The CFPB recently updated  its examination manual to, in Director Chopra’s words, “combat discriminatory practices across the board in consumer finance.” Under the CFPB’s revised manual, any discriminatory conduct that the CFPB identifies during a compliance exam can form the basis for a violation of the Dodd-Frank Act’s prohibition on unfair acts and practices. This is a novel expansion of the CFPB’s anti-discrimination authority and a game changer for CFPB-supervised companies.

The Equal Credit Opportunity Act (ECOA), administered by the CFPB, and the Fair Housing Act (FHA), which is administered by the US Department of Housing and Urban Development, are the primary sources of anti-discrimination law in the context of consumer financial services. They prohibit discrimination in consumer credit and housing transactions, respectively. The ECOA and FHA differ fundamentally from Dodd-Frank in that they are purpose-built to address discrimination in specific contexts, and they state the characteristics that creditors are prohibited from using as a basis for discrimination (e.g., race, nationality, sex). The ECOA and FHA also benefit from decades of judicial and regulatory interpretation. Historically, the CFPB has pursued illegal discrimination under the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in credit transactions on the basis of specified characteristics, such as race, age, sex, and nationality.

Dodd Frank, on the other hand, does not expressly prohibit discrimination but instead prohibits “unfair” practices, which are practices that harm consumers in a way that they cannot reasonably avoid and that is not offset by countervailing benefits to consumers or to competition.

The FTC has long had authority to enforce a similar unfairness standard under the Federal Trade Commission Act (FTCA), but, like the CFPB, the FTC has never used its unfair practices authority to pursue discrimination. The CFPB’s exam manual updates are a novel expansion of the CFPB’s anti-discrimination efforts.

Critics of the CFPB’s position have focused on this lack of precedent and the lack of express anti-discrimination language and standards in Dodd-Frank as reasons to doubt that Congress intended the CFPB to apply the unfairness standard to discrimination, particularly outside the consumer credit and housing markets. The American Bankers’ Association (ABA) recently published a white paper criticizing what it calls the CFPB’s unauthorized use of the unfairness doctrine as a “gap filler” to address an ill-defined range of conduct that Congress has not proscribed.

The ABA’s white paper also takes issue with the CFPB’s requirement that its examiners consider not only whether a covered entity has appropriate policies and procedures in place to prevent discrimination but whether the entity “uses decision-making processes in its eligibility determinations, underwriting, pricing, servicing or collections that result in discrimination.”¹ In effect, the CFPB is signaling that it will apply a results-based disparate impact analysis to identify discriminatory (and therefore unfair) practices.

It remains to be seen whether the ABA, or another interested party, will mount a formal challenge to the CFPB’s exam manual update. The ABA’s white paper takes the position that the manual update is a rule subject to both notice-and-comment procedures under the Administrative Procedure Act (which the CFPB did not observe in updating the exam manual) and congressional review (and potential rescission) under the Congressional Review Act. Also to be seen is whether a CFPB enforcement action based on discriminatory conduct as an unfair practice would, if challenged, be upheld by a court.

Non-bank fintechs and other financial services companies not currently subject to CFPB supervision should also take note of the CFPB’s new approach to discrimination. As we reported last quarter, the CFPB is planning to cast a wider supervisory net to include non-banks that it finds pose risks to consumers.

We have identified five key takeaways from the CFPB’s exam manual update:

1. Supervised companies that provide consumer financial products and services other than credit (e.g. remittances, deposit accounts, collections) should prepare to be examined for discrimination under Dodd-Frank’s unfairness standard.
2. CFPB examiners will evaluate whether examinees have policies and procedures, training programs, and vendor management systems in place to prevent discrimination at all stages of the product life-cycle, from marketing² through underwriting, account reviews, servicing, and collections.
3. CFPB examiners may conduct retrospective transaction testing to determine whether the examinee’s policies have a disparate, adverse impact on the basis of a protected characteristic.³
4. In addition to prevention measures, supervised companies should conduct ongoing monitoring for potential discrimination. This should include processes for identifying and following up consumer complaints that allege discrimination, whether they are received by the company or an affiliate or service provider.
5. Supervised companies should consider: (a) limiting discretion of employees and service providers to make exceptions to company policies (e.g., waiving late payment fees) and (b) providing clear written guidance on eligibility criteria for policy exceptions. Exceptions should be documented and reviewed to ensure they are not granted in a discriminatory manner.

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