“In the late 1960s, the Fair Housing Act (FHA) was passed by Congress to prohibit discrimination in housing-related services, including lending, on the basis of specified bases. Less than a decade later, Congress enacted the Equal Credit Opportunity Act (ECOA) to take similar action regarding all types of credit, on the basis of a similar set of factors.” William J. Showalter, CRCM, CRP, is a Senior Consultant with Young & Associates, Inc. (www.younginc.com), with over 35 years of experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. Bill can be reached at (330) 678-0524 or wshowalter@younginc.com. Now that the CFPB explicitly recognizes discriminatory practices as “consumer harm,” they are considered as “unfair,” and the product scope covered by standards in fair lending laws has expanded beyond just credit to include any financial product or service. The UDAAP examination procedures provide general guidance on: • The principles of unfairness, deception, and abuse in the context of offering and providing consumer financial products and services; • Assessing the risk that an institution’s practices may be unfair, deceptive, or abusive • Identifying unfair, deceptive or abusive acts or practices (including by providing examples of potentially unfair or deceptive acts and practices); and • Understanding the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection and antidiscrimination statutes. The exam procedures deal with the three elements of unfairness, much of which is not new. The first prong, substantial injury, usually involves monetary harm. Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury. Foregone monetary benefits or denial of access to products or services, like that which may result from discriminatory behavior, may also cause substantial injury. The CFPB notes that actual injury is not required in every case. A significant risk of concrete harm is also sufficient. Trivial or merely speculative harms are typically not sufficient for a finding of substantial injury. Similarly, emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. However, in certain circumstances, such as unreasonable debt collection harassment or discriminatory conduct, emotional impacts or dignitary harms may amount to or contribute to substantial injury. The exam procedures then deal with the second element of “unfairness,” whether the consumer may reasonably avoid the injury. An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. A key question, according to the CFPB, is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decisionmaking. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those most desirable to them, and avoiding those that are inadequate or unsatisfactory. For an injury to be reasonably avoidable, consumers must have practical means to avoid it, and the actions that a consumer is expected to take to avoid injury must be reasonable. There are many instances where consumers simply have no mechanism to avoid injury. For example, consumers typically cannot avoid the harms of discrimination. Regarding the third element – injury outweighed by consumer or competitive benefits – to be unfair, the act or practice must be injurious in its net effects. That means the injury must not outweigh any offsetting consumer or competitive benefits produced by the act or practice. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition. A discriminatory act or practice is not shielded from the possibility of being unfair, deceptive or abusive even when fair lending laws do not apply to the conduct. For example, not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit accounts, may be an unfair practice even when ECOA does not apply to this type of transaction. Conclusion Financial institutions directly supervised by the CFPB should treat this exam manual update as a regulation change. They should update their risk assessments, policies, procedures, processes, internal controls, audit processes, staff training, and so forth to incorporate the new application of anti-discrimination standards to areas other than credit. Financial institutions supervised by other federal agencies would be well advised to at least begin to look at this issue since the regulators tend to generally move in the same direction. 11 ISSUE 6 | 2022
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