The Consumer Financial Protection Bureau (CFPB) is continuing to take a more aggressive approach to consumer protection, specifically around UDAAP and how it plans to carry out enforcement actions.
Discrimination Is Considered Unfair Under UDAAP
The CFPB recently announced changes to its supervisory operations that will now consider discrimination an unfair act or practice under UDAAP. The goal of this update is to better identify and address illegal discrimination that harms consumers, even in instances where fair lending laws may not apply.
Under Dodd-Frank Act, an act or practice is considered unfair when:
- It causes or is likely to cause substantial harm to consumers
- Consumers cannot reasonably avoid injury
- The injury is not outweighed by benefits to consumers or competition
As it relates to the CFPB’s announcement, discrimination and improper exclusion are unavoidable by consumers, deeming it unfair under UDAAP-whether the act was intentional or not.
To help carry out its updated supervisory operations, the CFPB published an updated exam manual for evaluating UDAAP to include this change.
With these new updates, the CFPB will:
- Examine for discrimination in all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.
- Closely examine financial institutions’ decision-making in areas such as advertising, pricing, and other practices to ensure that companies are appropriately testing for, and eliminating, illegal discrimination.
- 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.
- Look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.
Updated Procedural Rules
The Bureau also recently issued updated procedural rules that could have a significant impact on their enforcement actions.
In short, these updated rules will allow the CFPB to bring more enforcement cases in-house (instead of in a federal court), and Director Chopra will be making the calls on what does or does not break the law-a process similar to how the Federal Trade Commission (FTC) operates.
As the Bureau continues to pursue an aggressive approach to consumer protection (including its efforts to crack down on discrimination), these procedural rules will allow them to move faster and cover more cases.
What This Means for Consumer Finance Companies
The CFPB is casting a broader net across the consumer finance market. This should not come as any surprise, as the writing has been on the wall for some time and by now everyone should be prepared for increased supervision by the Bureau. With this expanded authority, the Bureau is preparing to enter new territory with a renewed commitment to ensuring companies are tightening their compliance management by improving testing and monitoring, and addressing issues of discrimination (including the discovery of unintentional biases).
This new shift into using UDAAP as a tool for enforcement does not mean that the CFPB is taking its foot off the gas as it applies to fair lending or ECOA. In fact, it should sound even more alarms that this expansion of its authority means that it is likely that there will be more enforcement as it applies to not just testing and monitoring of the decision-making process, but also understanding how companies are assessing risk, documentation of customer demographics, and how product and fees impact various groups.
For some in the industry, that is easier said than done as some are finding the updates to the UDAAP exam manual to be extremely vague and ambiguous. There is also an unfortunate reality that some in the industry are simply not prepared for what is to come and as a result, the fines and penalties could prove to be damaging.
Be Proactive And Get Out Ahead of Enforcement Actions
The key to mitigating risk is a proactive approach to compliance. Whether it’s intentional or not, the CFPB has made it clear that any type of discrimination is unacceptable, and they’re not afraid to take corrective action.
Make sure your compliance management program is buttoned up and that you’re taking the necessary steps to avoid discrimination and other unfair practices in your marketing.
Learn how PerformLine can help your organization optimize its compliance management program and be proactive in UDAAP and other regulatory compliance initiatives.
John Zanzarella 
Gianna Kennedy 
PerformLine