Consistent with expectations that the CFPB under Director Chopra’s leadership would take an expansive view of its statutory authorities, the CFPB has announced its intention to use its authority to prohibit unfair, deceptive, or abusive acts or practices (UDAAPs) to target discriminatory conduct, even where fair lending laws may not apply.
Specifically, the CFPB is directing its examiners to apply the Consumer Financial Protection Act’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the Equal Credit Opportunity Act (such as in connection with denying access to a checking account). Under the CFPA, an act or practice is “unfair” if (1) it causes or is likely to cause substantial injury to consumers, (2) the injury is not reasonably avoidable by consumers, and (3) the injury is not outweighed by countervailing benefits to consumers or competition. In its press release, the CFPB states:
The CFPB will examine for discrimination in all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits. CFPB examiners will require supervised 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. CFPB examiners will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.
The CFPB’s blog post about the manual update provides an indication of some of the practices the CFPB intends to scrutinize using an “unfairness” analysis. As an example of a discriminatory practice that “fall[s] squarely within our mandate to address and eliminate unfair practices,” the blog post identifies “the widespread and growing reliance on machine learning models throughout the financial industry and their potential for perpetuating biased outcomes,” and specifically mentions “certain targeted advertising and marketing, based on machine learning models, [that] can harm consumers and undermine competition.” Observing that “[c]onsumer advocates, investigative journalists, and scholars have shown how data harvesting and consumer surveillance fuel complex algorithms that can target highly specific demographics of consumers to exploit perceived vulnerabilities and strengthen structural inequities,” the CFPB indicates that it “will be closely examining companies’ reliance on automated decision-making models and any potential discriminatory outcomes.”
The updates to the manual intended to implement the CFPB’s use of its UDAAP authority to address discriminatory conduct consist of the following:
- The manual previously stated that an examination objective is to identify acts or practices that materially increase the risk of consumers being treated in an unfair, deceptive, or abusive matter. The manual is updated to specifically state that such practices include “discriminatory acts or practices.”
- The materials examiners are directed to review to initially identify UDAAP concerns are expanded to include:
- Documentation regarding the use of models, algorithms, and decision-making processes used in connection with consumer financial products and services;
- Information collected, retained or used regarding customer demographics; and
- Any demographic research or analysis relating to marketing or advertising of consumer financial products or services.
- The determinations examiners must make based on the review of documents are expanded to include whether:
- The entity has a process to prevent discrimination in relation to all consumer financial products and services it offers, which includes an evaluation of all policies, procedures, and processes for discrimination prior to implementation or making changes, and continued monitoring for discrimination after implementation; and
- The entity’s compliance program includes an established process for periodic analysis and monitoring of all decision-making processes used in connection with consumer products and services, and a process to take corrective action to address any potential UDAAP concerns related to their use, including discrimination.
- In determining through discussions with management and a review of available information whether an entity’s internal controls are adequate to prevent UDAAPs, the issues examiners are directed to consider are expanded to include whether:
- 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 or services, or offer different terms and conditions, in a discriminatory manner; and
- The entity has appropriate training for customer service personnel to prevent discrimination.
- The process for identifying areas for potential transaction testing is expanded to direct examiners to determine whether:
- 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; and
- The entity fails to evaluate and make necessary adjustments and corrections to prevent discrimination.
- When transaction testing is needed:
- The determinations that an examiner is required to make through a review of marketing materials, customer agreements, and other disclosures are expanded to include whether, before the consumer choses to obtain the products or services, marketing or advertising improperly target or exclude consumers on a discriminatory basis, including through digital advertising.
- In evaluating whether the products and services consumers are receiving are consistent with disclosures and policies:
- The elements of the sample that an examiner selects for each product and service reviewed are expanded to include identification of the decision-making processes used to determine approval or denial and the terms of the offer, as well as the corresponding inputs used in the decision-making processes for each account in the sample.
- The determinations an examiner is required to make are expanded to include whether the entity offers products and services to consumers in a manner that prevents discrimination.
- In evaluating how an entity monitors the activities of employees and third party contractors, marketing sales personnel, vendors, and service providers to ensure they do not engage in UDAAPs with respect to consumer interactions, the issues examiners are directed to consider are expanded to include whether the entity has a process to take prompt corrective action if the decision-making processes it uses produces deficiencies or discriminatory results.
- In evaluating whether servicing and collection practices raise potential UDAAP concerns, the factors examiners must consider are expanded to include whether:
- Call centers effectively third party contractors refrain from engaging in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis respond to calls from consumers with limited English proficiency; and
- The entity ensures that employees and third party contractors do not engage in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis.
The CFPB’s decision to use its UDAAP authority to challenge discriminatory conduct was presaged by an article published last year by the Student Borrower Protection Center titled “Discrimination is ‘Unfair’.” The article argued that the CFPB, FTC, state attorneys general and regulators, and in some cases private individuals, should consider challenging discrimination as an unfair practice covered by federal and state laws prohibiting unfair, deceptive or abusive acts and practices. In its press release and blog post about the manual update, the CFPB does not indicate whether it plans to also use its UDAAP authority to bring discrimination-based claims in enforcement actions. As we indicated in our blog post about the article, we have considerable doubts as to whether a court would uphold the CFPB’s position.