If a Consumer Financial Protection Bureau (CFPB) rule is allowed to stand, it could impact short- and long-term compliance costs for regulated entities in the consumer banking field.
The United States Chamber of Commerce, along with other banking and business associations (plaintiffs), have prevailed in challenging the Consumer Financial Protection Bureau's (CFPB) March 2022 update to its Supervision and Examination Manual, Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) Section (update). Had the update been allowed to stand, the CFPB would have received enhanced authority to examine regulated entities for alleged discriminatory conduct under the CFPB’s UDAAP authority.
Among its findings, the United States District Court for the Eastern District of Texas, which issued the ruling on September 8, 2023, noted that “Courts must presume that Congress intends to make major policy decisions itself, not leave those decisions to agencies.” The court reviewed other federal nondiscrimination statutes and noted that such statutes typically define protected classes, outcomes or actions that are prohibited, and defenses to liability. Under the Dodd-Frank Act, the court noted that the unfairness section itself does not mention discrimination, protected classes, nor does it mention disparate-impact standards. The court’s analysis also noted that discrimination is treated as a separate concept from UDAAP by use of the word “and” when conveying authority on CFPB to take certain designated actions. CFPB would have faced a high burden in showing that Congress conferred broad antidiscrimination authority without defining discrimination or disparate impact, while at the same time, giving the CFPB the ability to police discrimination in specific areas under the court’s reasoning. As a result, the plaintiffs prevailed.
Original Story (10/19/2022)
The United States Chamber of Commerce, along with other banking and business associations, filed a federal lawsuit against the Consumer Financial Protection Bureau (CFPB) in late September 2022. The lawsuit primarily challenges the CFPB’s March 2022 update to its Supervision and Examination Manual, Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) Section (manual), which allows the CFPB the authority to examine regulated entities for alleged discriminatory conduct under the agency’s UDAAP authority. The lawsuit also challenges the CFPB’s manual update as a substantive rule that failed to follow the Administrative Procedures Act’s required notice and comment period, among other legal claims. In particular, the agency’s determination that it can review discriminatory conduct is particularly far-reaching and concerning.
The updated manual is the first time the CFPB has interpreted its UDAAP authority to include the power to regulate discriminatory conduct, by redefining unfairness in a way that has no legislative justification. The definition of unfairness that governs the CFPB was borrowed from the Federal Trade Commission Act, which by definition, does not include discrimination. Before updating the examination manual, the CFPB specifically chose to treat UDAAP and discrimination separately.
According to the complaint, the manual requires that regulated entities have a process to take corrective action to address potential UDAAP concerns, including discrimination related to the entity’s decision-making processes used in connection with consumer financial products or services. Regulated entities must test and monitor decision-making processes for potential discrimination. The manual also requires that a regulated entity ensures employees and third parties refrain from engaging in servicing or collection practices that lead to disproportionately adverse impacts on a discriminatory basis. Examiners are instructed to obtain documentation regarding a regulated entity's use of algorithms, and demographic research or analysis relating to marketing or advertising of consumer financial products or services.
UDAAP compliance was already costly prior to the March 2022 update. The manual provides no instruction for what may constitute unfair discrimination or disparate impact that would warrant action from the agency. Additionally, any entity subject to the Dodd-Frank Act provisions governing UDAAP is affected by the actions of the CFPB in updating the manual. (The CFPB was created out of Dodd-Frank’s legislation.)
If allowed to stand, the rule will certainly lead to increased costs for compliance, both in the short and long term. Plaintiffs highlight in the complaint that regulated entities that are subject to the CFPB’s update may be forced to pass increased costs to consumers, or they may choose to not offer particular services or products. Such actions would hurt consumers by reducing the availability of products or services in the marketplace, as the update provides no clear guidance on how regulated entities can avoid running into compliance issues in the eyes of the examiners. Regulated entities will be subjected to a substantive rule that imposes new duties on businesses by requiring that they begin to collect or keep certain records and policies for examination processes to show compliance, without allowing the entities the opportunity to provide comments. Additionally, as highlighted in the complaint, a favorable decision for the CFPB may ultimately hurt consumers. The CFPB’s update may, as the complaint states “open the door to uncertain and excessive regulation in the financial marketplace that imposes significant financial burdens on Plaintiffs, their members, and the public.”
The National Apartment Association (NAA) will continue to monitor this case for industry impact and keep members updated on any developments.