Maryland Legal Alert for Financial Services

The Consumer Financial Protection Bureau (CFPB) released updates to its Supervision and Examination Manual (Manual) on March 16, 2022. The updates signal a major expansion of the CFPB’s focus on combating discrimination in the consumer finance marketplace.

Key takeaways from the updated Manual include the following:

• The CFPB is likely to look at deposit offerings, servicing practices, and payment and remittance products, not just lending products;
• How products and services are marketed, including targeted digital advertising, and decisioning algorithms are likely to be reviewed; and
• Traditional fair lending concerns are likely to be used to identify areas of disparate impact discrimination.

Under the Dodd-Frank Wall Steet Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the CFPB was vested with the authority to address certain unfair, deceptive, and abusive acts and practices (UDAAPs). The updated Manual indicates that the CFPB will examine providers of consumer financial products and services to identify potential discrimination in all areas of consumer finance, not just lending products covered by the Equal Credit Opportunity Act or Fair Housing Act.

The CFPB’s determination of what is “unfair” involves a somewhat “squishy” review of a practice to determine if:

• It causes or is likely to cause substantial injury to consumers,
• The injury is not reasonably avoidable by consumers, and
• The injury is not outweighed by countervailing benefits to consumers or competition.

This wide net will allow the CFPB to label a broad array of conduct as unfair, leaving providers of consumer financial products or services without a clear roadmap of what conduct to avoid.

The updates to the Manual include these additions concerning what CFPB examination staff are to obtain and review when doing an examination:

• Documentation regarding the use of models, algorithms and decision-making processes used in connection with consumer financial products and services;
• Information collected, retained or used regarding customer demographics, including:
  • The demographics of consumers using various products or services, and
  • The breakdown of consumer demographics for various product uses, fees, revenue sources and costs, or the impacts of various products and services on specific demographics; and
• Any demographic research or analysis relating to marketing or advertising of consumer financial products or services.

The CFPB’s examination scope now includes a twofold review responsibility. This review is intended to determine whether the financial services provider has a process to prevent discrimination regarding all aspects of consumer financial products or services offered and has a compliance program with a periodic review and monitoring of all decision-making processes, including steps to take corrective action to address any potential UDAAP concerns, such as discrimination.

Notably, these areas will be indicators of discrimination:

• Improperly giving inferior terms to one customer demographic as compared with other customer demographics;
• Improperly offering or providing more products or services to one customer demographic as compared with other customer demographics;
• Having customer service representatives who improperly treat customers of certain demographics worse or provide extra assistance or exceptions to customers of certain demographics;
• Using targeted advertising or marketing in a discriminatory way;
• Using decision-making processes in making eligibility determinations, underwriting, pricing, servicing or collections that result in discrimination; and
• Failing to evaluate and make necessary adjustments and corrections to prevent discrimination.

Practice Pointer: The CFPB is likely to pay particular attention to what consumer finance providers do to monitor their own offerings for disparate impacts on protected classes. Financial service providers should review their compliance management programs to ensure that product marketing is not improperly targeting or excluding members of protected classes, and that online account opening automated decisioning tools are not disproportionately excluding members of protected classes in the marketplace. This will involve regular testing of booked accounts with use of proxies for race, gender, etc. to identify and address areas where protected classes are not getting in the “front door” and/or are treated differently than non-protected class consumers.

For questions about the CFPB’s UDAAP authority, please contact Christopher R. Rahl or Bryan M. Mull.

Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com

Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com