be held to meet the criteria for “unfairness.” Although not altogether unexpected, this announcement represents a substantial expansion of the regulator’s authority to police practices it deems discriminatory.
To that end, the CFPB explained that intentional or unintentional discrimination may meet the criteria for “unfairness” where it causes “substantial harm to consumers that they cannot reasonably avoid, where that harm is not outweighed by countervailing benefits to consumers or competition.” One example of this dynamic, per the CFPB, is that “denying access to a checking account because the individual is of a particular race could be an unfair practice even in those instances where ECOA may not apply.”
In the CFPB’s new exam manual, it is noteworthy how the definition of unfair acts or practices has changed. One element of an unfair act or practice defined in the CFPB’s exam procedures, whether a consumer is “reasonably able to avoid the injury” at issue, now includes the explicit statements that “[c]onsumers cannot reasonably avoid discrimination” and “consumers typically cannot avoid the harms of discrimination.” It is expected that these additions will increase the likelihood the CFPB will detect “unfairness” if it believes discriminatory conduct towards consumers has occurred.
The CFPB’s release also outlined the scope of these new supervisory practices and the expected steps examiners will take to uphold this new mandate. The CFPB states it will examine for discrimination in “all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.” It is expected that examiners will require covered companies “to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.” The CFPB stated it also will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.
To that end, the CFPB has now instructed examiners to determine whether:
- The entity has a process to prevent discrimination in relation to all aspects of consumer financial products or services the entity offers or provides, which includes the evaluation of all policies, procedures and processes for discrimination prior to implementation or making changes, and continued monitoring for discrimination after implementation.
- The entity’s compliance program includes an established process for periodic analysis and monitoring of all decision-making processes used in connection with consumer financial products or services and a process to take corrective action to address any potential UDAAP concerns related to their use, including discrimination.
- The entity has established policies and procedures to review, test, and monitor any decision-making processes it uses for potential UDAAP concerns, including discrimination.
- The entity has established policies and procedures to mitigate potential UDAAP concerns arising from the use of its decision-making processes, including discrimination.
- The entity’s policies, procedures and practices do not target or exclude consumers from products and services, or offer different terms and conditions, in a discriminatory manner.
- The entity has appropriate training for customer service personnel to prevent discrimination.
Examiners will also now test to determine whether:
- A product is targeted to particular populations, without appropriate tailoring of marketing, disclosures, and other materials designed to ensure understanding by the consumers.
- The entity improperly gives inferior terms to one customer demographic as compared to other customer demographics.
- The entity improperly offers or provides more products or services to one customer demographic as compared to other customer demographics.
- Customer service representatives improperly treat customers of certain demographics worse or provide extra assistance or exceptions to customers of certain demographics.
- The entity engages in targeted advertising or marketing in a discriminatory way.
- The entity uses decision-making processes in its eligibility determinations, underwriting, pricing, servicing or collections that result in discrimination.
- The entity fails to evaluate and make necessary adjustments and corrections to prevent discrimination.
The CFPB has yet again continued to stress its commitment to strengthening enforcement of fair lending issues. These new changes to the CFPB’s examination procedures increase the potential that an examination might find “unfairness” if discriminatory conduct is found to exist. CFPB examiners will now place a renewed focus on discriminatory conduct, and covered entities should review their policies and procedures in advance of future examinations.