On March 16, the Consumer Financial Protection Bureau (CFPB) issued an update to the CFPB Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) Examination manual, taking a broader view of discriminatory and unfair practices. The CFPB stated that it plans to examine for discrimination across all activities over which it has supervisory authority, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits, thereby extending the procedures beyond credit, fair lending, and the Equal Credit Opportunity Act (ECOA). The update continues to signal the CFPB’s expansion of their view on discrimination and unfair practices within the financial services industry.
This change expands the reach and scope of anti-discrimination supervision beyond those of the ECOA and other fair lending laws. ECOA covers lending products and prohibits discrimination against consumers; however, the CFPB’s UDAAP authority reaches across all consumer financial products and service providers. The expansion to examine discrimination under the definition of “unfairness” extends and widens the scope of CFPB examinations beyond lending products to scrutinizing how companies advertise, market, and target consumers as well as “companies’ decision-making processes” for all financial products and services, not just credit products.
The CFPB has positioned this change as an update to its exam procedures rather than a formal rulemaking, likely due to the lengthy notice and comment period associated with rulemaking. As such, it may be more difficult for industry parties to challenge the updates and there is uncertainty around how courts may rule on these cases.
The updated UDAAP Examination Procedures outline how the agency examiners will require financial institutions to demonstrate their processes for assessing risks, potential discriminatory outcomes, and compliance with UDAAP, including documentation of customer demographics and the impact of products and fees on different demographic groups.
While the updates clearly broaden the scope to cast a wider net to examine discriminatory practices, it is unclear from the updates which groups of consumers should be considered protected from discrimination, which is clearly laid out in ECOA.
The CFPB will examine the organization’s policies, procedures, training materials, complaints, and complaints management, not just for lending products but other products and services as well, such as payments, remittances, and deposits. Exams will include a documentation review as well as an analysis of how organizations test and monitor their decision-making processes to ensure these processes are not unfairly discriminating in violation of UDAAP.
Additionally, this new position from the CFPB is expected to impact a wider range of organizations, including financial institutions, fintechs, and other non-bank providers of consumer financial products or services, as these organizations may engage in non-lending-based activities where ECOA does not apply but activity may be deemed a discriminatory practice under the new interpretation.
The updated UDAAP Examination manual defines “unfairness” as a practice that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or to competition. The manual notes that consumers cannot reasonably avoid discrimination and it causes injury to the consumer, thus it is considered unfair. With this update, the CFPB could perform an “unfairness” analysis on any financial product or service. This could include:
Third-party debt collection and debt buying
Lead generation and aggregation activities
Credit repair organizations
Debit and prepaid cards
The updated manual describes how all financial products and advertisements will be examined to assess the risk of an organization causing consumer harm, including potential “foregone monetary benefits, denial of access to products. or service or emotional impacts or dignitary harms” that may be caused by exclusionary or discriminatory terms or targeted advertising.
This latest update follows a pattern of statements made by CFPB’s Director Rohit Chopra and his focus on eliminating bias in all areas of consumer finance, with a heightened focus on algorithmically based lending or advertising. This latest change is a big step by the CFPB to eliminate harm to consumers that could potentially be caused by what he calls “black box models.”
What this Means for You
The CFPB’s announcement should have financial institutions rethinking their fair lending and fair treatment policies and procedures beyond lending products to their full portfolio of consumer financial products and services, with a view toward anti-discrimination and the ability to demonstrate that practices, processes, and algorithms do not discriminate or potentially harm consumers.
Financial institutions will now need to perform comprehensive compliance assessments and recalibrate fair treatment and anti-discrimination frameworks around training, testing, monitoring, and even statistical analyses of their operations. Institutions should also be able to demonstrate remediation efforts where needed.
Financial institutions should look to review any policies or practices that potentially target or exclude individuals from products and services or offer products or services with different terms. These reviews should use the lens of determining if the organization’s policies and procedures could be considered discriminatory against certain groups.
Financial institutions should conduct internal examination of models and machine learning decisioning algorithms and be able to examine these models and review for potential “unfairness” and discrimination.
Financial industry participants will be required to fully understand and explain the methodologies of their business practices, including any machine learning models and algorithms, that could result in discrimination or exclude groups of people from services or products. Industry participants should consider reviewing bias trainings, information collection practices, and generally any practice or algorithm that could be perceived as discriminatory. Additionally, lines of business that did not previously require consideration of the UDAAP Examination Procedures may now need to review data collection, advertising, lending, and servicing practices for procedures that could be considered discriminatory. Finally, financial institutions should consider that the CFPB may be leading the way for other regulatory bodies to define their stances on decisioning algorithms and advertising models to ensure there is not unconscious bias or unidentified discrimination.
How Guidehouse can Help
Guidehouse teams have decades of experience updating team structures, procedures, and documentation in response to regulatory changes across all consumer financial products. Our teams have also helped financial institutions with monitoring and testing, as well as exam preparation and response specifically related to fair lending regulations. With our experts, we will partner with your teams to ensure that regulatory risk is understood and managed.
Special thanks to Courtney Cox and Tom Davies for assisting in the writing of this article.