Recent CFPB Actions on UDAAP, Fair Lending Signal More Regulatory Focus

Financial institutions should review their consumer compliance programs in light of changes

In today’s world, the demand for consumer protection and equitable treatment is becoming more and more prevalent. While the Consumer Financial Protection Bureau (CFPB) rolled back many consumer protection policies over the past few years, the tides appear to be shifting again. As a result, financial institutions may soon face more regulatory scrutiny related to UDAAP and Fair Lending.

Defining ‘abusive’ in Unfair, Deceptive or Abusive Acts or Practices (UDAAP)

The Dodd-Frank Act of 2010, the first legislation to broadly prohibit “abusive” practices in connection with consumer financial products or services, has been loosely applied for a decade.

In January 2020, the CFPB issued a Policy Statement providing a framework on how it intended to apply abusiveness standards in supervision and enforcement matters in an effort to provide clarity about the meaning of abusiveness. The Policy Statement defined “abusive” practices as when “the harm to consumers outweighs the benefits.”

At that time, the CFPB also said it would avoid challenging conduct as abusive when the conduct can also be alleged as unfair or deceptive. Lastly, the CFPB stated it intended to seek monetary relief for “abusiveness” violations only when there was lack of good-faith efforts to comply.

However, the CFPB rescinded this Policy Statement in March 2021, stating that in its review and experience in applying the Policy Statement, regulated entities were not provided clarity as intended. In addition, the CFPB found that declining to apply the full scope of the statutory standard had a negative effect on the bureau’s ability to achieve the objective of protecting consumers from abusive practices.

The CFPB now intends to exercise its full authority to better protect consumer from abusive acts or practices as defined in section 1031(d) of the Dodd-Frank Act:

• Materially interfering with someone’s ability to understand a product or service
• Taking unreasonable advantage of someone’s lack of understanding or someone who cannot protect themselves or someone who reasonably relies on a company to act in their interests

The CFPB stated it intends to consider good faith, company size and all other factors it typically considers in its prosecutorial discretion.

Fair Lending rule officially adds gender identity and sexual orientation

Alongside the changes in UDAAP regulations, in March 2021, the CFPB also issued a final rule expanding the definition of sex discrimination under the Equal Credit Opportunity Act (ECOA) and Regulation B to include protection against gender identity and sexual orientation discrimination. This includes, but is not limited to, discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s associations.

The breadth of the impact of this final rule on financial institutions has yet to be determined. The CFPB stated it will review its examination guidance and make updates if needed. At a minimum, financial institutions should update their policy, procedures, and training materials to incorporate the expanded definition of sex discrimination and ensure their employees are aware of the change. Institutions could face greater risk, both financially and reputationally.

Best practices for maintaining CFPB compliance with UDAAP and Fair Lending

In recent years, we’ve seen companies like Wells Fargo pay for their failure to protect consumers in fines, reimbursements and a tarnished reputation, as UDAAP violations disrupted their growth and operations.

With more regulatory scrutiny on the horizon, financial institutions need to have a sound consumer compliance risk management program that includes, among other things, policies and procedures designed to reduce their UDAAP and Fair Lending Compliance risk.

Financial institutions should consider engaging a qualified compliance consultant to perform a risk assessment that analyzes the organization’s products, services, policies and procedures through the lens of UDAAP and Fair Lending Compliance. A compliance provider can also help implement or enhance the organization’s consumer compliance program, including a monitoring system that tracks consumer compliance-related complaints.

Business advertisements are also susceptible to potential UDAAP and Fair Lending violations. Any financial institution that runs advertisements should review the ads to confirm they are compliant with regulatory expectations in order to prevent UDAAP violations and Fair Lending discrimination.

Navigating the consumer compliance rules, regulations and risks can be tricky. Contact Kaufman Rossin’s Risk Advisory Services team for assistance with staying up to date on UDAAP and Fair Lending Compliance and constructing a comprehensive and effective consumer compliance risk management program.