On March 16, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced a significant expansion of its “anti-discrimination efforts to combat discriminatory practices across the board in consumer finance.”1 Under the Dodd-Frank Act, the CFPB’s explicit statutory authority to examine covered institutions for potential discriminatory practices arises primarily in the consumer credit and housing markets under the Equal Credit Opportunity Act (“ECOA”) and Home Mortgage Disclosure Act (“HMDA”). Last week, the agency announced that it will examine institutions for potential discrimination (presumably on the basis of protected characteristics such as race, religion, sex and age) in the offering or provision of consumer financial products or services more broadly. The announcement asserts that such discrimination may constitute an unfair act or practice under the Consumer Financial Protection Act (“CFPA”).
The Bureau’s announcement has potentially far-reaching implications for providers of consumer financial products and services, whether or not they are already subject to oversight under ECOA, HMDA, or other anti-discrimination statutes, such as the Fair Housing Act, enforced by other federal regulators. First, non-credit consumer financial products formerly not covered by fair lending laws will be subject to anti-discrimination risk under the Bureau’s new standard. The position outlined in the revised examination manual is likely to extend beyond supervision to the Bureau’s other regulatory activities, including enforcement. Indeed, the Bureau’s Assistant Directors who oversee its supervision and enforcement offices issued a joint blog post on the day of the Bureau’s announcement discussing the newly announced standard.2 Second, non-bank providers of consumer financial products, including entities not subject to the Bureau’s supervisory authority, may be subject to anti-discrimination compliance obligations enforced by the Bureau for the first time. Third, entities should prepare for uncertainty regarding the precise legal standard the Bureau will employ in applying its new unfair discrimination standard, which may diverge from established anti-discrimination liability standards.
1. Background
The Bureau’s traditional statutory authority for fair lending supervision and enforcement arises from ECOA and HMDA. ECOA prohibits discrimination by creditors against credit applicants.3 Its implementing regulations also largely prohibit creditors from collecting demographic data related to the protected class status of credit applicants.4 HMDA, a limited exception to the data collection provisions in ECOA, requires mortgage lenders to collect and report to the Bureau data about their mortgage lending activities, including demographic data on mortgage applicants.5
The Bureau’s newly announced anti-discrimination policy rests on the CFPA’s prohibition on unfair acts or practices. An act or practice is unfair under the CFPA if it (1) “causes or is likely to cause substantial injury to consumers” (2) which is not “reasonably avoidable by consumers” (3) and which is “not outweighed by countervailing benefits to consumers or to competition.”6 Generally, an injury is reasonably avoidable “if consumers have reason to anticipate the impending harm and the means to avoid it.”7
Typically, unfairness actions have challenged “behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decision-making.”8 Unfairness analysis focuses on consumers’ awareness of the potential for harm and their ability to mitigate it; indeed, the Federal Trade Commission (“FTC”) regulations based on unfairness have generally required disclosure of material terms, conditions, and risks of products and services.9 Discriminatory conduct has not historically been analyzed in these terms.
2. Revised Examination Manual
The Bureau’s announcement and revised manual unambiguously signal the Bureau’s intent to address discrimination using the unfairness standard. The revised examination manual provides several examples of the injury discrimination may cause to consumers. For instance, the manual explains, forgone monetary benefits or denial of access to financial products or services resulting from discrimination can cause substantial injury, as can the emotional or dignitary impacts of discriminatory conduct.10 With respect to the unfairness standard’s “reasonably avoidable” prong, the manual establishes an apparent presumption that discrimination is not avoidable, noting categorically that “[c]onsumers cannot reasonably avoid discrimination.”11
The revised examination manual similarly expands the scope of documents CFPB examiners will review to assess potential discrimination, including documents related to models, algorithms, and decision-making processes; information “collected, retained, or used regarding customer demographics”; and demographic research or analysis related to marketing or advertising.12 This new focus on potential algorithmic discrimination is in line with Director Chopra’s expressed concerns that “black-box algorithms” may “reinforce biases and discrimination, undermining racial equity.”13
The revised manual also adds instructions to examiners to ensure that entities have processes in place to “prevent discrimination in relation to all aspects of consumer financial products or services,” including through review of policies and procedures, decision-making processes, and employee and third-party training, and that entities’ compliance programs include processes for periodic analysis and monitoring of decision-making processes for potential discrimination.14 The manual also now contemplates transaction testing to assess whether entities are improperly targeting or excluding consumers through marketing or advertising; using decision-making processes that result in discrimination (noting eligibility determinations, underwriting, pricing, servicing, and collections as areas where such discrimination may occur); or engaging in improper customer service practices on a discriminatory basis.15
The Bureau’s announcement is not entirely a surprise. The Bureau recently premised an unfairness claim on a lender’s targeting of predominantly Hispanic limited English proficiency (“LEP”) consumers with complicated contracts they allegedly could not understand.16 Director Chopra also has previously made a number of public statements that signaled his belief that discriminatory practices prohibited under ECOA may also be unfair.17 But in announcing that it will use its UDAAP authority to address discrimination, the Bureau appears to be signaling both an expansion of the scope of conduct it will consider to constitute unlawful discrimination and an increased focus on potential discrimination in its supervision and enforcement work.
