By Catherine Brown and Paul Marker
Since his nomination by President Biden, we’ve anticipated CFPB Director Rohit Chopra will adopt a more expansive view of the Bureau’s authority to remedy inequities in the way financial products and services are provided to consumers. Chopra and other CFPB leaders have consistently signaled their intent to use UDAAP as a regulatory gap filler to address those inequities beyond lending products already covered by fair lending laws. On March 16, 2022, the CFPB issued its revised UDAAP exam manual, which codifies discrimination in the provision of any consumer financial product or service as a violation of UDAAP under the unfairness standard. We believe this update will be a regulatory game changer.
The revised manual, which had not been updated since October 2012, is reflective of the CFPB “...expanding [its] anti-discrimination efforts to combat discriminatory practices across the board in consumer finance.” The new guidance is consistent with Chopra’s position during his tenure as an FTC Commissioner that UDAAP can be used to combat discrimination across the economy.
At a tactical level, the revised manual provides a roadmap for CFPB examiners to follow when assessing whether a consumer financial services company has engaged in discrimination. There are several key additions to the manual to note, requiring CFPB examiners to review the following:
The entity’s processes to prevent discrimination in relation to all aspects of consumer financial products or services the entity provides.
Documentation and justification of the use of models, algorithms, and decision-making processes in connection with all consumer financial products and services (including marketing).
Information regarding customer demographics, including:
Demographics of customers using various products or services;
A breakdown of consumer demographics for various product uses, fees, revenue sources and costs; and/or
The impacts of various products and services on specific demographics.
Whether 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.
Most significant, and as expected, the revised manual suggests that regulated entities must now identify discrimination in every aspect of all products and services offered. Additionally, discrimination is not limited to just unfair treatment, but could be interpreted to include disparate impact and is not tethered to certain protected classes, as in the case of ECOA. Notably, this may include conducting fair lending-like proxy analyses on products and services not covered by ECOA (e.g., deposits, ancillary products, customer service, trust or custody services, and credit reporting). These more expansive standards will require institutions to fully and timely remediate discrimination and resulting consumer harm wherever it exists.
Although the industry anticipated regulatory changes under the Biden Administration, the sweeping impact of this specific change cannot be overstated. Institutions should begin by reviewing their risk and compliance programs with a focus on enhancing their ability to identify and correct discrimination outside of areas traditionally covered under fair lending laws. This will require a more nuanced approach to identifying consumer harm using a UDAAP rubric, and traditional compliance monitoring and testing activities alone will not be sufficient.
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