How CFPB Is Reshaping Banks’ Growth Strategy

Concerns over discriminatory marketing and design of all banking products — not just credit — led the Consumer Financial Protection Bureau to do an end run around the usual procedure for detecting unfair, deceptive and abusive practices. Exposures now include targeted marketing and programmatic digital advertising.
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Financial marketers, especially those whose institutions are directly supervised by the Consumer Financial Protection Bureau, need to seriously review how they approach some key marketing functions. The stakes: Running afoul of a new twist on anti-discrimination oversight that the bureau has put into place without an opportunity for industry comment.

This may be the start of CFPB moving beyond jawboning to an aggressive new wave of enforcement.

In most cases, federal banking regulators make major policy shifts after publishing proposed rules, with an opportunity for industry comment. But sometimes they make what amounts to a policy change by amending examination guidelines, which are the rules of the road for an agency’s field examiners.

Such changes may not be regulations, but their bite can be just as strong if your bank screws up.

In mid-March 2022 CFPB announced changes to the portion of its examination manual dealing with “Unfair, Deceptive, or Abusive Acts or Practices,” called “UDAAP” for short.

CFPB Makes a Major Gearshift:

Up until now, federal fair-lending laws, which encompass everything from how loans are marketed to how they are serviced, have been the basis of banking agencies' anti-discrimination enforcement.

What CFPB did was to link UDAAP and anti-discrimination in its exam guidelines, to include instances such as availability of deposit accounts and other services not covered specifically by fair-lending laws.

In an announcement of the change, CFPB stated: “In the course of examining banks’ and other companies’ compliance with consumer protection rules, the CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices. The CFPB will closely examine financial institutions’ decisionmaking in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.” [Emphasis added.]

“We will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance.”

— Rohit Chopra, Director, CFPB

Specifically, he said, “when a person is denied access to a bank account because of their religion or race, this is unambiguously unfair.” Chopra became director of the bureau in October 2021.

Experts have suggested that this move grabs regulatory authority that no legislation granted to CFPB. That could become a matter for the courts, and CFPB is no stranger to litigation about its status and approaches. This move may lead to more cases filed against financial institutions. Some experts have been surprised that CFPB hasn’t pursued high-profile banks to make a splash since Chopra arrived.

In the meantime, banks have to understand how this may affect them and what to do about it. They also need to understand how CFPB operates these days.

CFPB Works All the Levers of Commentary and Debate

Chopra’s CFPB has amped up commentary in speeches, blogs and other formats on key consumer issues in ways not seen among regulators before.

Take nonsufficient fund fees. A 2022 blog proclaims that bureau efforts to call out banks for these charges has saved consumers $1 billion annually. In the blog a table is presented highlighting institutions that have announced plans to drop or reduce NSF fees versus those who have not changed their policies and earn a high level of NSF income.

Similarly, the bureau periodically updates a table of overdraft and nonsufficient funds policies and metrics for the top 20 banks by overdraft and NSF revenue.

Many of the banks in these listings are among the large institutions that Chopra has indicated in speeches and testimony that he doesn’t think have been slapped hard enough in the past.

More recently the bureau has been pursuing an initiative to eliminate “exploitative junk fees,” to which it reports having had over 25,000 comments — a rare tsunami of responses.

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CFPB Signals Rising Anti-Discrimination Emphasis

Chopra regularly questions the potential unintended consequences, notably racial disparities, in the results of artificial intelligence applied to lending. In an interview with The Financial Brand, Catherine Brown, Partner at Klaros Group, said that he often portrays AI as a potentially nefarious black box.

Comments by Chopra and other messages from the bureau have begun to suggest that there are vulnerable populations who are not specifically protected by fair-lending laws.

If that scope is expanded by CFPB, said Brown, “the bureau will have the very clear expectation that the regulated entities will have some additional responsibility for providing protections for those groups.” Among the groups Chopra has been signaling about are veterans, the elderly, immigrants, people with limited English skills and students, notes Brown.

“I’ve been encouraging my clients to take a really broad view of those groups,” said Brown, “and to identify the weak points in their organizations where potential consumer harm may be lurking.” She added that she has been stressing that banks must look beyond technical compliance.

Marketers beware: The new exam guidance itself notes that even if a transaction technically complies with state or federal rules, it may still violate the prohibition against unfair, deceptive, or abusive acts or practices.

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Understanding CFPB’s UDAAP/Anti-Discrimination Maneuver

CFPB’s rulemaking authority covers all banking institutions in some cases — its administration of truth in lending rules, for example. Exam guidance, however, relates to institutions under direct CFPB supervision.

“Rohit Chopra seems to have convinced himself that financial institutions around the country are denying checking accounts to individuals based on their race or based on their religion,” said John Culhane, Partner in the Consumer Financial Services Group of Ballard Spahr, during a podcast. The exam guidance specifically said that “not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit account, may be an unfair practice …”

Regarding what is covered by the revised manual section, Ronald Vaske, Co-Leader of Ballard Spahr’s Fintech and Payments Practice, said in going beyond fair-lending law, it covers the waterfront.

“It’s basically everything,” said Vaske during the podcast. “It’s deposits, it’s funds transmission, it’s debt collection, check cashing, anything you can think of that might fit into the realm of consumer financial services or practices related to them.”

This will result in bank exams casting a wider net than ever.

“CFPB examiners will be asking for demographic research or analysis related to marketing or advertising, which, of course, organizations conduct in the course of evaluating the efficacy of where their dollars are going for … campaigns,” said Heather Klein, of counsel with the firm. Klein said many clients have started training contact staff on nondiscrimination laws.

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Action Steps for Bank Marketers

Here are matters to review in the area of marketing and product design, based on what Klein said during the podcast about CFPB’s exam shift:

• Review models and algorithms used for decisionmaking with regard to any product, not just lending.

• Examine target marketing programs that affect any group that could be considered, directly or indirectly, a protected class under the exam manual.

• Take a fresh look at targeted ads, the terms of outreach offers to targeted groups and other contact points with protected groups.

• Consider whether product offers could potentially target or exclude consumers in a discriminatory way.

• Compare how marketing efforts differ by geography.

• In a related vein, consider how digital advertising efforts may inadvertently be discriminating, such as via programmatic buys.

• Review policies for collecting visual information, like driver’s license or photo ID, when opening accounts.

• Consider what factors go into decisions to waive fees and the basis for placing consumers into better service or product tiers.

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