On March 16, 2022, the Consumer Financial Protection Bureau (CFPB) announced its intent to expand the agency’s interpretation of its authority regarding its ability to prohibit discrimination. The agency’s anti-discrimination authority will now apply to all financial products and services offered to consumers by banks and other financial services firms subject to CFPB supervision.

This change will have a significant impact on companies regulated by the CFPB. Firms will be expected to undergo additional procedures to ensure compliance, particularly to assess the potential disparate impacts that a firm’s policies may have on consumers. The CFPB will begin applying the new interpretation in its examinations, so companies should implement these compliance changes as soon as possible.

The press release announcing the change was accompanied by an updated manual for CFPB examiners and a blog post shedding further light on the agency’s position.

The CFPB’s Rationale for Expanded Authority

Under the Equal Credit Opportunity Act, the CFPB has authority to prohibit discrimination against credit applicants. The Consumer Financial Protection Act, which created the CFPB, granted it the authority to prevent unfair, deceptive, and abusive acts and practices (UDAAPs) among the entities it regulates. The CFPB has historically used this authority to target practices such as misrepresentations or omissions in consumer disclosures, violation of state lending laws, and deceptive marketing, among others.

The CFPB explained its position by claiming that discrimination meets the definition of an “unfair” act, which requires that an act or practice:

  • Causes or is likely to cause substantial injury to consumers;
  • Is not reasonably avoidable by consumers; and
  • Is not outweighed by countervailing benefits to consumers or competition.

According to the CFPB, discrimination meets this three-part definition because:

  • It may result in substantial injury in the form of forgone monetary benefits, denial of access to products or services, emotional impact and dignitary harms; and
  • Consumers cannot reasonably avoid discrimination.

The release does not discuss whether the CFPB views the third part of the definition –  countervailing benefits to consumers or competition – as factoring into its analysis.

Areas and Activities Impacted by the New Interpretation

The new interpretation applies to “all consumer finance markets” under the CFPB’s authority, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.

Examiners will evaluate for discrimination in areas including setting of terms, customer service, advertising and marketing, eligibility determinations, underwriting, pricing, servicing, and collections. For example, the manual instructs examiners to consider:

  • Customer service ­How customer service representatives treat customers of different demographics, including if they “effectively respond to calls from consumers with limited English proficiency”[1]
  • Advertising and marketing – Whether marketing or advertising improperly targets or excludes consumers on a discriminatory basis[2]
  • Eligibility – Whether more products or services are improperly offered to one customer demographic as compared to others[3]
  • Terms – Whether inferior terms are improperly offered to one customer demographic as compared to others[4]
  • Servicing and collection – Whether serving and collection practices “lead to differential treatment or disproportionately adverse impacts on a discriminatory basis”[5]

The CFPB will assess several types of business activities when determining an entity’s compliance, including:

  • Establishment of policies and procedures – Whether policies and procedures “target or exclude consumers from products and services” in a discriminatory manner[6]
  • Evaluation and monitoring of policies and procedures – Whether processes include “evaluation of all policies, procedures, and processes for discrimination prior to implementation,”[7] “continued monitoring for discrimination after implementation,”[8] and “prompt corrective action” in the case of discriminatory results[9]
  • Training – Whether customer service personnel have appropriate training to prevent discrimination[10]

Key Takeaways and Implications

The updated manual introduces a new concept that requires the agency to consider the entity’s internal decision-making processes. For example, examiners will consider whether the decision-making processes used in an entity’s eligibility determinations, underwriting, pricing, servicing, or collections result in discrimination.[11] In the case of approvals or denials for a product and setting of its terms, the CFPB will identify the decision-making process used and its inputs as applied to each account examined.[12] The scrutiny of a company’s decision-making appears to be particularly targeted to automated processes that use models and algorithms, which the CFPB plans to monitor for any potential discriminatory outcomes.[13]

The manual implies that the agency expects companies to perform statistical analysis regarding how its products and services are used by various demographics.[14] The agency is also interested in demographic analysis related to the company’s marketing or advertising.[15]  Incorporating these types of analyses could entail significant compliance costs for many companies.

Notably, the change would apply to disparate impacts in addition to intentional discriminatory acts.[16] For example, examiners are expected to consider whether companies have a process for taking for corrective action if its decision-making processes “produce deficiencies or discriminatory results.”[17] Examiners will also look for disproportionately adverse impacts from servicing or collection practices.[18]

Companies may seek to challenge the CFPB’s position in court on the grounds that it exceeds the agency’s authority as prescribed by statute and was not promulgated pursuant to notice and comment under the Administrative Procedure Act.

How Patomak Can Help

Patomak has deep experience on CFPB and related compliance issues. If you would like to learn more about how Patomak can help, reach out to Paul Watkins or your regular Patomak contact.

[1] Unfair, Deceptive, or Abusive Acts or Practices, Manual V.3, CFPB (Mar. 2022), https://files.consumerfinance.gov/f/documents/cfpb_unfair-deceptive-abusive-acts-practices-udaaps_procedures.pdf at 15, 18.

[2] Id. at 16.

[3] Id. at 15.

[4] Id.

[5] Id. at 18.

[6] Id. at 14.

[7] Id. at 13.

[8] Id.

[9] Id. at 18.

[10] Id. at 14.

[11] Id. at 15.

[12] Id. at 16.

[13] See Cracking down on discrimination in the financial sector, CFPB (Mar. 16, 2022), https://www.consumerfinance.gov/about-us/blog/cracking-down-on-discrimination-in-the-financial-sector/ (“Consumer advocates, investigative journalists, and scholars have shown how data harvesting and consumer surveillance fuel complex algorithms that can target highly specific demographics of consumers to exploit perceived vulnerabilities and strengthen structural inequities. We will be closely examining companies’ reliance on automated decision-making models and any potential discriminatory outcomes”).

[14] Manual, supra note 1 at 12 (directing examiners to obtain and review information collected regarding customer demographics and the “impacts of various products and services on specific demographics”).

[15] Id. (directing examiners to obtain and review demographic research or analysis relating to marketing or advertising).

[16] See generally CFPB Targets Unfair Discrimination in Consumer Finance, CFPB (Mar. 16, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-targets-unfair-discrimination-in-consumer-finance/ (“Consumers can be harmed by discrimination regardless of whether it is intentional”); Eric Halperin and Lorelei Salas, Cracking down on discrimination in the financial sector, CFPB (Mar. 16, 2022), https://www.consumerfinance.gov/about-us/blog/cracking-down-on-discrimination-in-the-financial-sector/ (“Many individuals may be unaware they received disparate treatment or a discriminatory outcome”); Id. (“There is no one solution to ending both individual and systemic discrimination”).

[17] Manual, supra note 1 at 18.

[18] Id.