Using alternative data about online lending, computer-assisted underwriting, and artificial intelligence to provide consumer financial services can lead to unintended fair lending and UDAP risks.
"Keeping Fintech Fair: Thinking About Fair Lending and UDAP Risks," a detailed primer by Carol A. Evans, published by Consumer Compliance Outlook, details general guideposts for evaluating unfair or deceptive acts or practices (UDAP) and fair lending risks related to Fintech. Using highlights from CFPB, FTC, banking agency, and DOJ enforcement actions, "Keeping Fintech Fair" showcases fair lending and UDAP concepts to "help guide thinking early on in the business development process."
Because of Evans' position as Associate Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, "Keeping Fintech Fair" is a significant resource for regulators, enforcement agencies, industry, and advocates seeking to understand and avoid potential Fintech legal pitfalls.
Here's a look at some of the topics covered.
Fair Lending Risks in Fintech
Evans' central warning is that "Fintech may raise the same types of fair lending risks present in traditional banking, including underwriting discrimination, pricing discrimination, redlining, and steering." The article provides a user-friendly explanation of two fair lending laws, the Equal Credit Opportunity Act and the Fair Housing Act, which broadly prohibit two kinds of discrimination: disparate treatment and disparate impact.
UDAAP and UDAP in Financial Services
If there's one thing we've observed since the passage of the Dodd-Frank Act, it is the CFPB's ability and willingness to bring claims using its enforcement authority to enforce the Dodd-Frank prohibition on unfair, deceptive, or abusive acts or practices (UDAAP). In addition, the FTC, Federal Reserve, and FDIC have similar authority under Section 5 of the Federal Trade Commission Act, and most states have their own UDAP laws.
Ask Questions Early to Evaluate Alternative Data
Using examples from recent enforcement matters, Evans suggests several questions that can be used to begin an analysis of the use of alternative data.
- Is there a nexus with creditworthiness?
- Are the data accurate, reliable, and representative of all consumers?
- Will the predictive relationship be ephemeral or stable over time?
- Are you using the data for the purpose for which they have been validated?
- Do consumers know how you are using the data?
- Is the data being used to determine content shown to consumers?
- Which consumers are evaluated with the data?
None of the highlights above or the complete article in Consumer Compliance Outlook is "a substitute for the careful legal review that should be part of any effective consumer compliance program," writes Evans. Consumer Compliance Outlook is a Federal Reserve System publication dedicated to consumer compliance issues.
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For more information, please contact Jonathan L. Pompan at 202.344.4383 or jlpompan@Venable.com.
Jonathan L. Pompan, partner and co-chair of Venable's Consumer Financial Services practice, advises on compliance matters, and represents clients in investigations and enforcement actions brought by the CFPB, FTC, state attorneys general, and regulatory agencies.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can be provided only in response to a specific fact situation.