In scripture, let alone the 1951 eponymous film, the Latin expression quo vadis means "Whither goest thou?" when translated poetically. In the context of the Consumer Financial Protection Bureau (CFPB) and discrimination, the parallel question is, “Where is the CFPB taking the allegation of discrimination by applying its UDAAP powers?”
How does that work? The "U" in UDAAP (or UDAP for the FTC and the states) stands for unfair. The central allegation is that discrimination is unfair and therefore a violation of the law. If this legal theory is successful, the ramifications could be significant.
UDAP – Unfair or Deceptive Acts or Practices UDAAP – Unfair, Deceptive or Abusive Acts or Practices
In March 2022, the CFPB announced its intention to use its authority to prosecute discrimination as an unfair act or practice in any financial services category. This would include banking, servicing, collections, credit reporting, payments, or money transfers and remittances. Advertising, pricing and other areas are targets for the Bureau to ensure that companies are appropriately testing for and eliminating illegal discrimination.
“It's the view of the Bureau that consumers may be unaware that they have been the subject of discrimination.”
This is a new, untested approach. There are no examples of its application just yet.
The updated Manual interprets unfairness as a tool to combat discrimination through the Bureau's examination process. The Manual puts forth the expectation that organizations will respect the UDAAP standard and apply it ubiquitously throughout their business activities.
The examination process will track businesses to ensure that they are implementing the following:
CFPB examiners will require supervised companies to demonstrate their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.
The CFPB is careful to note that injuries sustained from discrimination do not need to be intentional. Machine learning models and artificial intelligence will be a point of focus for “any potential discriminatory outcomes.” Disparate impact will be a preferred theory for UDAAP analysis.
Discrimination is the application of discernment regarding classes, groups, or other discrete or insular singularities of people, culminating in unfair or prejudicial actions by commercial or other human enterprises. Discrimination leads to people not being treated the same.
With the origin of the CFPB, circa 2011, the Bureau had a key focus on discrimination. However, that focus was centered on the broad legal concept of fair lending. The Bureau sought strict compliance with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. As a reminder, Congress passes acts and federal agencies promulgate regulations.
The related theory of disparate impact, somewhat discredited, was part of this calculus. ECOA prohibits discrimination in credit transactions against applicants based on certain characteristics including race, color, religion, national origin, sex, marital status or age, among other categories. This line of reasoning came about because of 14th Amendment cases regarding discrimination. Certain groups of people were identified as discrete and insular minorities and were subjected to discriminatory practices, found unlawful pursuant to the 14th Amendment.
ECOA applies to creditors and to organizations that refer applicants to creditors. As implemented by “Reg. B,” it is illegal to discriminate against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age of a person in his majority, or if an applicant has exercised his rights under the Consumer Credit Protection Act. It's important to recognize that the CFPB has ECOA rulemaking authority and supervises and enforces compliance with the Act. The FTC also has enforcement authority.
All potential modes of discrimination are subject to action, including verbal and written statements, advertising, and so forth. Discouraging people from applying for credit is considered discrimination.
Favored theories prompting regulatory action are disparate impact and disparate treatment. Disparate treatment occurs when a creditor treats an applicant differently based on a prohibited basis. It can be identified by contrasting the treatment of the pool of applicants. Disparate impact occurs when a creditor employs facially neutral policies or practices that have an adverse result on members of the protected class, unless there is a legitimate business need which can't reasonably be achieved by means that are less dissimilar in their effect.
Now the CFPB will look at how companies test and monitor their decision-making processes pursuant to the UDAAP unfairness standard for discrimination, as well as discrimination under ECOA. It would follow that an ECOA analysis would be the model for alleging discrimination as a consequence of an unfairness challenge.
Unfairness is often defined as unconscionability, a doctrine of contract law where the contractual terms are considered unjust, or overwhelmingly favorable to the party who has the superior bargaining power. The terms of the contract can then be challenged on this basis since they offend the conscience. Unfairness can also be called injustice or inequality with all the implications these two words imply.
Franchise dealers are immune from the direct threat of the CFPB since they are specifically excluded from its jurisdiction. However, the FTC and, much more significant, state attorneys general, may be able to prosecute this new wrinkle in UDAAP and discrimination law. In other words, franchise dealers may be targeted in this new way, regardless of CFPB jurisdiction or authority. Because the unfairness standard is broad and flexible, the capability to prosecute discrimination in this manner will be far easier to advance.
Dealers need to be cognizant of recent cases, such as Federal Trade Commission v. Passport Automotive Group, Inc.; Federal Trade Commission and People of the State of Illinois v. North American Automotive Services, Inc., d/b/a Ed Napleton Automotive Group, et al.; and Federal Trade Commission v. Liberty Chevrolet, Inc., d/b/a Bronx Honda. These cases exhibit the wrath of the government in policing discrimination.
All dealers need to study their current operations to determine whether they are intentionally or unwittingly denying equal treatment to all their customers through advertising, on-site sales presentations and any other ways they engage with potential customers. The dealership's Compliance Officer should be evaluating potential discrimination throughout the store and seek legal guidance from outside counsel.
Discrimination is a pernicious problem. Depending on how far this theory will develop in application, it could be financially daunting to every dealer – franchise or independent.