CFPB Updates UDAAP Exam Manual To Target Discrimination – Finance and Banking – United States – Mondaq News Alerts

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On March 16, 2022, the Consumer Financial Protection Bureau
(CFPB) announced changes to its supervisory operations for the
stated purpose of positioning the CFPB to better protect families
and communities from illegal discrimination, including in
situations where fair lending laws may not apply. These changes are
reflected in the CPFB’s Supervision and Examination
(the Manual) under its procedures for evaluating
unfair, deceptive or abusive acts or practices (UDAAPs). The Manual
now explicitly incorporates anti-discrimination considerations in
determining UDAAPs and directs examiners to consider evidence of
discrimination when identifying potential UDAAPs and determining
whether UDAAPs have occurred.

The CFPB’s action reflects the agency’s broad
interpretation of its supervision and examination authority and the
stated desire of the CFPB’s leadership to enforce federal
consumer financial laws aggressively, specifically including fair
lending and anti-discrimination laws, such as the Equal Credit
Opportunity Act (ECOA), and the prohibition of UDAAPs. The
revisions to the Manual direct CFPB examiners to look beyond
conduct that is prohibited by or otherwise directly connected to
the fair lending laws and to consider whether a firm’s policies
and practices, by design or in their execution, have the effect of
excluding certain individuals in an unfair and discriminatory
manner. In practice, this shift in supervision and examination
policy and procedure may result in enforcement actions involving
cited violations of the fair lending laws and the prohibition on
UDAAPs in respect of the same conduct. Accordingly, the CFPB’s
action can reasonably be expected to facilitate the agency’s
vigorous enforcement of potential misconduct in the consumer
finance sector.

A comparison document reflecting the CFPB’s revisions to the
Manual can be found here.

Discrimination and Unfairness

Under the updated Manual, discriminatory conduct can contribute
to a finding of unfair practices. The standard for unfairness under
the Dodd-Frank Act is a finding by the CFPB that (1) an act or
practice causes or is likely to cause substantial injury to
consumers, (2) the injury is not reasonably avoidable by consumers
and (3) the injury is not outweighed by countervailing benefits to
consumers or to competition. The updated Manual incorporates
anti-discriminatory considerations into the first and second
factors of the test. Specifically, with regard to whether a
practice causes substantial injury to the consumer, the CFPB
recognizes that “[f]oregone monetary benefits or denial of
access to products or services, like that which may result from
discriminatory behavior” may cause substantial injury. The
CFPB adds that discriminatory conduct or dignitary harms may amount
to or contribute to substantial injury in certain cases. More
significantly, with regard to whether the injury can be reasonably
avoided by the consumer, the CFPB states that consumers cannot
reasonably avoid discrimination itself or the harms associated with

Though the updated Manual did not augment its discussion of
deceptive and abusive acts or practices with anti-discriminatory
considerations, this should not be understood to mean that
discriminatory conduct is never relevant in determining deceptive
and abusive acts or practices. Indeed, the CFPB recognizes that a
discriminatory act or practice can be unfair as well as deceptive
or abusive.

Interaction with Other Federal or State Laws

The updated Manual also makes clear the CFPB’s position that
compliance with other federal or state consumer protection laws
does not shield acts or practices from being UDAAPs, nor vice
versa. Regarding the relationship of UDAAPs with other federal or
state laws, the Manual states that a discriminatory act or
practices that is unfair, deceptive or abusive may also violate
other antidiscrimination laws, such as ECOA. This suggests that
discriminatory acts or practices can be deceptive or abusive, as
well as unfair. Even when a discriminatory act or practice is not
in violation of other anti-discriminatory laws or federal statutes
such as ECOA and the Truth in Lending Act (TILA), it is not
“shielded from the possibility of being unfair, deceptive or
abusive” under Dodd-Frank. For example, not allowing consumers
of a specific ethnicity to open deposit accounts or subjecting
consumers of that ethnicity to different requirements to open
deposit accounts may be viewed by the CFPB as an unfair practice
even in those instances when ECOA does not apply to this type of

Examination for Discriminatory Conduct

The updated Manual directs examiners to review and evaluate
additional documents, materials and considerations that may prove
relevant to discriminatory conduct. When identifying potential
UDAAP concerns, examiners should now also obtain and review (a)
documentation regarding the use of models, algorithms and
decision-making processes used in connection with consumer products
and services; (b) information regarding demographics of customers
using various products or services, and the impacts of various
products and services on specific demographics; and (c) demographic
research or analysis relating to marketing of consumer products and

When examining policies and procedures for potential UDAAP
concerns, the examiner should now also consider whether (a) the
examined entity has processes to prevent discrimination in relation
to all aspects of consumer products or services and to monitor for
such discrimination and (b) the examined entity has a compliance
program which includes an established process of periodic analysis
and monitoring of all decision-making processes in connection with
consumer financial products or services, and a process to take
corrective action to address potential UDAAP concerns, including
discrimination, that arise from using such decision-making
processes. Furthermore, the examiner is directed to determine
whether the examined entity’s policies, procedures and
practices target or exclude consumers in a discriminatory manner
and whether its customer service personnel have appropriate
training to prevent discrimination.

While the anti-discrimination factors discussed above pertain to
a high-level assessment of an entity, the following factors are
relevant to identifying specific areas/transactions that may raise
UDAAP concerns. For instance, when examining specific transactions
for potential UDAAPs, an examiner should now also consider whether
one demographic is favored with better terms, more products and
services, better customer service, targeted advertising (including
digital advertising) and less stringent eligibility determinations.
To take an example from the Manual, how effectively call centers
respond to calls from consumer with limited English proficiency is
a factor that may contribute to discriminatory customer

Financial institutions interested in the updated CFPB
examination procedures’ impact on their businesses may contact
any of authors of this Advisory or their usual Arnold & Porter
contact. The firm’s Financial Services team would be pleased to
assist with any questions about CFPB supervision or consumer
finance more broadly.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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