While credit-related products have long been subject to the anti-discrimination requirements of the Equal Credit Opportunity Act (ECOA), providers of non-credit financial products, such as payments, credit reporting services, deposit accounts, remittance transfers, and debt collectors and buyers, should take note of the CFPB’s announcement (the Announcement) that it will examine all entities and financial products subject to its jurisdiction for possible discriminatory behavior. The CFPB has likewise updated its examination manual on potentially unfair, deceptive or abusive acts and practices (UDAAPs) to expressly require examinations to evaluate potentially discriminatory conduct during UDAAP examinations.
In the Announcement, CFPB Director Rohit Chopra argued that “[w]hen a person is denied access to a bank account because of their religion or race, this is unambiguously unfair.” He added that the CFPB “will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance.”
While neither the Announcement nor the updated examination manual indicate what legal standard will be used to evaluate potentially discriminatory conduct under the updated UDAAP guidelines, it seems prudent to assume that the CFPB will look at any potentially disparate effects of financial institutions’ activities, regardless of whether such effects are intended. It is also clear that “impacts” the CFPB will consider actionable include nonmonetary injuries such as “emotional impacts or dignitary harms” (Manual at 2).
Financial institutions continually make manual and algorithmic decisions, each of which may now be subject to additional review for potentially discriminatory effects. Thus, the Announcement will further complicate the operational and compliance requirements of impacted financial institutions. The Announcement states that:
CFPB examiners will require supervised 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 will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.
The Announcement marks the second recent instance in which the CFPB is pushing aggressive or novel legal interpretations via an update to an applicable examination manual. In January, the CFPB announced via an update to its student lending exam manual that the agency considers transcript withholding by postsecondary schools due to unpaid debts to be an inappropriate practice (presumably under the view that such a practice is unfair or abusive) and that it considers Income Share Agreements to be loans.
Are there any limits to what the CFPB can do using its UDAAP authority? To date there have been few challenges to actions like these taken by the Bureau, or to the constitutionality of the CFPB’s UDAAP authority. As the CFPB continues to push the envelope of its jurisdiction and authority, we see the odds growing of such challenges becoming necessary.
If you have any questions about these new developments and how they may impact your company, please reach out to one of the coauthors or any member of the Manatt Financial Services team.