Breaking Down the CFPB’s Revised Examination Procedure Guide

By Keith Schostag

Keith Schostag

On March 16, 2022, the Consumer Financial Protection Bureau (CFPB or Bureau) published a revised examination procedure guide (Guide) for unfair, deceptive, or abusive acts or practices (UDAAP). In its press release, the CFPB states that the agency is now targeting discrimination as an unfair practice in connection with all financial products and services and not just credit products. In addition to specific non-discrimination laws that mainly target lending practices, credit unions will need to consider discrimination in relation to share accounts, debit cards, ACH transfers, and everything in between. This is a serious change in the CFPB’s stance on UDAAP and discrimination. As such, credit unions may want to review the Guide and their own practices to understand how this change may affect their business.

What is an unfair practice?

According to the Guide, an act or practice is unfair when:

  1. “It 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 Guide discusses each of the above three factors. Regarding substantial injury, the Guide states that discrimination that denies access to products or services, causes a consumer to forgo monetary benefits, or causes an emotional impact or dignitary harm, may cause  or contribute to substantial injury. The Guide also points out that “[c]onsumers cannot reasonably avoid discrimination.” The Guide does not discuss discrimination in regard to the third prong. This could be because the CFPB does not believe that discrimination can be outweighed; however, credit unions may want to consider disparate impact. The CFPB and many law firms have brought up disparate impact in regards to this new guidance.

Disparate impact occurs when a neutral credit union policy results in discrimination against members of a protected class or on a prohibited basis that results in fewer services or access to information than other members. For example, take a credit union whose field of membership is limited to county  firefighters. If the credit union focuses the majority of its marketing activities on new firefighters, it is likely that the marketing is targeting younger firefighters and leaving out older firefighters. Since the marketing disproportionately affects one age class over another, it might be considered discriminatory.

Often, credit unions may defend against a disparate impact case by arguing that challenged practices are necessary to achieve one or more substantial, legitimate, and nondiscriminatory interests and the business purpose could not be achieved by an alternative with a less discriminatory effect. This might be where an injury is outweighed; however, it is unclear if the CFPB will accept such a defense or whether they would consider such discrimination to be outweighed by the credit union’s business purpose.

What types of discrimination will be covered?

The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on specific bases. Specifically, creditors are prohibited from discriminating against a consumer on the basis of race, color, religion, national origin, sex, marital status, or age. While ECOA spells out the types of discrimination that are prohibited, unfortunately neither the CFPB’s press release nor the Guide explicitly discuss what types of discrimination are covered under the CFPB’s new stance. However, they both discuss ECOA and it appears that the CFPB may be targeting discrimination based on ECOA’s protected classes. However, until the CFPB states otherwise, credit unions may not want to assume that the CFPB will limit itself to ECOA’s prohibited bases. Credit unions may want to keep in mind that ECOA is not the only federal anti-discrimination law. For example, NCUA’s non-discrimination in real estate regulation prohibits discrimination based on familial status, a basis that is not prohibited by ECOA.

It may not seem important to know what types of discrimination the CFPB will focus on, as most credit union professionals do not want to discriminate against members in the first place. However, understanding the Bureau’s focus can help credit unions consider the likelihood that existing policies create a risk of discrimination. Many times, credit unions are unaware that a policy is discriminatory and has created a disparate impact. However, if a credit union knows what to look for, they can review their programs to see if they are treating members differently based on a particular characteristic. If a credit union does not know what types of discrimination to look out for, it will be harder to check to see if their policies have created a disparate impact. To analogize, it will be hard for a credit union to examine its policies to see if they create a disparate impact for members who are lefthanded if they do not know they need to take a member’s dominant hand into account.

As noted above, this change in the CFPB’s stance is significant. Credit unions may want to start looking at their policies, practices, and procedures for non-credit financial products and services to assess their UDAAP risk under the CFPB’s recent guidance. Ultimately, credit unions may want to speak with experienced local counsel to determine how the CFPB’s new stance will affect their business. As always, do not hesitate to reach out to NAFCU’s regulatory compliance team with any questions—we’re here to serve you.

Keith Schostag is regulatory compliance counsel for NAFCU.