By Christopher Sicuranza, Kathryn Rock, Alexandra Sawyer
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:
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.”
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.
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.