The guidance emphasizes the need for accurate and specific reasons for denying consumers credit, especially with the rise of complex algorithms and personal data usage.
09/21/2023 12:40 P.M.
2 minute read
In an effort to uphold fair lending practices and protect consumers, the Consumer Financial Protection Bureau has released a new circular outlining legal requirements for lenders employing artificial intelligence (AI) and complex models in credit evaluation.
“This follows the agency’s actions in May 2022, where it issued a circular clarifying that companies cannot use black-box models that do not provide the visibility necessary to comply with Equal Credit Opportunity Act (ECOA) requirements,” according to ACA member firm and advocacy partner Brownstein Hyatt Farber Schreck LLP. “The CFPB’s circulars are a nonbinding tool used to communicate the agency’s position on the topic, and they often restate existing statutes and rules.”
The guidance strongly advocates for specific and accurate explanations when adverse actions, such as credit denials or alterations, are taken against consumers.
“In today’s marketplace, creditors are increasingly using complex algorithms, marketed as artificial intelligence, and other predictive decision-making technologies in their underwriting models. Creditors often feed these complex algorithms with large datasets, sometimes including data that may be harvested from consumer surveillance. As a result, a consumer may be denied credit for reasons they may not consider particularly relevant to their finances. Despite the potentially expansive list of reasons for adverse credit actions, some creditors may inappropriately rely on a checklist of reasons provided in CFPB sample forms,” according to the CFPB.
The ECOA unequivocally demands that creditors provide specific and accurate reasons for adverse actions, even when employing complex algorithms and black-box credit models that may make identifying these reasons challenging.
Rather than providing generic justifications, the bureau encourages creditors to outline the specifics negative behaviors that contributed to adverse actions, ensuring consumers have a clear understanding of why a particular decision was made.
CFPB Director Rohit Chopra emphasized the importance of transparency, stating, “Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied… Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”