On March 16, the Consumer Financial Protection Bureau (CFPB or Bureau) unveiled an enormous change to its fair lending philosophy that will have major ramifications for financial services providers of all types. In a press release, the CFPB announced that it will begin targeting discrimination as an unfair practice under its unfair, deceptive, and abusive acts or practices (UDAAP) authority, vastly expanding the reach of its anti-discrimination enforcement beyond the limits of the Equal Credit Opportunity Act (ECOA). The CFPB also updated its UDAAP Exam Manual to reflect this expansion, providing details about the types of discrimination it intends to address under this new standard.

Background

While this announcement will likely surprise the financial services industry, the idea that discrimination could be enforced under UDAP authority has been simmering for a couple of years now. In May 2020, the Federal Trade Commission (FTC) settled with a motor vehicle dealer regarding discriminatory practices in its sale and financing of motor vehicles. In a concurring statement, then-FTC Commissioner and current CFPB Director Rohit Chopra noted that practices could be both discriminatory (under specific laws like ECOA and the Fair Housing Act (FHA)) and unfair under the FTC Act. Chopra specifically noted that the FTC could “use its unfairness authority to attack harmful discrimination in other sectors of the economy.”

Then, in spring 2021, the Student Borrower Protection Center published an article by Relman Colfax attorneys Stephen Hayes and Kali Schellenberg, titled “Discrimination is “Unfair”: Interpreting UDA(A)P to Prohibit Discrimination.” The article noted that the existing legal framework for discrimination (including ECOA and FHA) is a “patchwork” of laws and that discrimination is “not expressly prohibited or regulated in large swaths of our nation’s economy.” To remedy these gaps, the article argued that discrimination fits squarely within the definition of “unfairness” used by regulators in that discrimination is (1) likely to cause substantial injury to consumers; (2) which is not reasonably avoidable; and (3) that is not outweighed by countervailing benefits to consumers or competition. Notably, the article argued that both disparate treatment and disparate impact should be actionable under a UDAP/UDAAP statute.

Practical Impacts

The CFPB, through its announcement and exam manual updates, adopted the position that discrimination meets the definition of “unfairness.” We are skeptical that federal courts would endorse this position in contested litigation because it seems to ignore the legislative choice made by Congress to explicitly limit the reach of anti-discrimination concepts to specific areas when it passed legislation like ECOA, the Fair Housing Act, Title VII, the Americans with Disabilities Act, and the like. We suspect a court would be suspicious of the CFPB taking this policy judgment into its own hands.

Moreover, if discrimination is “unfair” under the Dodd-Frank Act, then it also must be “unfair” under the FTC Act and other state UDAP laws. But those laws reach every aspect of the economy. The logical conclusion of the CFPB’s position is that disparate impact applies to everything in society. Every industry in the economy, from grocery stores to equipment manufacturers to nail salons, would be under a commandment to ensure that all their operations — including marketing and advertising — are free from disparate impact. This is an impossible and unnecessary restriction to impose, but it is what the CFPB’s position would require because it has always aligned the definition of “unfair” under Dodd-Frank with the same term used in the FTC Act.

But our doubts about its legal merits aside, the Bureau signaled that it intends to apply this position in supervision and enforcement matters, and the implications of this position for the financial services industry cannot be overstated.

First, though not explicitly mentioned by the CFPB, the updated UDAAP Exam Manual very strongly indicates that the CFPB plans to use both disparate treatment and disparate impact analyses as a way of establishing “unfair” discrimination. For example, the manual urges its examiners to consider whether a supervised entity has “a process to take prompt corrective action if the decision-making processes it uses produce deficiencies or discriminatory results.” (emphasis added). Further, examiners must consider whether a supervised entity ensures that employees and third-party service providers “refrain from engaging in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis.” (emphasis added). According to the CFPB, this means the disparate impact doctrine now applies to every aspect of every financial services provider over which the Bureau has jurisdiction.

Second, by expanding the reach of its unfair practices authority to include discrimination, the CFPB now has the power to examine potentially discriminatory practices in both new markets and involving activities outside of its authority under ECOA. Under ECOA, discrimination is prohibited only against “applicants” for credit. In its press release, the CFPB specifically noted that it would examine for discrimination in “all consumer finance market,” including noncredit products like payments, remittances, and deposit accounts.

In addition, the CFPB specifically highlighted targeted marketing, which we consider to be outside of the scope of ECOA because viewers of advertisements are not “applicants.” The updated UDAAP Exam Manual states that transaction testing should determine whether a supervised entity “engages in targeted advertising or marketing in a discriminatory way.” The manual also notes that a supervised entity’s polices, procedures, and practices should “not target or exclude consumers from products and services, or offer different terms and conditions, in a discriminatory manner.” Now, for the first time, the CFPB explicitly asserted that targeted marketing is discriminatory or actionable, although how the Bureau intends to assess targeted advertising remains unclear. Nevertheless, the Bureau’s new exam manual clearly signaled that the Bureau will examine targeted advertising.

