VIDEO: Discrimination Risk on Deposit Accounts
In this Compliance Clip (video), Adam discusses new discrimination risk on deposit accounts. While discrimination has typically been linked to loans, that is no longer the case as the regulators are now specifically looking for discrimination on the deposit side of the bank.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss discrimination risk on deposit accounts. Really, what we're going to discuss is how much risk do you have in regards to discrimination on your deposit accounts and the deposit side of your financial institution.
Traditionally, we probably would have said we don't have a lot of risk because we understand that fair lending laws do not apply directly to deposit accounts, because it's fair lending. That all changed when on March 16, 2022, when the CFPB announced that they made some pretty significant changes to their UDAAP exam procedures. What essentially happened in these procedures was the CFPB explained that this change was done to protect families and communities from illegal discrimination, including situations where fair lending laws may not apply.
The updated exam procedures document actually notes that discrimination may meet the criteria for unfairness by causing substantial harm to consumers that they cannot reasonably avoid, where that harm is not outweighed by countervailing benefits to consumers or competition. Basically, what we have here is we have changed the philosophy of UDAAP where unfair has always had the same three-prong test, but the regulators are coming out now and telling us specifically, and it's really the CFPB is telling us specifically that you can have a discrimination violation under the unfair prong of UDAAP. So, we don't have to have a discrimination violation under the ECOA prong, under the Equal Credit Opportunity Act of Regulation B, which is your fair lending laws, but rather we can have a discrimination violation under the UDAAP prong. What this means is, and the greater question of this Compliance Clip, is how much discrimination risks do we have on our deposit accounts and on the deposit side of our financial institutions? How do we evaluate this?
What we can do is start to take a look at our processes and procedures in our financial institution relating to our deposit accounts, to determine where there could be potential discrimination. The best way to do that is to really model what you do in the fair lending department to look for discrimination. But of course, the UDAAP piece does not have a list of protected classes. So what that means is there could be risks that go above and beyond the protected classes listed in the fair lending laws. So, what is your risk? What is your risk in your organization? Now, if you have very strict processes and procedures, your risk is probably pretty low. If you have a lot of discretion, it could be elevated. If you have processes and procedures that are strict, but seem to harm certain groups like servicemembers, like the elderly, like the young, like minorities, people on government aid, receiving public assistance, that could all be problematic when it comes to deposit accounts. So, you definitely want to evaluate this and make sure you don't have any issues in your institution.
I don't have a lot of slides for this because I just finished recording a new section in our UDAAP Foundations class, where I spend about 22 minutes talking about this new change of discrimination under UDAAP. And I go into detail about where this came from, what the examiners are now expecting, and I actually leave you with 11 different steps you can take in your organization to help to mitigate the risks of UDAAP violations in relationship to discrimination. If you're interested in taking an even deeper dive into this topic of deposit discrimination, take a look at our UDAAP Foundations program, which has an entire section dedicated to dealing with discrimination under UDAAP, really the unfair prong of UDAAP.
That's all I have for you for this Compliance Clip.