Home BusinessFinancial Consumer Finance Monitor Podcast Episode: Federal Court Rules CFPB Cannot Use UDAAP Authority to Regulate Discrimination: A Close Look at the Decision and its Implications | Ballard Spahr LLP

Consumer Finance Monitor Podcast Episode: Federal Court Rules CFPB Cannot Use UDAAP Authority to Regulate Discrimination: A Close Look at the Decision and its Implications | Ballard Spahr LLP

by Paul Morgan

In March 2022, the Consumer Financial Protection Bureau (CFPB) made significant changes to its examination manual, allowing its examiners to apply the “unfairness” standard under the Consumer Financial Protection Act to conduct considered to be discriminatory, regardless of whether it falls under the purview of the Equal Credit Opportunity Act (ECOA). These changes allow the CFPB to target discrimination more broadly, ensuring that no discriminatory practices go unchecked.

The revisions to the manual were made with the aim of strengthening the CFPB’s ability to combat discrimination in the financial services industry. By expanding their jurisdiction beyond the ECOA, the CFPB can now address discriminatory practices that may have previously fallen through the cracks. This broader application of the “unfairness” standard is essential in ensuring fair and equal treatment for all consumers.

However, the changes made by the CFPB were met with resistance from the industry. Several industry players filed a lawsuit challenging the legality and validity of the revisions. They argued that the CFPB had exceeded its statutory authority and that the changes should be invalidated.

The industry’s objections centered on the belief that the CFPB’s authority was restricted to enforcing the ECOA, and that any expansion of that authority would be an overreach. They claimed that only Congress had the power to grant the CFPB the authority to regulate discrimination outside the scope of the ECOA.

The relief sought by the industry was to have the court invalidate the CFPB’s changes to the examination manual and limit the Bureau’s authority to enforcing the ECOA only. They argued that the CFPB’s actions were arbitrary and capricious, and that they disregarded the limits on the Bureau’s authority.

In a subsequent court decision, the changes made by the CFPB were vacated. The court held that the revisions went beyond the Bureau’s authority and violated the “major questions” doctrine. This doctrine states that if a statutory ambiguity exists, an agency’s interpretation of the law must be reasonable and consistent with the overall statutory scheme. In this case, the court found that the CFPB’s interpretation of its authority was unreasonable and inconsistent with the legislative intent of the ECOA.

The court’s decision is a setback for the CFPB’s efforts to combat discrimination in the financial services industry. It limits the Bureau’s ability to use the “unfairness” standard to target discrimination that falls outside the scope of the ECOA. This ruling also has implications for other CFPB rulemakings and actions that seek to address discrimination in the financial industry.

Moving forward, the CFPB will have to reassess its approach to combating discrimination. It may consider seeking legislative changes to expand its authority or redrafting its examination manual to bring it in line with the court’s decision. The Bureau’s next steps will be critical in its ongoing efforts to promote fair and equal treatment in the financial services sector.

In conclusion, the CFPB’s changes to its examination manual aimed to broaden its ability to address discrimination in the industry. However, the industry’s lawsuit challenging these changes resulted in a court decision that invalidated them. The court’s ruling limits the CFPB’s authority in targeting discrimination outside the scope of the ECOA, highlighting the need for the Bureau to revisit its approach and find alternative ways to combat discrimination in the financial services sector.

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