Focus on Fintech: CFPB plans to use its UDAAP authority to expand anti-discrimination efforts to non-credit financial products and services | Eversheds Sutherland (US) LLP

The CFPB recently updated its examination manual to, in Director Chopra’s words, “combat discriminatory practices across the board in consumer finance.” According to the CFPB’s revised handbook, any discriminatory conduct that the CFPB identifies during a compliance examination can form the basis of a violation of the Dodd-Frank Act’s prohibition against unfair acts and practices. This is a new expansion of the CFPB’s anti-discrimination authority and a game changer for CFPB-supervised companies.

The Equal Credit Opportunity Act (ECOA), administered by the CFPB, and the Fair Housing Act (FHA), administered by the US Department of Housing and Urban Development, are the primary sources of consumer antidiscrimination law. financial services. They prohibit discrimination in consumer credit and housing transactions respectively. ECOA and FHA differ fundamentally from Dodd-Frank in that they are purpose-built to address discrimination in specific contexts, and they specify the characteristics that creditors are prohibited from using as a basis for discrimination (eg, race, nationality, sex). ECOA and FHA also benefit from decades of judicial and regulatory interpretation. Historically, the CFPB has prosecuted unlawful discrimination under the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in credit transactions on the basis of specified characteristics, such as race, age, sex, and national origin.

Dodd Frank, on the other hand, does not expressly prohibit discrimination, but instead prohibits “unfair” practices, which are practices that harm consumers in a way that they cannot reasonably avoid and that are not outweighed by countervailing benefits to consumers or competition.

The FTC has long had the authority to enforce a similar unfairness standard under the Federal Trade Commission Act (FTCA), but, like the CFPB, the FTC has never used its unfair practices authority to pursue discrimination. The CFPB’s examination manual updates are a new expansion of the CFPB’s anti-discrimination efforts.

Critics of the CFPB’s position have focused on this lack of precedent and the lack of express anti-discrimination language and standards in Dodd-Frank as reasons to doubt that Congress intended the CFPB to apply the unfairness standard to discrimination, particularly outside the consumer credit and housing markets. The American Bankers’ Association (ABA) recently published a white paper criticizing what it calls the CFPB’s unauthorized use of the unfairness doctrine as a “gap filler” to address an ill-defined range of conduct that Congress has not prohibited.

The ABA’s white paper also takes issue with the CFPB’s requirement that its examiners not only consider whether a covered entity has appropriate policies and procedures in place to prevent discrimination, but whether the entity “uses decision-making processes in its eligibility determinations, warranties, pricing, service or collection that result in discrimination.”¹ In effect, the CFPB is signaling that it will use an outcomes-based disparate impact analysis to identify discriminatory (and therefore unfair) practices.

It remains to be seen whether the ABA, or another interested party, will mount a formal challenge to the CFPB’s examination manual update. The ABA’s white paper takes the position that the manual update is a rule subject to both notice and comment procedures under the Administrative Procedure Act (which the CFPB did not observe when updating the exam manual) and congressional review (and potential override) under the Congressional Review Act. It also remains to be seen whether a CFPB enforcement action based on discriminatory conduct as an unfair practice would, if challenged, be upheld by a court.

Non-bank fintechs and other financial services companies not currently subject to CFPB oversight should also take note of the CFPB’s new approach to discrimination. As we reported last quarter, the CFPB plans to cast a wider supervisory net to include non-banks that it finds pose a risk to consumers.

We’ve identified five key takeaways from the CFPB’s exam manual update:

1. Supervised companies that provide financial products and services to consumers other than credit (eg, wire transfers, deposit accounts, collections) should be prepared to be investigated for discrimination under Dodd-Frank’s unfairness standard.
2. CFPB examiners will assess whether the examinee has policies and procedures, training programs and supplier management systems in place to prevent discrimination at all stages of the product life cycle, from marketing² through underwriting, account review, service and collection.
3. CFPB examiners may perform retrospective transaction testing to determine whether the examiner’s policy has a disparate, adverse impact on the basis of a protected characteristic.³
4. In addition to preventive measures, monitored businesses should carry out ongoing monitoring for potential discrimination. This should include processes for identifying and following up on consumer complaints alleging discrimination, whether received by the company or an affiliate or service provider.
5. Supervised companies should consider: (a) limiting the discretion of employees and service providers to make exceptions to company policies (eg, waiving late payment fees) and (b) providing clear written guidance on eligibility criteria for insurance exceptions. Exceptions should be documented and reviewed to ensure that they are not granted in a discriminatory manner.

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