CFPB Expands UDAAP Enforcement to Prevent Unfair Discrimination in All Financial Products

On March 15, 2022, the Consumer Financial Protection Bureau (“CFPB”) issued an updated examination procedures manual for Unfair Deceptive or Abusive Acts or Practices (“UDAAP”).¹  The updated examination guidance makes clear that the CFPB will take an expansive view of “unfairness” under UDAAP to encompass fair lending and anti-discrimination considerations even outside of traditional “credit” products.² 

While anti-discrimination concepts previously focused largely on “credit” products under the Equal Credit Opportunity Act and the Fair Housing Act, the CFPB will now apply anti-discrimination principles to all financial products and services offered by the broad array of entities within its purview.  For example, the CFPB signaled this broad reach could include deposit and checking services (including how checks are honored, accounts opened and closed, imposition of fees, etc.), any add-on products or services, any banking and servicing fees charged to consumers (for example, late fees, processing fees, etc.), processing of consumer payments and remittances, and any advertising and offering of consumer financial products or services.  The CFPB’s intent is to examine “all aspects of consumer financial products or services” that an entity offers or provides under an anti-discrimination lens.  This expanded view of UDAAP is consistent with the Bureau’s renewed focus on fair lending issues over the past year.  The CFPB is aligned with other federal and state regulatory agencies on collaborative enforcement of consumer protection statutes with a focus on fair lending, including through the Justice Department’s Combatting Redlining Initiative.  See our article discussing the renewed regulatory focus on fair lending here. 

With this new examination guidance, we can expect an expansion of enforcement actions under both “unfair” and “abusive” UDAAP theories.  Under the Trump Administration, the CFPB sought to resolve uncertainty regarding the scope and meaning of “abusiveness” and adopted a policy to (1) cite UDAAP violations only when the harm to the consumer outweighs the benefit, (2) avoid “dual pleading” of UDAAP based on the same facts as other violations, and (3) not to seek monetary relief beyond consumer restitution where the company did not act in bad-faith.³  Earlier this year, the CFPB quickly rescinded that Trump-era UDAAP policy on “abusiveness” and advised that its current policy is to “exercise the full scope of its supervisory and enforcement authority to [] remediate abusive acts or practices” which can “clarify the statutory abusiveness standard” over time through judicial and administrative decisions.⁴  Coupled with the latest expansion of “unfairness” to include discrimination, the CFPB signaled that it has returned to a broad view of UDAAP and will return to the policy of “regulation by enforcement” that predominated under the Obama Administration.

With this policy, CFPB examiners will be “alert throughout an examination” for potential UDAAP issues and will consider specific UDAAP examinations based on the entity’s risk assessment.⁵  Based on the updated examination manual, as financial institutions review their UDAAP-related policies and procedures, fair lending and disparate impact theories should also be at front of mind.  When developing or testing your institutions’ UDAAP and fair lending policies, it is essential to keep in mind the primary areas of examination, including but not limited to training materials, descriptions of products and services, minutes of Board or management meetings, and documentation related to software and decision-making algorithms.⁶  Compliance programs should also be developed in light of the financial institutions specific programs and customer reach.  For example, while reviewing for UDAAP concerns, the CFPB indicated that examiners will consider the institution’s marketing programs, product and service mix, and customer base.⁷

In light of the updated manual and the enforcement focus of the CFPB, it is critical that institutions review their UDAAP policies and procedures to incorporate a broad view of “abusiveness,” “unfairness” and anti-discrimination.  The CFPB’s significant expansion of the UDAAP examination procedures to consider unfair discrimination across all financial products (not just credit products) is a major development that financial institutions should be prepared for at their next examination and proactively address in their compliance programs.  Entities should review their consumer products and services broadly under “unfairness” and anti-discrimination principles, including consideration of how fees are charged (or waived), policies for acceptance of payment methods, and advertising and offering of products or services. 

