The Consumer Financial Protection Bureau (CFPB) announced on March 16, 2022, the added scrutiny of illegal discriminatory practices within its examination procedures for Unfair, Deceptive, Abusive Acts and Practices (UDAAP). The CFPB considers that illegal discrimination practices based on services or products can cause consumer harm; therefore, UDAAP should be included with the other Fair Lending laws. Even though these changes are to the CFPB exams procedures for UDAAP, generally the other regulatory agencies follow the CFPB’s lead and will update their exam procedures similarly to the CFPB.
The areas of additional focus to determine illegal discrimination include:
- Credit servicing
- Collections
- Credit reporting
- Payments
- Remittance
- Deposits
Three factors that are considered under UDAAP for unfairness are:
- It causes or is likely to cause substantial injury to consumers;
- The injury is not reasonably avoidable by consumers; and
- The injury must not be outweighed by countervailing benefits to consumer or competition.
The Agency provided examples of illegal discrimination practices which included:
- Refusing to release lien after consumer makes the final payment on a mortgage;
- Dishonoring credit card convenience checks without notice;
- Processing payments for companies engaged in fraudulent activities;
- The representation, omission, act or practice of information must be considered from the perspective of the reasonable consumer;
- Inadequate disclosure of material lease terms in television advertising; and
- Misrepresentation about loan terms.
The CFPB will require the financial institution to show its process for assessing its UDAAP illegal discrimination risk and outcome of analysis performed to identify any illegal discrimination practices. What does this mean for financial institutions? A fully developed UDAAP risk assessment, additional documented monitoring processes, and upward reporting to Senior Management and the Board to ensure swift action plans to mitigate when a pattern or trend of illegal discrimination practice is identified.
In addition, to ensure the bank as a whole (from the Board to the Teller line) has the knowledge and awareness to identify illegal discrimination. A best practice of the bank should include performing the following:
- Train staff on UDAAP and other Fair Lending laws;
- Ensure policies and procedures are well documented to identify and report any potential practice of discrimination to the Compliance Officer;
- Monitor consumer complaints for possible trends in the servicing areas, product offerings or deposit denials at account opening;
- Analysis should include customer demographics based on products, fees, and actions taken which can impact different demographic groups. This will require geocoding of the borrower’s address to ensure adequate employment of the Bayesian Improved Surname Geocoding (BISG) Proxy Methodology where applicable;
- Target marketing should be analyzed to ensure there is no form of disparity, especially when a third party is involved in the marketing process, including any data provided through algorithms;
- Conduct due diligence on third-party vendors that assist the bank in its various operational areas to ensure no illegal practice through periodic reviews; and
- Update Fair Lending Risk Assessment to include UDAAP.
TCA recommends that Compliance staff and Management review the CFPB’s news release titled “CFPB Targets Unfair Discrimination in Consumer Finance.”
If your bank needs assistance with updating your Risk Assessments or perform analysis for monitoring for discrimination, give us a call and find out why TCA is A Better Way to understand your UDAAP Risk.
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