The Senate Banking Committee recently held a hearing entitled, “Fairness in Financial Services: Racism and Discrimination in Banking.” The hearing was held to discuss historical and ongoing discrimination in the financial services industry, and the roles of Congress and regulators in addressing these issues. The witnesses included: Ms. Lisa Rice, President and CEO, National Fair Housing Alliance; Mr. Marc H. Morial, President and CEO, National Urban League; The Honorable Byron Donalds (R-FL), United States House of Representatives; Mr. Devon Westhill, President and General Counsel, Center for Equal Opportunity; and Ms. Janai Nelson, President and Director-Counsel, NAACP Legal Defense and Educational Fund, Inc. (LDF). The witness list did not include any representatives of the financial services industry testified.
U.S. Senators and participating witnesses discussed the necessity of the Fair Access to Financial Services Act, which was introduced in the Senate in July 2022 and would expand the protections found in other nondiscrimination laws, like the Equal Credit Opportunity Act (ECOA), and apply them to all “goods, services, facilities, privileges, and accommodations of financial institutions.” If enacted, the law would prohibit banks and other financial institutions from discriminating in the services they offer on the basis of race, color, religion, national origin, or sex (including sexual orientation and gender identity). The participants also discussed the appropriateness of the CFPB’s steps to supervise for discrimination through its authority over unfair, deceptive, and abusive acts or practices (UDAAP). As a reminder, in March 2022, the CFPB updated its exam manual and announced, “In the course of examining banks’ and other companies’ compliance with consumer protection rules, the CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices.” The update has been challenged in a lawsuit filed by the U.S. Chamber of Commerce and other trade groups.
In his remarks, Chairman Brown (D-OH) explained the importance of addressing the longstanding pattern of discrimination against minority households – from slavery, to Jim Crow, to redlining, to the crypto crisis, and many other forms of discrimination. Chairman Brown noted that a 2021 FDIC household survey found about 11% of Black and 9% of Hispanic households were unbanked or underbanked, and consumer complaints suggested that minority customers are often viewed as suspicious and treated poorly in financial institutions. He went on to explain that the CFPB took an appropriate and necessary approach in including illegal discrimination within the UDAAP framework if the discrimination fits the test already outlined in the CFPB’s guidance. He remarked that the current nondiscrimination laws leave loopholes and allow the financial industry to continue to mistreat minority customers. The Chairman added that by fitting discrimination into the unfairness framework, the CFPB is attempting to exhaust all of its options to hold financial institutions to the standard of treating all customers equally.
U.S. Senator Toomey (R-PA) detailed how the current scheme for eliminating discrimination has made banking and borrowing possible for millions of customers, and stated that new nondiscrimination laws will only further complicate the system of rules banks have to navigate. The Senator also remarked on how difficult disparate impact and other discrimination claims are to prove and how bringing these claims broadly can, and does, sweep up innocent actors making reasonable business decisions. According to the Senator, this creates reputational and financial burdens for the financial services industry, as banks continue to bear the costs of compliance, litigation, and settlement of broad claims of discrimination, even when they cannot avoid the disparities that already exist. The Senator went on to explain that the CFPB re-interpreted UDAAP to include discrimination in a way that was never provided by Congress, creating tremendous uncertainty for the industry. The Senator stated that this instability may lead banks to limit the services offered in order to avoid any risk of litigation, while attempting to guess what the CFPB will do next.
Participating witnesses all brought invaluable perspective and experience to the hearing. Those who work on behalf of consumers focused their testimonies on the necessity of change within the financial system. They described the difficulties faced by consumers, especially people of color who have limited access to basic financial services. According to witness testimony:
- When banks close at higher rates in communities of color, it exacerbates the lack of access for already underbanked households. This allows payday lenders, pawn stores, check cashers, and other predatory businesses to thrive in these communities because the customers have no other services.
- When communities of color do find banks for financial services, employee discretion often leads to people of color being steered into accounts or services that carry higher costs.
- There are many loopholes in the current scheme of nondiscrimination laws: for the example ECOA and the Fair Housing Act only apply to credit transactions. Many communities could benefit from simple, affordable financial tools, such as checking accounts, but discrimination in this area is left unchecked.
On the other hand, a few of the witnesses shed light on the regulatory and compliance burdens faced by the industry, including the following:
- The regulatory and compliance burdens force many financial institutions to close branches or cut staff, further harming minority communities.
- Uncertainty and ambiguity in the law, coupled with infinite rulemaking is not sustainable and does not help financial institutions to create better systems for communities of color.
- While the industry would benefit from eliminating intentional discrimination, it is unreasonable to expect financial institutions to reverse all existing disparity created by decades of past discrimination.
Participants discussed the value of the growing role of community development financial institutions (CDFIs) and the impact these institutions have on the communities they serve. It was generally agreed that CDFIs are typically in a better position than large banks to reach and grow relationships with underserved groups, and that ensuring their access to resources has proven to be beneficial to the entire industry. Some argued that expanding the capabilities and resources for CDFIs should be more of a priority than creating new methods of targeting discrimination, because empowering and funding CDFIs would create an immediate impact for the communities they serve.
On the topic of the CFPB’s role in eliminating discrimination, the testimonies varied greatly. Some witnesses remarked that discrimination can be unfair, because denying access to groups of consumers or offering them unfavorable terms may already fit squarely within the scheme currently used to determine that a practice is unfair. Generally, the participants agreed that rulemaking is valuable in order to receive and include industry feedback in rules and guidance. However, some argued that this process has continuously carved out certain actions or products, which has created room for discrimination that is unfair to consumers.
Ultimately, the hearing was full of robust conversation about how Congress, regulators, and financial institutions must align efforts to eliminate and remediate long-standing discrimination in the financial industry. We will continue to monitor developments involving the Fair Access to Financial Services Act and challenges to the CFPB’s exam manual update on discrimination.
For the full discussion, a recording of the hearing and copies of witnesses’ testimonies can be found here.