CFPB “Unfairness Discrimination” Struck Down

On September 8, 2023, a federal court struck down the Consumer Financial Protection Bureau’s (CFPB) attempts to supervise institutions for so-called “unfairness discrimination.” The CFPB had previously announced the view that the statutory prohibition on unfairness encompasses a broad-based prohibition on discrimination in an update to its examination manual in March 2022, eliciting substantial objections and pushback from the financial services industry. Importantly, in addition to declaring the CFPB’s interpretation to be beyond the CFPB’s statutory authority, the court also enjoined the CFPB from “any examination, supervision, or enforcement action … based on the [CFPB’s] interpretation of its UDAAP authority announced in the March 2022 update to its Supervision and Examination Manual” with respect to any member of the plaintiff organizations in the case. If upheld on appeal, the ruling would be a significant blow to the CFPB’s efforts to enforce anti-discrimination principles based on the statutory prohibition on unfairness.

As we have previously discussed, in March 2022, the CFPB updated the UDAAP section of its examination manual to include a review for discriminatory conduct in all aspects of the offering or provision of consumer financial products or services, regardless of whether a company extends any credit or would otherwise be subject to the Equal Credit Opportunity Act (ECOA), including activities such as advertising, pricing, servicing, collections, consumer reporting, payments, remittances, deposits and algorithms. The CFPB’s announcement also suggested that the CFPB may be expecting supervised entities to perform testing to identify and correct unfair discrimination outside of the credit context. Specifically, the CFPB stated that it will “require supervised companies to show their processes for assessing risks and discriminatory outcomes” and that the CFPB will review “how companies test and monitor their decision-making processes for unfair discrimination.”

Several industry trade associations sued the CFPB, alleging, among other things, that the CFPB’s interpretation of “unfairness” to encompass discrimination untethered from any legislatively identified protected classes or activities stretched the notion of unfairness too far. In its ruling, the district court agreed. The court first held that the “major questions” doctrine applies because the question of whether unfairness encompasses discrimination “is a question of major economic and political significance” given the impact it would have on the financial services industry. The court went on: “Given that context, the CFPB faces a high burden in arguing that Congress conferred a sweeping antidiscrimination authority without defining protected classes or defenses, without using the words ‘discrimination’ or ‘disparate impact,’ and while separately giving the agency authority to police ‘discrimination’ only in specific areas.” Although noting that the CFPB’s interpretation “has a certain appeal given the facial breadth of [the statutory] language” defining unfairness, the court ultimately determined that that the “text and structure of the Act … make its definition of ‘unfairness’ at least vague as to the topic of discrimination” and thus “is not the sort of ‘exceedingly clear language’ that the major-questions doctrine demands.” (The court separately ruled against the CFPB based on its funding structure, an issue that the Supreme Court will be ruling upon this term. Unless it is overturned on appeal, the substantive ruling about the CFPB’s statutory authority will survive even if the Supreme Court upholds the CFPB’s structure.)            

As a remedy, the court not only vacated the update to the examination manual but went further and enjoined the CFPB from pursuing any examination, supervision or enforcement action against any member of any of the plaintiff organizations. (The plaintiffs in the case are: the U.S. Chamber of Commerce, the Longview Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, the Independent Bankers Association of Texas, the Texas Association of Business, and the Texas Bankers Association). Any institution that is a member of these organizations need only inform the CFBP of that membership to trigger the protections of the injunction. We expect that additional trade associations may seek to intervene in the case to obtain the benefits of the injunction for their members, which is what has happened in the separate lawsuit challenging the CFPB’s small business data collection rule. Any company that is the subject of a UDAAP examination (or enforcement investigation) in which the CFPB seems to be exploring possible claims of UDAAP discrimination should consider whether it wishes to take steps to avail itself of the protections of the injunction. The CFPB is likely to appeal this decision and we will continue to monitor this case.