VIDEO: CFPB Focus on Unfair Discrimination

VIDEO: CFPB Focus on Unfair Discrimination

In this Compliance Clip (video), Adam talks about the CFPB’s new focus on unfair discrimination. Specifically, the CFPB recently announced changes to its supervisory operations to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply.


Video Transcript

This Compliance Clip is going to talk about the CFPB’s new focus on unfair discrimination. That's right. I said new focus. It's been a long time that the CFPB has been worried about discrimination under ECOA and the fair lending laws. But what the CFPB is talking about here is a little bit different. So let's take a look at this. 

This is a slide that came from our Spring 2022 Quarterly Compliance Update. This occurred during the first quarter of 2022. Specifically, this happened on March 16th of 2022 when the CFPB announced changes to its supervisory operations to better protect families and communities from illegal discrimination, including situations where fair lending laws may not apply. That bold sentence is the key piece here. They said that they're looking to stop illegal discrimination, especially unfair discrimination in situations where fair lending laws may not apply. They go on to say that the CFPB is going to closely examine discriminatory practices that violate the rules against unfair practices. Specifically, the CFPB is going to focus on financial institutions’ decision-making, advertising, pricing and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.

What's happening here, the big picture is that the CFPB understands that there are certain elements in banking that are not covered by fair lending laws. These elements typically relate to deposit products and services. What the CFPB is saying is that when we talk about unfair discrimination, we can utilize not only fair lending laws to look for unfair discrimination, but we can also utilize UDAAP. UDAAP is the unfair and deceptive acts in the practices rule from the Federal Trade Commission that was amended by the Dodd-Frank Act to include abusive practices. This rule has been around for decades under the Federal Trade Commission in the Federal Trade Commission Act, but has recently been revived through the Dodd-Frank Act in the financial sector.

What's interesting here is that the CFPB is saying that they're looking for unfair discrimination under the unfair prong of UDAAP. Therefore financial institutions need to be very careful going forward on how they handle deposit accounts when it relates to unfair discrimination. The reality is that most financial institutions should not have a problem because they understand that they need to treat customers equally. They cannot discriminate on lending sides, why would they do that on the deposit side? And frankly, we've known that this day has been coming for a long time.

However what's happened is the CFPB now has announced these official changes that they're looking for unfair discrimination under UDAAP. And it really falls under that three prong test of the criteria for unfairness, which includes causing substantial harm to consumers that they cannot reasonably avoid, or that harm is not outweighed by countervailing benefits to consumers or the competition. So that's what the CFPB is looking for and this now is going to relate to all areas in financial institutions, including the deposit accounts.

Now, what the CFPB says is that they will examine for discrimination in all consumer finance markets, including credit servicing collections, consumer reporting, payments, remittances, and deposits, and they'll pay particular attention to processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups. They want to see financial institutions are weighing the risks of different demographic groups in all areas of the financial institution and the relationship to unfair discrimination. So that's specifically what they're looking at. The CFPB says that it will also observe how companies test and monitor their decision making processes for unfair discrimination, as well as discrimination under, of course, fair lending laws and the Equal Credit Opportunity Act. 

The bottom line is we've known for a long time that we cannot discriminate against consumers on the lending side, and we knew it was not a good idea on the deposit side, but here the CFPB is saying that they're using their authority to look for unfair discrimination under the unfair prong of UDAAP. So that is what they're looking at.

That's it for this Compliance Clip.

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