The Consumer Financial Protection Bureau (“CFPB”) issued a release on March 16, 2022 in order to announce changes to its supervisory operations with respect to discriminatory lending and servicing practices. 

In its press release, the CFPB explains that it has changed its approach towards examination of banks and non-banks in order to more closely “scrutinize” discriminatory practices. The CFPB’s announced changes are significant—as under the CFPB’s newly updated exam manual for evaluating unfair, deceptive, and abusive acts and practices (UDAAPs), both unintentional discriminatory practices and practices that fall outside of the scope of the Equal Credit Opportunity Act (ECOA) now may be held to meet the criteria for “unfairness.” Although not altogether unexpected, this announcement represents a substantial expansion of the regulator’s authority to police practices it deems discriminatory.

To that end, the CFPB explained that intentional or unintentional discrimination may meet the criteria for “unfairness” where it causes “substantial harm to consumers that they cannot reasonably avoid, where that harm is not outweighed by countervailing benefits to consumers or competition.” One example of this dynamic, per the CFPB, is that “denying access to a checking account because the individual is of a particular race could be an unfair practice even in those instances where ECOA may not apply.”

In the CFPB’s new exam manual, it is noteworthy how the definition of unfair acts or practices has changed. One element of an unfair act or practice defined in the CFPB’s exam procedures, whether a consumer is “reasonably able to avoid the injury” at issue, now includes the explicit statements that “[c]onsumers cannot reasonably avoid discrimination” and “consumers typically cannot avoid the harms of discrimination.” It is expected that these additions will increase the likelihood the CFPB will detect “unfairness” if it believes discriminatory conduct towards consumers has occurred. 

The CFPB’s release also outlined the scope of these new supervisory practices and the expected steps examiners will take to uphold this new mandate. The CFPB states it will examine for discrimination in “all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.” It is expected that examiners will require covered 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 stated it also will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.

To that end, the CFPB has now instructed examiners to determine whether:

  • The entity has a process to prevent discrimination in relation to all aspects of consumer financial products or services the entity offers or provides, which includes the evaluation of all policies, procedures and processes for discrimination prior to implementation or making changes, and continued monitoring for discrimination after implementation.
  • The entity’s compliance program includes an established process for periodic analysis and monitoring of all decision-making processes used in connection with consumer financial products or services and a process to take corrective action to address any potential UDAAP concerns related to their use, including discrimination.
  • The entity has established policies and procedures to review, test, and monitor any decision-making processes it uses for potential UDAAP concerns, including discrimination.
  • The entity has established policies and procedures to mitigate potential UDAAP concerns arising from the use of its decision-making processes, including discrimination.
  • The entity’s policies, procedures and practices do not target or exclude consumers from products and services, or offer different terms and conditions, in a discriminatory manner.
  • The entity has appropriate training for customer service personnel to prevent discrimination.

Examiners will also now test to determine whether:

  • A product is targeted to particular populations, without appropriate tailoring of marketing, disclosures, and other materials designed to ensure understanding by the consumers.
  • The entity improperly gives inferior terms to one customer demographic as compared to other customer demographics.
  • The entity improperly offers or provides more products or services to one customer demographic as compared to other customer demographics.
  • Customer service representatives improperly treat customers of certain demographics worse or provide extra assistance or exceptions to customers of certain demographics.
  • The entity engages in targeted advertising or marketing in a discriminatory way.
  • The entity uses decision-making processes in its eligibility determinations, underwriting, pricing, servicing or collections that result in discrimination.
  • The entity fails to evaluate and make necessary adjustments and corrections to prevent discrimination.

Takeaways

The CFPB has yet again continued to stress its commitment to strengthening enforcement of fair lending issues. These new changes to the CFPB’s examination procedures increase the potential that an examination might find “unfairness” if discriminatory conduct is found to exist. CFPB examiners will now place a renewed focus on discriminatory conduct, and covered entities should review their policies and procedures in advance of future examinations.

On Wednesday, March 23 at 3:00pm CDT, Bradley attorneys Andrew Narod and Christopher Friedman will present a flash webinar discussing their initial impressions and analysis regarding the CFPB’s new guidance. You can register for the webinar by clicking on this link.

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Photo of Andrew J. Narod Andrew J. Narod

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation…

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation matters in some of the most difficult venues in the country.

Photo of Christopher K. Friedman Christopher K. Friedman

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated…

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products, conduct due diligence, engage in compliance reviews, evaluate litigation risk, and solve some of the unique legal problems faced by companies who work with small businesses. In that vein, Chris has written extensively about the upcoming rulemaking related to Dodd-Frank 1071, which will require data collection and reporting by companies making loans to certain small businesses.

Photo of Beryl Newchurch Billings Beryl Newchurch Billings

Beryl Billings is an associate in the Banking and Financial Services Practice Group.

Beryl received her J.D. from the University of Tennessee College of Law. While in law school, she was a judicial intern for the Hon. R. David Proctor of the United…

Beryl Billings is an associate in the Banking and Financial Services Practice Group.

Beryl received her J.D. from the University of Tennessee College of Law. While in law school, she was a judicial intern for the Hon. R. David Proctor of the United States District Court for the Northern District of Alabama. She earned a B.S. in Political Science from Spring Hill College, where she was captain of the women’s soccer team and served as president of the Student Athletics Advisory Committee.

Photo of David T. Long Jr. David T. Long Jr.

David Long counsels clients in complex banking and financial services matters in both state and federal courts across the country. Based upon the specific needs of his clients, he advises individuals and corporate clients on their claims and outlines strategies to achieve the…

David Long counsels clients in complex banking and financial services matters in both state and federal courts across the country. Based upon the specific needs of his clients, he advises individuals and corporate clients on their claims and outlines strategies to achieve the best result for each client.

David also has extensive experience representing and advising multinational corporations to ensure compliance with state and federal regulations.