United States: ECOA And Beyond: Recent Updates And Developments In Discrimination Enforcement

On February 9, the FTC provided the CFPB with its annual summary of activities enforcing the Equal Credit Opportunity Act (ECOA). The release of this summary provides a great opportunity for a round-up and some updates on new developments in this space over the past year.

What is ECOA?

ECOA prohibits discrimination in consumer credit transactions on the basis of a number of protected categories, including race, color, religion, national origin, sex, marital status, and age. The statute's prohibition covers "any aspect of a credit transaction" – a phrase that has been interpreted by the CFPB to cover creditor activities before, during, and after the extension of credit. In addition, creditors who deny a credit application, provide substantially less credit than requested, or make a change in the terms of an existing credit agreement, must provide applicants with specific reasons for the "adverse action." Regulation B implements ECOA's requirements and sets out more detailed rules for creditors to follow.

Who implements and enforces ECOA?

The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (CFPA) granted the CFPB rulemaking authority for ECOA and also conferred the CFPB with supervisory and enforcement authority as to entities subject to CFPB jurisdiction. In addition, the FTC retains overlapping authority to enforce ECOA and Regulation B as to entities within the FTC's jurisdiction, which include most non-bank financial services providers. This week's summary is in furtherance of the CFPB's and FTC's commitment to coordinate ECOA enforcement pursuant to a memorandum of understanding initially entered into in 2012.

Recent FTC developments

Discriminatory auto dealer financing practices. In 2022, the FTC brought two cases (here and here) against auto dealership groups, alleging that they violated ECOA by discriminating with respect to discretionary markups. Markups, also known as the "dealer reserve," are commissions that dealers assess for arranging financing for car buyers. The markups usually involve charging 1-2% extra on top of the bank's interest rate. The FTC also alleged that the dealerships were adding junk fees and unwanted add-ons to customer contracts in a discriminatory manner. This is the third auto dealer ECOA case the FTC has brought in the last couple of years (here's another from 2020), signaling the agency's commitment to focusing on auto dealer practices in the future.

Discriminatory artificial intelligence technologies. In 2022, the FTC also issued a report to Congress warning about using artificial intelligence (AI) to combat online problems such as scams, deepfakes, fake reviews, child sexual exploitation, hate crimes, and glorification of violence. The report cautions that the AI tools themselves can be inaccurate, biased, and discriminatory by design, reflecting the biases of its developers, and thus leading to potentially illegal outcomes.

Recent CFPB developments

ECOA's applicability to prospective applicants. This month, the CFPB suffered a significant defeat in its first ever redlining case against a non-bank mortgage company based on violations of ECOA and the CFPA. In an action against Townstone Financial, the U.S. District Court for the Northern District of Illinois granted a motion to dismiss the CFPB's complaint on the grounds that ECOA does not apply to prospective applicants. Although the language of Regulation B includes prospective applicants, the court determined that the agency's interpretation was not in line with the statute's intent. The CFPB must now decide whether to appeal to the Seventh Circuit Court of Appeals

Discrimination as "unfairness" under the CFPA. In early 2022, the CFPB updated its Supervision and Examinations Manual to make clear that discrimination is "unfair" under the CFPA, and that the Bureau plans to scrutinize discrimination "across the board in consumer finance," "including in situations where fair lending laws may not apply." The CFPB further clarified that consumers can be harmed by discrimination regardless of whether it is intentional. The revisions prompted a lawsuit last fall from trade groups to set aside the CFPB's update as violating the Administrative Procedures Act (APA), which we previously discussed here. We'll be keeping a close eye on both these actions.

It's worth mentioning that the CFPB isn't the only agency advancing these views. In one of the auto dealer cases described above, the FTC also alleged that the companies' discriminatory financing activities constituted "unfair practices" under the FTC Act, prompting a spirited dissenting statement from former Commissioner Noah Phillips. State Attorneys General are taking similar positions. For example, California Attorney General Bonta sent letters under its Unfair Competition Law to hospital CEOs requesting information on how healthcare providers are addressing racial and ethnic disparities in commercial decision-making tools.

Digital marketing providers can be subject to discrimination allegations under the CFPA. Last fall, the CFPB issued a new interpretive rule announcing its position that digital marketing providers helping financial service companies identify and target consumers with online ads constitute "service providers" under the CFPA that can be held liable for any unfair, deceptive, or abusive uses of those marketing techniques. The CFPB specifically called out companies that gather and aggregate consumer-level data, engage in sophisticated analytic techniques to predict consumer behavior, and identify the most receptive consumer to receiving targeted ads. The CFPB also referenced its exam manual update that includes discrimination as a CFPA violation, reminding digital marketing providers that they could be subject to an investigation or enforcement for allegedly discriminatory uses of marketing and targeting services.

Clearly, there's a lot going on in this space as both the FTC and CFPB make good on promises to think creatively about enforcement mechanisms to combat potentially discriminatory practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.