In March 2022, the Consumer Financial Protection Bureau (CFPB) made a significant revision to its examination manual for Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). The main intent of this action is, as the CFPB states in its press release, “to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply.”

While this action is coming from the CFPB, which directly regulates large financial institutions, other federal supervisors can be expected to pay close attention to it. They may even follow the CFPB lead and adjust their supervisory approach in dealing with discrimination issues.

Background
In the late 1960s, the Fair Housing Act (FHA) was passed by Congress to prohibit discrimination in housing-related services, including lending, on the basis of specified bases. Less than a decade later, Congress enacted the Equal Credit Opportunity Act (ECOA) to take similar action regarding all types of credit, on the basis of a similar set of factors. These “prohibited bases” – including race, sex, and age (other than the legal capacity to enter into a binding contract) – are deemed to be irrelevant to a borrower’s creditworthiness.

Federal banking supervisors and other federal agencies have used these tools over the years to try to reverse inequalities in credit markets. However, they have not had similar legal avenues for dealing with concerns over discrimination related to other financial services, though some have argued that general civil rights laws might apply.

“Unfairness” in UDAP/UDAAP
The Federal Trade Commission (FTC) has had jurisdiction over “unfair or deceptive acts or practices” (UDAP) since at least the 1970s. The FTC spelled out three elements to the concept of “unfairness.” Those three elements are:

• The act or practice must cause or be likely to cause substantial injury to consumers.
• Consumers must not reasonably be able to avoid the injury.
• The injury must not be outweighed by countervailing benefits to consumers or competition.

The FTC issued interpretations and enforcement actions over the years that developed the scope of these concepts (as well as the “deceptive” concept). However, Congress determined after the financial crisis of 2008 that consumer protection policy and enforcement needed to be changed.

As a result, the Dodd-Frank Wall Street Reform Act of 2010 moved much of the consumer protection rulemaking and interpretation responsibility from the individual financial regulators and placed it in a new federal agency – the Consumer Financial Protection Bureau (CFPB). This law also added another element to UDAP – the “abusive” concept, which has added a letter to the acronym giving us UDAAP (unfair, deceptive, or abusive acts or practices).

The CFPB is building on the UDAP structure that the FTC built. In fact, the Dodd-Frank Act ensconced much of the previous FTC policy concepts in federal law. The statutory elements of what constitutes “unfairness” are the same three (listed above) originally developed by the FTC.

Unfairness is Discrimination
Some have advocated for applying the “unfairness is discrimination” theory to fill what they see as important gaps in the existing patchwork of anti-discrimination laws, which currently leave large parts of the economy unregulated and unprotected from a variety of discriminatory practices, including those with a disparate impact.

Then-FTC Commissioner Rohit Chopra said at a conference in 2020, “Discriminatory practices often are three for three [under the unfairness elements], causing grievous harm that cannot be avoided.” Mr. Chopra is now Director of the CFPB.

CFPB UDAAP Exam Manual
This has led to the revisions announced in the spring to the CFPB UDAAP examination manual. By revising its examination manual rather than going through the formal rulemaking process, the CFPB did not have to put the changes out for comment beforehand. The revisions have just been announced as an accomplished fact, effective immediately (in March).

Now that the CFPB explicitly recognizes discriminatory practices as “consumer harm,” they are considered as “unfair,” and the product scope covered by standards in fair lending laws has expanded beyond just credit to include any financial product or service.

The UDAAP examination procedures provide general guidance on:

• The principles of unfairness, deception, and abuse in the context of offering and providing consumer financial products and services;
• Assessing the risk that an institution’s practices may be unfair, deceptive, or abusive
• Identifying unfair, deceptive or abusive acts or practices (including by providing examples of potentially unfair or deceptive acts and practices); and
• Understanding the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection and antidiscrimination statutes.

The exam procedures deal with the three elements of unfairness, much of which is not new.

The first prong, substantial injury, usually involves monetary harm. Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury. Foregone monetary benefits or denial of access to products or services, like that which may result from discriminatory behavior, may also cause substantial injury.

The CFPB notes that actual injury is not required in every case. A significant risk of concrete harm is also sufficient. Trivial or merely speculative harms are typically not sufficient for a finding of substantial injury. Similarly, emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. However, in certain circumstances, such as unreasonable debt collection harassment or discriminatory conduct, emotional impacts or dignitary harms may amount to or contribute to substantial injury.

The exam procedures then deal with the second element of “unfairness,” whether the consumer may reasonably avoid the injury. An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury.

A key question, according to the CFPB, is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those most desirable to them, and avoiding those that are inadequate or unsatisfactory.

For an injury to be reasonably avoidable, consumers must have practical means to avoid it, and the actions that a consumer is expected to take to avoid injury must be reasonable. There are many instances where consumers simply have no mechanism to avoid injury. For example, consumers typically cannot avoid the harms of discrimination.

Regarding the third element – injury outweighed by consumer or competitive benefits – to be unfair, the act or practice must be injurious in its net effects. That means the injury must not outweigh any offsetting consumer or competitive benefits produced by the act or practice. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition.

A 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. For example, not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit accounts, may be an unfair practice even when ECOA does not apply to this type of transaction.

Conclusion
Financial institutions directly supervised by the CFPB should treat this exam manual update as a regulation change. They should update their risk assessments, policies, procedures, processes, internal controls, audit processes, staff training, and so forth to incorporate the new application of anti-discrimination standards to areas other than credit.

Financial institutions supervised by other federal agencies would be well advised to at least begin to look at this issue since the regulators tend to generally move in the same direction.