3. Implications for Covered Entities
First, industry participants need to closely examine the products and services they offer to identify those that may be in scope of the Bureau’s new interpretation of its UDAAP authority. Under the Bureau’s new approach, an act or practice may be unfair “even when fair lending laws do not apply to the conduct,”18 and as a result the Bureau’s anti-discrimination examinations and investigations are likely to address a far wider range of consumer financial products and services than are covered by laws such as ECOA and HMDA. In fact, the Bureau’s announcement of its revised examination manual specifically noted that the agency will “examine for discrimination in all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.”19
The Bureau’s revised examination procedures also suggest certain additional areas of focus. The Bureau has repeatedly emphasized its concern that automated decision-making models may result in discrimination, and the Bureau’s announcement underlines that focus. The requirement that examiners ensure that call centers effectively respond to calls from LEP consumers indicates likely emphasis on protecting such consumers. Similarly, the requirement that covered entities’ employees and third party contractors “refrain from engaging in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis” indicate that, in applying its new approach to anti-discrimination, the Bureau may emphasize loan and account servicing.20 Such an emphasis would align with the Bureau’s broader focus on servicing issues, including payment application, customer service, and loan modification or forbearance requests. The Bureau also appears likely to focus on potential anti-discrimination concerns in examining how covered entities advertise and market their offerings, as examiners will now scrutinize whether such efforts, including targeted digital advertising, “improperly target or exclude consumers on a discriminatory basis”21 in contexts beyond credit, where marketing is already covered by ECOA.22
Second, industry participants not previously subject to Bureau supervision and enforcement for potentially discriminatory practices will need to prepare themselves for such review. The Bureau’s supervisory authority includes depository institutions with over $10 billion in assets, mortgage companies, payday lenders, and private education lenders, as well as “larger participants” in the consumer reporting, debt collection, student loan servicing, international money transfer, and automobile financing markets, as defined by prior CFPB regulations.23 Any such entity may be subject to an examination focusing on potential discrimination under the Bureau’s revised procedures. The scope of the Bureau’s enforcement authority is even broader, encompassing, with few exceptions, any entity that offers or provides a consumer financial product or service within the meaning of the CFPA. These entities may likewise be subject to investigations addressing such potential discrimination under a UDAAP theory. The Bureau’s newly announced position thus likely will require a far wider array of financial institutions, fintech firms, and other non-bank providers of consumer financial products or services to implement consider new or updated compliance programs to ensure their practices are not discriminatory than do ECOA and HMDA. Entities already subject to ECOA and HMDA will see anti-discrimination compliance obligations expand to new markets beyond mortgages and other credit, such as deposit products, payments products, and loan servicing. For any affected entity, developing or expanding fair lending compliance programs may require the use of proxies where (as may frequently be the case for consumer credit offerings not subject to HMDA) detailed customer demographic data is not available.
Third, the industry should prepare itself for the uncertainty introduced by the Bureau’s announcement regarding the specific theories that may be advanced. By relying on the malleable unfairness authority to extend its jurisdiction in this area, the Bureau’s revised examination procedures suggest a potential departure from longstanding principles of liability under anti-discrimination law that have been developed over decades of precedent.
Under ECOA and other federal anti-discrimination statutes, the courts generally recognize two theories of liability: disparate treatment and disparate impact. Disparate treatment is intentional discrimination against a protected class, e.g., race, color, national origin, religion, sex, or familial status, while disparate impact occurs when otherwise facially neutral policies have a disproportionate effect on members of a protected class without sufficient business justification. It remains to be seen whether the Bureau, in relying on its unfairness authority, will be required to demonstrate a discriminatory intent as an element of a disparate treatment claim, which in turn could impact the types of evidence the agency would be required to proffer to establish liability.24 The Bureau’s announcement suggests it may seek to advance disparate impact claims under the auspices of its UDAAP authority. It is unclear how, if at all, the “countervailing benefits” prong of an unfairness claim, which may include “lower prices to the consumer or a wider availability of products,” might stand in for the valid interest defense traditionally used in federal discrimination enforcement cases.25 The Bureau may take the view that, by proceeding under its UDAAP authority, it may avoid the burden-shifting framework traditionally used in discrimination cases, which places a burden on plaintiffs to show less discriminatory alternatives.26
In light of these uncertainties, entities may need to take a holistic view of their anti-discrimination compliance programs going forward, as the Bureau’s approach under an unfairness lens may depart from traditional theories of liability under federal discrimination statues. Whether the Bureau does, in fact, intend such a departure will become clearer as its staff undertake supervisory and other activities under the new manual.