Financial institutions should consider implementing policies and procedures to address likely areas of examination, such as:

• Controls and oversight for decision-making based on algorithms or machine learning models including those used for targeted advertising and marketing or underwriting;⁸
• Whether different product terms exist or whether more products or services are provided to certain demographics;⁹
• Whether marketing and advertising – particularly digital advertising – reaches the entire appropriate customer base and does not improperly exclude consumers on a discriminatory basis;¹⁰ and
• Whether third party vendors and service providers are properly trained and supervised to ensure no UDAAP concerns exist. This may include ensuring that:
  • Third party call centers or other vendors have appropriate UDAAP policies and oversight,
  • Employees or third parties do not engage in collection practices “that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis,” and
  • Employees and third party vendors are effectively responding to communications from consumers with limited English proficiency.

Our attorneys have significant experience in the financial services sector.  We have represented clients at all stages in the compliance process from development and review of policies, procedures, and training programs, to representation in examinations and matters before the agencies.  Our team can assist your institution with compliance programs to meet the evolving priorities and considerations of the regulatory agencies. 

Contacts

Abigail M. Lyle*
alyle@huntonak.com 

Nicole Skolnekovich**
nskolnekovich@huntonak.com 

* Abigail Lyle is a partner in the financial services litigation and compliance practice group in the Dallas office of Hunton Andrews Kurth LLP. Abigail’s practice focuses on regulatory compliance and defending financial institutions in enforcement actions and litigation related to consumer protection laws. She can be reached at +1 214 979 8219 or alyle@HuntonAK.com.

** Nicole Skolnekovich is an associate in the financial services litigation and compliance practice group in the Dallas office of Hunton Andrews Kurth LLP. Her practice focuses on counseling financial service providers on regulatory and compliance matters. She can be reached at +1 214 979 2940 or nskolnekovich@huntonak.com.

 

¹ CFPB Targets Unfair Discrimination in Consumer Finance, Consumer Financial Protection Bureau (Mar. 16, 2022) available at https://files.consumerfinance.gov/f/documents/cfpb_unfair-deceptive-abusive-acts-practices-udaaps_procedures.pdf.

² See Unfair, Deceptive, or Abusive Acts or Practices Manual V.3 (March 2022) at p.10 (“… discriminatory act or practice is not shielded from the possibility of being unfair, deceptive or abusive even when fair lending laws do not apply to the conduct”).

³ CFPB Announces Policy Regarding Prohibition on Abusive Acts or Practices, Consumer Financial Protection Bureau (Jan. 24, 2020), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-policy-regarding-prohibition-abusive-acts-practices/.

⁴ Consumer Financial Protection Bureau Rescinds Abusiveness Policy Statement to Better Protect Consumers, Consumer Financial Protection Bureau (Jan. 24, 2020), available at https://files.consumerfinance.gov/f/documents/cfpb_abusiveness-policy-statement-consolidated_2021-03.pdf.

⁵ See Unfair, Deceptive, or Abusive Acts or Practices Manual V.3 (March 2022) at p.11 (“Even if the risk assessment has not identified potential unfair, deceptive, or abusive acts or practices, examiners should be alert throughout an examination for situations that warrant review.”).

⁶ Review the full scope of examination procedures here.

⁷ See Unfair, Deceptive, or Abusive Acts or Practices Manual V.3 (March 2022) at p.11 (“Based on the results of the risk assessment of the entity, examiners should review for potential unfair, deceptive, or abusive acts or practices, taking into account an entity’s marketing programs, product and service mix, customer base, and other factors, as appropriate.”).

⁸ Cracking down on discrimination in the financial sector, Consumer Financial Protection Bureau (Mar. 16, 2022), available at https://www.consumerfinance.gov/about-us/blog/cracking-down-on-discrimination-in-the-financial-sector/).

⁹ See Unfair, Deceptive, or Abusive Acts or Practices Manual V.3 (March 2022) at p.15.

¹⁰ Id.