In a new blog post published on the Consumer Law & Policy Blog, Professor Jeff Sovern argues very strongly for the interpretation of the “unfairness” component of the UDAAP to encompass discrimination in relation to financial products and services at consumption with and without credit offered by banks. and others covered by the Consumer Financial Protection Act (CFPA). He backs up his position with the plain language of “unfair” (which is not inextricably linked to credit products) and the common sense notion that companies should not be able to discriminate in any way. whether in the context of offering financial products or services to consumers. .
Professor Sovern’s argument misses the point. The consumer financial services industry does not seek a “free pass” when it comes to any form of discrimination. Instead, the industry simply wants to know what the “rules of the road” are. The Equal Credit Opportunity Act is a very specific anti-discrimination law that outlaws certain types of credit discrimination. It has been implemented through detailed regulations (Reg B) which have been in force for many decades. It prohibits discrimination only on certain grounds: race, color, religion, national origin, sex, marital status or age (provided the claimant has the capacity to enter into a binding contract); the fact that all or part of the applicant’s income comes from any public assistance program; or the fact that the plaintiff has exercised in good faith any right under the CFPA or any law of the state from which an exemption has been granted by the CFPB.
First, I find considerable merit in the argument that if Congress considered discrimination to be “unfair”, it would not have been necessary for Congress to pass laws such as the Equality Act credit opportunities to specifically prohibit discrimination. According to Professor Sovern, this argument is flawed because the ECOA does more than prohibit discrimination in credit transactions, such as providing aggrieved consumers with a private right of action, and therefore would have been necessary even if Congress considered the discrimination as something the CFPB could deal with. via its UDAAP authority. This would have been necessary, Professor Sovern says, because the CFPA does not grant consumers a private right of action for UDAAP claims and “Congress wanted aggrieved consumers to have a private claim” which is provided for in the ECOA.
The difficulty I have with Professor Sovern’s reasoning is that if the UDAAP covers discrimination more broadly than the ECOA, why wouldn’t Congress have wanted aggrieved consumers also to have a private right of action? to use the UDAAP to challenge any discrimination that they could not challenge under the ECOA? In other words, it seems to me that the absence of a private right of action in the CFPA for UDAAP claims strongly supports the position that the UDAAP does not cover discrimination.
But even assuming for the sake of argument that the interpretation of the UDAAP advocated by the CFPB and Professor Sovern is correct, what would that mean? It is unclear whether the ECOA covers discrimination based on marketing or if it only applies once someone has applied for credit. Would the UDAAP now fill this void? And what about the additional question of whether the disparate impact theory applies to the ECOA and, if not, whether it would nevertheless apply to the UDAAP. These are just some of the questions raised by the CFPB and Professor Sovern’s interpretation of consumer credit.
The interpretation of the CFPB and Professor Sovern raises even more questions in the context of discrimination involving non-credit products such as deposits, prepaid cards and remittances. For example, many banks have a policy of not opening deposit accounts to anyone who does not reside in the bank’s market area. Would this be considered a violation of the UDAAP? While there is a well-established body of law regarding the application of the ECOA, there is absolutely no body of law regarding how the unfair component of the UDAAP applies to non-credit products. . Although the CFPA became law in 2011, I am not aware of a single instance in which the CFPB has used its UDAAP authority to prosecute a person based on non-credit discrimination. Also, I am not aware of the FTC using its UDAP authority under Section 5 of the FTC Act (which was enacted over 100 years ago) to unearth discrimination regarding credit products or nope.
Given the complexity of the issues raised by the CFPB’s expansion of the UDAAP, it seems obvious that this type of drastic change should be made through regulation and not through an amendment to an exam manual.