The CFPB intends to use its powers under the Consumer Financial Protection Act to identify, prohibit and prosecute discrimination as a UDAAP – an “unfair” act or practice any Financial service category, be it banking (including deposits), services, collections, credit reports, payments, or money transfers and transfers. The CFPB will focus on financial institutions’ decision-making on advertising, pricing and other areas to ensure businesses adequately investigate and eliminate unlawful discrimination.
Citing the test for an “unfair” act or practice, the Bureau held that (1) discrimination causes or is likely to cause significant harm to consumers, (2) such harm is not reasonably avoidable to consumers, and (3) such harm they are not outweighed by compensating consumer or competitive benefits. “Depending on how the behavior occurs (face-to-face, digital, systematic, etc.), many individuals may not be aware that they have received differential treatment or a discriminatory outcome,” said Eric Halperin and Lorelei Salas, leaders of the CFPB Enforcement and Supervision Divisions or in a blog post published with the announcement.
From its inception, the CFPB has focused on discrimination. However, that focus has been on fair lending and compliance with the Equal Credit Opportunity Act (ECOA) and its executive order, Regulation B, which prohibits discrimination against applicants in credit transactions based on race, color, religion, national origin, sex, marital status or Age, among other categories. Now the CFPB will examine 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) Audit Manual, which requires companies to incorporate anti-discrimination measures into every aspect of UDAAP prevention. As part of the review process, CFPB reviewers will determine whether companies:
- Have processes in place to “prevent discrimination in relation to any aspect of a consumer financial product or service” and whether those processes, including compliance programs, assess policies and procedures for discrimination both prior to adoption and periodically after implementation,
- Ensure their “policies, procedures and practices do not discriminately target or exclude consumers from products and services or offer different terms and conditions”.
- 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
- Ensure that “employees and third parties who market or advertise products or services are adequately trained not to engage in unfair, deceptive or abusive acts or practices, including discrimination.”
CFPB auditors require regulated entities to disclose their procedures for assessing risk and discriminatory outcomes, including documenting customer demographics and the impact of products and fees on different demographics.
The CFPB is vigilant that injuries arise from discrimination don’t have to be intentional. At this point, the Governing Board addressed the increasing reliance of financial services firms on machine learning models and the use of artificial intelligence, particularly in relation to targeted advertising and marketing, stating, “We will closely examine the reliance of firms on automated decision-making. Modeling and possible discriminatory outcomes.” In other words, the CFPB appears willing to use evidence of mixed implication to determine whether a financial services provider engaged in unfair discrimination.
The CFPB press release is here.
The CFPB’s updated UDAAP exam manual is here.
A related CFPB blog post is here.
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