Conclusion

The CFPB’s announcement is a sea change in how financial institutions need to think about fair lending and fair treatment. By expanding both the product and activity reach of anti-discrimination enforcement, the CFPB will force financial institutions — including those with operations wholly outside the scope of ECOA — to perform comprehensive compliance assessments and establish fair lending concepts like policies, procedures, training, testing, monitoring, and even statistical analyses of their operations.

 


 

On March 23, please join us for a webinar where we will examine this announcement, its enormous practical impacts, and what the Bureau’s new position means for the financial services industry. Click here to register.

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Photo of David N. Anthony David N. Anthony

David is an experienced trial attorney with a concentration in litigating financial services and business disputes, including class actions related to the FCRA, FDCPA, TCPA and other consumer protection statutes.

Photo of Mark Furletti Mark Furletti

Mark is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He focuses on federal and state consumer and small business lending and payments laws, including those that apply to payment cards, buy-now-pay-later transactions, vehicle-secured loans, lines of credit, unsecured…

Mark is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He focuses on federal and state consumer and small business lending and payments laws, including those that apply to payment cards, buy-now-pay-later transactions, vehicle-secured loans, lines of credit, unsecured loans, and deposit products. He counsels providers of consumer and small business financial services, including banks, on regulatory compliance, and defends them in class action litigation and government supervisory and enforcement matters. He also counsels purchasers of merchant receivables, companies that specialize in online small business lending, and companies that interact with their customers electronically or that set up recurring billing arrangements with their customers.

Mark regularly provides guidance on electronic payments and payment network rules, electronic contracting and mobile commerce, online banking, retail installment sales, preparing for examinations by the Consumer Financial Protection Bureau (CFPB), responding to CFPB supervisory requests (including so-called PARR letters), Article 9 of the Uniform Commercial Code, lease-purchase transactions and consumer protection laws, such as the Telephone Consumer Protection Act (TCPA), Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Electronic Funds Transfer Act (EFTA), Electronic Signatures in Global and National Commerce Act (E-SIGN), and statutes prohibiting unfair, deceptive, and abusive acts and practices.

He is the co-chair of the American Bar Association’s (ABA’s) National Institute on Consumer Financial Services Basics. He previously served as co-chair of the Electronic Financial Services Subcommittee of the ABA’s Consumer Financial Services Committee.

Previously, Mark worked for the Federal Reserve Bank of Philadelphia for several years, during which he wrote more than 15 articles on consumer credit and payments topics and advised those crafting regulations on consumer credit and consumer payments issues. One article, “The Debate Over the National Bank Act and the Preemption of State Efforts to Regulate Credit Cards,” 77 Temple L. Rev. 425 (2004), was named best student article by the American College of Consumer Financial Services Lawyers. Other published articles include “Credit Card Pricing Developments and Their Disclosure,” 13 J. of Fin. Transformation 5 (2005).

Mark also worked as a business consultant, assisting the nation’s largest retail banks and credit card lenders with customer strategy issues, and as a manager at one of the largest credit card issuers in the United States.

Photo of Michael E. Lacy Michael E. Lacy

Michael specializes in complex litigation matters in state and federal courts.

Photo of Chris Willis Chris Willis

Chris is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He advises financial services institutions facing state and federal government investigations and examinations, counseling them on compliance issues including UDAP/UDAAP, credit reporting, debt collection, and fair lending, and defending…

Chris is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He advises financial services institutions facing state and federal government investigations and examinations, counseling them on compliance issues including UDAP/UDAAP, credit reporting, debt collection, and fair lending, and defending them in individual and class action lawsuits brought by consumers and enforcement actions brought by government agencies.

Chris also leverages insights from his litigation and enforcement experience to help clients design new products and processes, including machine learning marketing, fraud prevention and underwriting models, product structure, advertising, online application flows, underwriting, and collection and loss mitigation strategies.

Chris brings a highly practical focus to his legal advice, informed by balancing a deep understanding of the business of consumer finance and the practical priorities of federal and state regulatory agencies.

Chris speaks frequently at conferences across the country on consumer financial services law and has been featured in numerous articles in publications such as the Wall Street Journal, the New York Times, the Washington PostAmerican BankerNational Law JournalBNA Bloomberg, and Bank Safety and Soundness Advisor.

Photo of Alan D. Wingfield Alan D. Wingfield

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance…

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance counseling to help businesses with the myriad federal and state consumer protection laws and laws regulating financial services companies.

Photo of Chris Capurso Chris Capurso

Chris’ practice focuses on consumer financial services law, primarily on federal and state law compliance matters. Chris regularly advises financial institutions, lenders, and sales finance companies in the development and maintenance of closed-end and open-end lending, automobile finance, fintech, point-of-sale, small dollar, and…

Chris’ practice focuses on consumer financial services law, primarily on federal and state law compliance matters. Chris regularly advises financial institutions, lenders, and sales finance companies in the development and maintenance of closed-end and open-end lending, automobile finance, fintech, point-of-sale, small dollar, and other credit programs. He provides guidance on federal consumer protection laws and regulations, including TILA, ECOA, ESIGN, and GLBA.