Why the CFPB’s enlargement of its UDAAP authority to focus on discrimination requires rulemaking

In a new blog post revealed on the Client Legislation & Coverage Weblog, Professor Jeff Sovern advocates very strongly in assist of decoding the “unfairness” prong of UDAAP to embody discrimination in reference to credit score and non-credit shopper monetary services supplied by banks and different individuals coated by the Client Monetary Safety Act (CFPA).  He helps his place by counting on the plain language of “unfair” (which isn’t inextricably tied to credit score merchandise) and the frequent sense notion that firms shouldn’t be capable of discriminate in any style in reference to providing of shopper monetary services or products.

Professor Sovern’s argument misses the purpose.  The patron monetary companies trade shouldn’t be searching for a “go” in the case of any type of discrimination.  As an alternative, the trade merely needs to know what are the “guidelines of the highway.”  The Equal Credit score Alternative Act is a really particular anti-discrimination statute that proscribes sure varieties of credit score discrimination.  It has been applied by way of an in depth regulation (Reg B) that has been on the books for a lot of many years.  It solely prohibits discrimination on sure bases: race, colour, faith, nationwide origin, intercourse, marital standing, or age (supplied that the applicant has the capability to enter right into a binding contract); the truth that all or a part of the applicant’s revenue derives from any public help program; or the truth that the applicant has in good religion exercised any proper beneath the CFPA or any state legislation upon which an exemption has been granted by the CFPB.

As an preliminary matter, I discover appreciable benefit within the argument that if Congress thought-about discrimination to be “unfair,” it could have been pointless for Congress to enact legal guidelines such because the Equal Credit score Alternative Act to particularly prohibit discrimination.  In response to Professor Sovern, this argument is flawed as a result of the ECOA does extra than simply prohibit discrimination in credit score transactions, similar to offering injured shoppers with a non-public proper of motion, and due to this fact would have been wanted even when Congress thought-about discrimination one thing the CFPB may handle by way of its UDAAP authority.  It might have been wanted, says Professor Sovern, as a result of the CFPA doesn’t present shoppers with a non-public proper of motion for UDAAP claims and “Congress wished injured shoppers to have a non-public declare” which is supplied within the ECOA.

The problem I’ve with Professor Sovern’s reasoning is that if UDAAP covers discrimination extra broadly than the ECOA, why wouldn’t Congress have wished injured shoppers to even have a non-public proper of motion to make use of UDAAP to problem any discrimination they may not problem beneath the ECOA?  In different phrases, it appears to me that the absence of a non-public proper of motion within the CFPA for UDAAP claims gives robust assist for the place that UDAAP doesn’t cowl discrimination.

However even assuming arguendo that the interpretation of UDAAP advocated by the CFPB and Professor Sovern is right, what would that imply?  It’s unclear whether or not the ECOA covers discrimination primarily based on advertising or whether or not it applies solely as soon as somebody has utilized for credit score.  Would UDAAP now fill that void?  And what in regards to the additional query of whether or not the disparate affect concept applies to ECOA and, if not, whether or not it nonetheless would apply to UDAAP.  These are only a few of the questions the CFPB’s and Professor Sovern’s interpretation raises for shopper credit score.

The CFPB’s and Professor Sovern’s interpretation raises much more questions within the context of discrimination involving non-credit merchandise similar to deposits, pay as you go playing cards, and remittances.  For instance, many banks have a coverage of not opening deposit accounts for somebody who doesn’t reside throughout the financial institution’s market space.  Would that be thought-about a UDAAP violation?  Whereas there’s a well-established physique of legislation pertaining to the appliance of ECOA, there’s completely no physique of legislation pertaining to how the unfairness prong of UDAAP applies to non-credit merchandise.  Though the CFPA grew to become legislation in 2011, I’m not conscious of a single occasion through which the CFPB has used its UDAAP authority to proceed in opposition to an individual primarily based on non-credit discrimination.  Moreover, I’m not conscious of the FTC utilizing its UDAP authority beneath Part 5 of the FTC Act (which was enacted greater than 100 years in the past) to ferret out discrimination coping with both credit score or non-credit merchandise.

Given the complexity of the questions the CFPB’s enlargement of UDAAP raises, it appears apparent that the sort of a drastic change ought to be carried out by way of a rulemaking and never by way of an modification to an examination handbook.

Why the CFPB’s expansion of its UDAAP authority to target discrimination requires rulemaking

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