March 21, 2022

CFPB Officially Adds UDAAP to Its Anti-Discrimination Tool Kit

3 min

The CFPB intends to use its authority under the Consumer Financial Protection Act to identify, prohibit, and prosecute discrimination as a UDAAP—an "unfair" act or practice in any financial services category, whether it be banking (including deposits), servicing, collections, credit reporting, payments, or money transfers and remittances. The CFPB will focus on financial institutions' decision-making in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.

Citing the test for an "unfair" act or practice, the Bureau explained that (1) discrimination causes or is likely to cause substantial injury to consumers, (2) such injuries are not reasonably avoidable by consumers, and (3) those injuries are not outweighed by countervailing benefits to consumers or competition. "Depending on how the conduct occurs (face to face, digital, systematic, etc.), many individuals may be unaware they received disparate treatment or a discriminatory outcome," said Eric Halperin and Lorelei Salas, chiefs of the CFPB Enforcement and Supervision Divisions, respectively, in a blog post released with the announcement.

Dating back to its early days, the CFPB has focused on discrimination. However, that focus was centered on fair lending and compliance with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, which prohibit discrimination in credit transactions against applicants based on race, color, religion, national origin, sex, marital status, or age, among other categories. Now the CFPB will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.

CFPB also released an updated Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) Examination Manual that expects companies to weave measures preventing discrimination into every aspect of UDAAP prevention. As part of the examination process, CFPB examiners will determine whether entities:

  • Have processes to "prevent discrimination in relation to all aspects of consumer financial products or services" and whether those processes, including compliance programs, evaluate policies and procedures for discrimination both prior to enactment and periodically after implementation,
  • Make sure their "policies, procedures and practices do not target or exclude consumers from products and services, or offer different terms and conditions, in a discriminatory manner,"
  • Ensure their "marketing or advertising does not improperly target or exclude consumers on a discriminatory basis, including through digital advertising,"
  • Train their own "customer service personnel to prevent discrimination," and
  • Verify that "employees and third parties who market or promote products or services are adequately trained so that they do not engage in unfair, deceptive, or abusive acts or practices, including discrimination."

CFPB examiners will require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.

The CFPB is careful to note that injuries sustained from discrimination do not need to be intentional. On this point, the Bureau homed in on financial services companies' increasing reliance on machine-learning models and use of artificial intelligence, especially with respect to targeted advertising and marketing, stating, "we will be closely examining companies' reliance on automated decision-making models and any potential discriminatory outcomes." In other words, the CFPB appears ready to use evidence of disparate impact in determining whether a financial services provider has engaged in unfair discrimination.

The CFPB's press release is here.

The CFPB's updated UDAAP Exam Manual is here.

A related CFPB blog post is here.

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