On March 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) announced it would combat perceived discrimination in the consumer financial marketplace by expanding its authority to target unfair, deceptive, or abusive acts or practices (“UDAAPs”). The new expansion of the CFPB’s authority allows the Bureau to examine for discrimination across all consumer financial products and consumer finance markets, and not just extensions of credit.
The CFPB, currently under the leadership of Director Rohit Chopra, announced its intention to scrutinize practices for discriminatory bias outside of lending. This announcement outlines the mechanism by which the CFPB plans to do so, with the Bureau noting it will closely examine financial institutions’ decision-making in advertising, pricing, and other areas, as well as institutions’ use of algorithms and artificial intelligence (“AI”) models, for any discriminatory practices that could form the basis of potential fair lending or UDAAP violations.1 To make good on its promise, the CFPB recently launched the “CFPB Technologist Program” to recruit at least two dozen new employees with information technology or data engineering backgrounds.2
One of the main concerns that stem from this expanded authority is how the element of “unfairness” is defined under UDAAP and how it coincides with the updated CFPB exam manual and Equal Credit Opportunity Act (“ECOA”) definition of “discriminatory conduct.” Under the Consumer Financial Protection Act (“CFPA”), an act or practice is unfair if:
When we focus on the most current CFPB exam manual, it states that discriminatory conduct causes substantial injury that cannot be avoided by the consumer and, as such, is unfair.3
This change drastically expands the CFPB’s authority to police myriad consumer financial markets for discriminatory practices. ECOA has traditionally been interpreted to be limited to discrimination in lending or advertising specifically to applicants for extensions of credit and not to apply more broadly to other financial products, services, or advertising activities.4 But when UDAAP and ECOA collide under the expanded authority, all consumer financial products or services can fall under the targeted review of both regulations.
In other words, classifying discriminatory conduct as potentially “unfair” under UDAAP permits the CFPB to evaluate discrimination in a much broader array of consumer financial products and markets, such as by reviewing advertising practices that are non-lending or credit related.
In addition to the expanded authority, there is another relevant area of concern that heightens the risk of potential fair lending and UDAAP violations. Imagine an African American homeowner who wants to refinance her home located in a white suburban neighborhood. Her application is denied because of the low valuation of her home appraisal. She then applies with another lender, this time leaving her home before the appraiser arrives and removing any evidence that could potentially indicate she is African American (i.e., removing the family portrait). This time the appraiser gives her home a much higher value, and she’s approved for refinancing.
This is a case of appraisal bias. The example provided is not hypothetical – it really happened.5 An appraisal bias occurs when an appraiser considers illegal factors such as the race of the homeowner or the racial makeup of a neighborhood when determining the fair market value of a property. This was not something that most lenders would’ve imagined to be a risk factor, especially in 2022, but it happens regularly. Combine this fact with the expanded authority announced by the CFPB, and it is crucial for financial institutions to take appropriate steps and update their Compliance Management Systems to manage fair lending appraisal risk.
The appraisal bias can be hard to detect, especially when the lender contracts third-party appraisers, yet the consequences of non-compliance with all applicable fair lending and UDAAP regulations or demonstrating inconsistencies and discriminatory biases can be devastating. Contact us about how your financial institution can avoid discriminatory appraisal practices and what you can do to assure your examiners that your financial institution is a “low-risk.”
It is notable that the CFPB executed this major expansion, invoking the so called “dormant authority” under CFPA by announcing updates to its manual rather than engaging in a rulemaking with the required public notice and comment period. However, it is not yet clear the extent to which the CFPB’s supervision policy will cause its examiners to recommend enforcement actions by using the expanded UDAAP authority against entities that may have engaged in discriminatory conduct. Regardless, our experts at Risk Management Solutions Group (RMSG) have carefully scrutinized the updated exam manual to anticipate how the CFPB examiners will conduct their targeted review and how to prepare our clients for examiners’ inquiries.