Deposit Discrimination: Legal Protection For Your Money

Discrimination has long been associated with loans, but regulators are now also looking for discrimination in deposits. While fair lending laws do not directly apply to deposit accounts, the Consumer Financial Protection Bureau (CFPB) has recently made changes to its supervisory operations to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply. The CFPB enforces several laws that target discriminatory practices, including the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Act (CFPA). The ECOA prohibits discrimination in credit transactions, while the CFPA defines an act as unfair when it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable, and such injury is not outweighed by benefits to consumers or competition. The CFPB will examine all consumer finance markets, including deposits, to ensure companies are appropriately testing for and eliminating illegal discrimination.

Discrimination in deposit accounts

The Equal Credit Opportunity Act (ECOA) is a fair lending law that prohibits discrimination in credit transactions, including those related to residential real estate. It makes it illegal for creditors, such as banks, mortgage companies, and credit card companies, to discriminate based on certain characteristics. These include sex, sexual orientation, gender identity, income source, and age.

In March 2022, the Consumer Financial Protection Bureau (CFPB) announced changes to its supervisory operations to better protect families and communities from illegal discrimination, including in situations where fair lending laws may not apply. The CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices, examining financial institutions' decision-making in advertising, pricing, and other areas. This includes looking at discrimination in deposit accounts, where not allowing people of colour to open accounts may be considered an unfair practice, even if the ECOA does not directly apply.

The updated CFPB exam procedures document notes that discrimination may meet the criteria for "unfairness" if it causes substantial harm to consumers that they cannot reasonably avoid, and the harm is not outweighed by benefits to consumers or competition. This change expands the scope of what is considered discriminatory, as it is no longer limited to the protected classes listed in the fair lending laws. Financial institutions should evaluate their processes and procedures related to deposit accounts to ensure they do not inadvertently discriminate against certain groups, such as servicemembers, the elderly, minorities, or people receiving public assistance.

By enforcing laws like the Consumer Financial Protection Act (CFPA), which defines and prohibits unfair practices, the CFPB aims to address and eliminate discrimination in the financial sector.

ECOA and Regulation B

The Equal Credit Opportunity Act (ECOA) is a federal law that prohibits discrimination in credit transactions. The ECOA makes it illegal for creditors, including banks, mortgage companies, credit card companies, and other lenders, to discriminate on the basis of race, colour, religion, national origin, sex, marital status, age, or income source. The law applies to every stage of the credit process, from seeking credit to the evaluation of income and credit decisions.

Regulation B is the implementing regulation of the ECOA. It covers creditor activities before, during, and after the extension of credit. This includes credit transactions and aspects of credit transactions, such as standards of creditworthiness, servicing and collection, and revocation, alteration, or termination of credit. Regulation B also sets forth additional requirements, such as the need for adverse action notices in certain circumstances.

The Consumer Financial Protection Bureau (CFPB) enforces the ECOA and Regulation B, with the authority to supervise and enforce compliance. The CFPB will examine financial institutions' decision-making in various areas, including advertising, pricing, and credit, to ensure companies are appropriately testing for and eliminating illegal discrimination.

The ECOA and Regulation B provide protections for applicants from discrimination in any aspect of a credit transaction. They outline prohibited practices and rules for taking applications, evaluating applications, and extensions of credit. These rules cover a range of factors, including inquiries about marital status, income sources, and age, to ensure fair treatment for all credit applicants.

UDAAP and unfair prong

The "unfair" prong of UDAAP refers to acts and practices that may cause substantial injury to consumers, including monetary harm, or a small amount of harm to a large number of people. This harm must not be reasonably avoidable by consumers and must not be outweighed by any countervailing benefits to consumers or competition. For example, if a large number of consumers are charged a small amount for a service they did not request, this would fall under the "unfair" prong.

The "deceptive" prong of UDAAP refers to statements or omissions that are misleading or likely to mislead a reasonable consumer. Intent is not required for an act to be considered deceptive, and deception may occur through words, silence, or action. For instance, a bank advertising $0 down payment leases without disclosing associated fees would fall under the "deceptive" prong.

The "abusive" prong of UDAAP was added to the Dodd-Frank Wall Street Reform Act in 2010 and is often considered the most subjective. An act is considered "abusive" when it materially interferes with a consumer's ability to understand the terms or conditions of a financial product or service, or takes unreasonable advantage of a consumer's lack of understanding, inability to protect their interests, or reasonable reliance on a covered person to act in their interests. For example, a lender keeping a lien on a house that is fully paid off by a consumer would fall under the "abusive" prong.

The Consumer Financial Protection Bureau (CFPB) has provided guidance on how it will exercise its authority regarding the "abusive" prong, aiming to reduce regulatory uncertainty and encourage consumer-beneficial innovations. The CFPB will generally avoid overlaps between the "abusive" prong and the "unfairness" or "deceptive" prongs and will not seek certain types of monetary relief for "abusive" prong violations if a covered person made a good-faith effort to comply.

Consumer Financial Protection Bureau's role

The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency that enforces federal consumer financial laws and protects consumers in the financial marketplace. The CFPB has taken steps to address and eliminate unfair practices and discrimination in consumer finance, including deposits.

The CFPB enforces several laws that target discriminatory practices, such as the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Act (CFPA). The ECOA is a fair lending law that prohibits discrimination in credit transactions, while the CFPA prohibits unfair, deceptive, and abusive acts or practices (UDAAPs).

In October 2024, the CFPB announced changes to its supervisory operations to better protect families and communities from illegal discrimination. The CFPB will scrutinize discriminatory conduct by financial institutions, including banks, and ensure compliance with consumer protection rules. This includes examining decision-making in advertising, pricing, and other areas to eliminate illegal discrimination.

The CFPB will examine discrimination in all consumer finance markets, including deposits. They 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 groups. The CFPB will also review how companies test and monitor their decision-making processes to identify and address unfair discrimination.

The CFPB aims to ensure that consumers are treated fairly by banks, lenders, and other financial institutions. They provide consumers with the information, steps, and tools needed to make informed financial decisions. The CFPB also takes consumer complaints, enhances financial education, and researches the consumer experience of using financial products.

Fair lending laws

The Fair Housing Act (FHA) is another crucial piece of legislation that prohibits discrimination in residential real estate transactions. This Act ensures that policies and practices that disproportionately burden or exclude certain individuals based on prohibited factors are considered a violation of fair lending laws, even without direct evidence of discriminatory intent. Disparate treatment, where a lender treats an applicant differently based on prohibited factors, is also considered intentional discrimination.

The Consumer Financial Protection Bureau (CFPB) plays a vital role in enforcing fair lending laws and has recently expanded its efforts to combat discrimination across consumer finance. The CFPB examines financial institutions' decision-making in areas like advertising, pricing, and consumer reporting to identify and eliminate illegal discrimination. The CFPB also enforces the Consumer Financial Protection Act (CFPA), which prohibits unfair, deceptive, and abusive acts and practices.

Overall, fair lending laws aim to ensure equal access to credit and protect consumers from discriminatory practices that may cause them harm. These laws empower consumers to take action against creditors who engage in credit discrimination and promote transparency and fairness in the financial sector.

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