(Note: this article has been updated to reflect new information on the CFPB's plans for ECOA enforcement on 10/6/22)
In May, the CFPB issued a stern warning to lenders: The Equal Credit Opportunity Act (ECOA) applies to the full lifecycle of an account including recovery and collections. That means every aspect of dealing with a creditor, not just to the credit application process.
ECOA bans credit discrimination based on race, color, religion, national origin, sex, marital status, and age. It also protects those receiving money from any public assistance program or exercising their rights under certain consumer protection laws.
And, as the advisory opinion indicates, the CFPB insists that ECOA protections apply to revocation, collection procedures, alteration or termination of credit, and anything else that takes place after credit has been extended.
The CFPB is now telling the industry how it plans to enforce those protections.
The CFPB will regulate through enforcement, according to Director Chopra, who added that the CFPB plans to protect consumers by “eradicat[ing] unlawful actors who really prey on people,” because consumer education has not fixed the problem, and in Director Chopra’s view, education has made the situation worse because of consumers’ overconfidence.
It’s concerning that the CFPB hasn’t been clear or explicit about their expectations, which means we’ll continue to see rule-marking by enforcement, which is not good for the industry or the consumers the CFPB is there to protect.
Here are three things creditors - and everyone else - needs to know about the advisory and its implications:
1. The CFPB thinks that creditors don't understand just how broadly ECOA applies.
To explain why anti-discrimination protections continue after a customer obtains a loan, the advisory opinion walked through the history of ECOA, Regulation B, and their amendments. Specifically, the opinion points out how ECOA and Regulation B refer to accounts in the past tense and refer to debtors. According to the CFPB, despite this "well-established interpretation," the advisory opinion is necessary because some creditors fail to acknowledge that ECOA and Regulation B plainly apply to events that take place after credit has been granted.
According to CFPB Director Rohit Chopra, the advisory opinion "makes clear that anti-discrimination protections do not vanish once a customer obtains a loan."
Reminder: the CFPB also pointed out that in addition to protecting borrowers after applying for and receiving credit, ECOA requires lenders to provide "adverse action" notices to borrowers with existing credit. These notices should be sent when credit is denied, an existing account is terminated, or an account’s terms are unfavorably changed.
2. This advisory opinion follows a distinct trend and has broader implications.
You might be inclined to consider this advisory in a vacuum. Don't. Considering the CFPB's other recent announcements that (1) its UDAAP authority allows it to review for discrimination and (2) that it has the power to supervise all nonbank financial institutions which pose a risk to consumers, it is clear where this CFPB is planning to go. It seems this version of the CFPB plans to focus like a laser on the effects practices and policies have on consumers. If it finds the net effect of procedures to be unfair, it will take action.
3. Expect more rule-making by enforcement.
The issue, of course, is not that anyone wants to mistreat people or wants to discriminate. Any such entity doing so is a bad actor and should be treated as such. Instead, the issue here is that those subject to the CFPB's scrutiny still don't know the proverbial rules of the game. While the CFPB has made its desire to look at the net result clear, it hasn't alerted those subject to its oversight of which processes they will be looking at, what they will consider unfair, or any other insight into their expectations regarding processes and policies. Without this insight, we will continue to see rule-making by enforcement, which is not good for the industry or the consumers the CFPB is there to protect.
Any entity subject to the CFPB's oversight should heed these warnings, watch developments closely, and ensure they are prepared to handle compliance proactively.
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