The CFPB recently updated its examination manual to, in the words of Director Chopra, “address discriminatory practices at all levels in the area of consumer credit.” Under the revised CFPB Handbook, any discriminatory behavior identified by the CFPB during a compliance review may form the basis of a violation of the Dodd-Frank Act prohibition on unfair acts and practices. This is a further extension of the CFPB’s anti-discrimination authority and a game-changer for companies supervised by the CFPB.
The Equal Credit Opportunity Act (ECOA), administered by the CFPB, and the Fair Housing Act (FHA), which is administered by the United States Department of Housing and Urban Development, are the primary sources of anti-discrimination legislation in the context of consumer protection. financial services. They prohibit discrimination in consumer credit and housing transactions, respectively. ECOA and FHA differ fundamentally from Dodd-Frank in that they are specifically designed to address discrimination in specific contexts and set out features that creditors are prohibited from using as a basis for discrimination (eg race, nationality, gender). 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 nationality.
Dodd Frank, on the other hand, does not expressly prohibit discrimination but rather prohibits “unfair” practices, that is, practices that harm consumers in ways they cannot reasonably avoid and that are not offset by compensating benefits to consumers or competition.
The FTC has long had the authority to enforce a similar standard of unfairness under the Federal Trade Commission Act (FTCA), but, like the CFPB, the FTC has never used its unfair practices authority to prosecute discrimination. The updates to the CFPB exam manual are a further extension of the CFPB’s anti-discrimination efforts.
Critics of the CFPB’s position have focused on this lack of precedent and the lack of explicit anti-discrimination language and standards in Dodd-Frank as reasons to doubt that Congress intended the CFPB to enforce the unfairness standard. to discrimination, especially outside the consumer credit and housing markets. The American Bankers’ Association (ABA) recently released a white paper criticizing what it calls the CFPB’s unauthorized use of the unfairness doctrine as a “gap filler” to address a range of conduct ill-defined that Congress has not outlawed.
The ABA white paper also challenges the CFPB’s requirement that its examiners not only consider whether a covered entity has in place appropriate policies and procedures to to prevent discrimination, but if the entity “uses decision-making processes in its eligibility determinations, underwriting, pricing, service, or collections that results in discrimination.1 Indeed, the CFPB signals that it will apply a disparate outcome-based impact analysis to identify discriminatory (and therefore unfair) practices.
It remains to be seen whether the ABA, or another interested party, will formally challenge the CFPB exam manual update. The ABA white paper argues that updating the handbook 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 Handbook) and Congressional review (and possible revocation) 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 is considering casting a wider surveillance net to include non-banks that it believes pose risks to consumers.
We have identified five key takeaways from the updated CFPB Examination Manual:
- Supervised companies that provide financial products and services to consumers other than credit (eg, remittances, deposit accounts, collections) must be prepared to be reviewed for discrimination under the Dodd-Frank Unfairness Standard.
- CFPB examiners will assess whether applicants have 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 reviews, maintenance and collections.
- CFPB examiners can perform retrospective transaction testing to determine whether the applicant’s policies have a disparate and adverse impact based on a protected characteristic.3
- In addition to preventive measures, the companies monitored must carry out continuous monitoring of 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.
- Supervised companies should consider: (a) limiting the discretion of employees and service providers to make exceptions to company policies (for example, waiving late fees) and (b) providing guidelines clear written statements on eligibility criteria for policy exceptions. Exceptions should be documented and reviewed to ensure they are not granted in a discriminatory manner.
2 According to the CFPB review manual, discrimination in marketing can take the form of targeted marketing of inferior or more expensive products to consumers in a protected class. Such conduct has already been prosecuted under the ECOA and the FHA.
3 While it is likely that the protected features that the CFPB would seek to protect would roughly align with those specified in the ECOA, the Dodd-Frank Act itself does not specify any protected features.