CFPB expands its authority to punish banks for discrimination

The Consumer Financial Protection Bureau has declared that discrimination associated with any financial product — not just credit — is illegal.

The CFPB on Wednesday said for the first time that discrimination on the basis of age, race or sex — regardless of intent — violates the federal prohibition on “unfair, deceptive or abusive acts or practices." It vowed to use its UDAAP enforcement authority to root out discrimination in all consumer financial segments.

Under the new policy, the CFPB can now look for discrimination in a wide range of noncredit financial products including payments, deposit and checking accounts, prepaid cards, remittances and debt collection, among others.

The CFPB also said for the first time that the use of machine learning for targeting advertising and marketing is discriminatory.

“We will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance,” CFPB Director Rohit Chopra said in a press release.

Eric Halperin, the CFPB’s enforcement chief, also wrote in a blog post that the bureau “will fight to end discrimination in the financial sector.”

The move is a significant departure from anti-discrimination practices in the past that traditionally have focused on mortgage lending. The CFPB has been signaling all year that it plans to make racial equity and fair lending a major priority in investigations and supervisory exams.

But some critics said the new policy was a power grab that flies in the face of laws passed by Congress outlawing discrimination in housing, credit and employment— but not in all financial products.

Under the 1974 Equal Credit Opportunity Act, a civil rights law that bans discrimination against credit applicants, the CFPB is limited to addressing discrimination in lending. But under the new standard, the bureau said discriminatory practices may also trigger liability under the Consumer Financial Protection Act, which prohibits UDAAP violations.

As an example, Halperin said, preventing people of color from opening deposit accounts may be considered an unfair practice even though the equal credit act does not apply to noncredit products such as deposit or checking accounts.

The CFPB announced the policy change not through a rulemaking but by publishing an updated UDAAP exam manual that provided details about the types of discrimination it intends to address under the new standard.

Christopher Willis, a partner at Troutman Pepper, said the change will have major ramifications for all types of financial services providers.

“The CFPB’s announcement is a sea change in how financial institutions need to think about fair lending and fair treatment,” Willis wrote in a note to clients Thursday.

That the CFPB said it will examine targeted marketing and the use of machine learning in credit decisions came as less of a surprise. Chopra has repeatedly warned banks and fintechs about the harmful effects of technology. He has said that machine learning can be anti-competitive and could lead to “digital redlining” and “robo discrimination.”

“Fair lending risk relating to pricing, algorithmic underwriting, and all forms of credit extension remains elevated,” Isaac Boltansky, managing director and director of policy research at BTIG, wrote in a research note Friday.

Boltansky suggested that the CFPB could face a legal challenge because the agency did not issue a rulemaking with public notice and comment. Willis agreed.

“We suspect a court would be suspicious of the CFPB taking this policy judgment into its own hands,” Willis wrote.