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On March 16, 2022, the Consumer Financial Protection Bureau (CFPB) announced changes to its supervisory operations for the stated purpose of positioning the CFPB to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply. These changes are reflected in the CPFB’s Supervision and Examination Manual (the Manual) under its procedures for evaluating unfair, deceptive or abusive acts or practices (UDAAPs). The Manual now explicitly incorporates anti-discrimination considerations in determining UDAAPs and directs examiners to consider evidence of discrimination when identifying potential UDAAPs and determining whether UDAAPs have occurred.

The CFPB’s action reflects the agency’s broad interpretation of its supervision and examination authority and the stated desire of the CFPB’s leadership to enforce federal consumer financial laws aggressively, specifically including fair lending and anti-discrimination laws, such as the Equal Credit Opportunity Act (ECOA), and the prohibition of UDAAPs. The revisions to the Manual direct CFPB examiners to look beyond conduct that is prohibited by or otherwise directly connected to the fair lending laws and to consider whether a firm’s policies and practices, by design or in their execution, have the effect of excluding certain individuals in an unfair and discriminatory manner. In practice, this shift in supervision and examination policy and procedure may result in enforcement actions involving cited violations of the fair lending laws and the prohibition on UDAAPs in respect of the same conduct. Accordingly, the CFPB’s action can reasonably be expected to facilitate the agency’s vigorous enforcement of potential misconduct in the consumer finance sector.

A comparison document reflecting the CFPB’s revisions to the Manual can be found here.

Discrimination and Unfairness

Under the updated Manual, discriminatory conduct can contribute to a finding of unfair practices. The standard for unfairness under the Dodd-Frank Act is a finding by the CFPB that (1) an act or practice 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 to competition. The updated Manual incorporates anti-discriminatory considerations into the first and second factors of the test. Specifically, with regard to whether a practice causes substantial injury to the consumer, the CFPB recognizes that “[f]oregone monetary benefits or denial of access to products or services, like that which may result from discriminatory behavior” may cause substantial injury. The CFPB adds that discriminatory conduct or dignitary harms may amount to or contribute to substantial injury in certain cases. More significantly, with regard to whether the injury can be reasonably avoided by the consumer, the CFPB states that consumers cannot reasonably avoid discrimination itself or the harms associated with it.

Though the updated Manual did not augment its discussion of deceptive and abusive acts or practices with anti-discriminatory considerations, this should not be understood to mean that discriminatory conduct is never relevant in determining deceptive and abusive acts or practices. Indeed, the CFPB recognizes that a discriminatory act or practice can be unfair as well as deceptive or abusive.

Interaction with Other Federal or State Laws

The updated Manual also makes clear the CFPB’s position that compliance with other federal or state consumer protection laws does not shield acts or practices from being UDAAPs, nor vice versa. Regarding the relationship of UDAAPs with other federal or state laws, the Manual states that a discriminatory act or practices that is unfair, deceptive or abusive may also violate other antidiscrimination laws, such as ECOA. This suggests that discriminatory acts or practices can be deceptive or abusive, as well as unfair. Even when a discriminatory act or practice is not in violation of other anti-discriminatory laws or federal statutes such as ECOA and the Truth in Lending Act (TILA), it is not “shielded from the possibility of being unfair, deceptive or abusive” under Dodd-Frank. For example, not allowing consumers of a specific ethnicity to open deposit accounts or subjecting consumers of that ethnicity to different requirements to open deposit accounts may be viewed by the CFPB as an unfair practice even in those instances when ECOA does not apply to this type of transaction.

Examination for Discriminatory Conduct

The updated Manual directs examiners to review and evaluate additional documents, materials and considerations that may prove relevant to discriminatory conduct. When identifying potential UDAAP concerns, examiners should now also obtain and review (a) documentation regarding the use of models, algorithms and decision-making processes used in connection with consumer products and services; (b) information regarding demographics of customers using various products or services, and the impacts of various products and services on specific demographics; and (c) demographic research or analysis relating to marketing of consumer products and services.

When examining policies and procedures for potential UDAAP concerns, the examiner should now also consider whether (a) the examined entity has processes to prevent discrimination in relation to all aspects of consumer products or services and to monitor for such discrimination and (b) the examined entity has a compliance program which includes an established process of periodic analysis and monitoring of all decision-making processes in connection with consumer financial products or services, and a process to take corrective action to address potential UDAAP concerns, including discrimination, that arise from using such decision-making processes. Furthermore, the examiner is directed to determine whether the examined entity’s policies, procedures and practices target or exclude consumers in a discriminatory manner and whether its customer service personnel have appropriate training to prevent discrimination.

While the anti-discrimination factors discussed above pertain to a high-level assessment of an entity, the following factors are relevant to identifying specific areas/transactions that may raise UDAAP concerns. For instance, when examining specific transactions for potential UDAAPs, an examiner should now also consider whether one demographic is favored with better terms, more products and services, better customer service, targeted advertising (including digital advertising) and less stringent eligibility determinations. To take an example from the Manual, how effectively call centers respond to calls from consumer with limited English proficiency is a factor that may contribute to discriminatory customer service.

Financial institutions interested in the updated CFPB examination procedures’ impact on their businesses may contact any of authors of this Advisory or their usual Arnold & Porter contact. The firm's Financial Services team would be pleased to assist with any questions about CFPB supervision or consumer finance more broadly.

*Howard Duan contributed to this Advisory. Mr. Duan is a graduate of Harvard Law School and is employed at Arnold & Porter's New York office. He is not admitted to the practice of law.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.