WASHINGTON–The Consumer Financial Protection Bureau (CFPB) has issued guidance about certain legal requirements that lenders “must adhere to when using artificial intelligence and other complex models.”
The new guidance comes at the same time CUToday.info is running a series of stories on the implications of AI for credit unions, the most recent of which was reported here.
According to the Bureau, the guidance describes how lenders must use specific and accurate reasons when taking adverse actions against consumers.
“This means that creditors cannot simply use CFPB sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit or a change of credit conditions,” the Bureau said. “This requirement is especially important with the growth of advanced algorithms and personal consumer data in credit underwriting. Explaining the reasons for adverse actions help improve consumers’ chances for future credit, and protect consumers from illegal discrimination.”
Data From Consumer Surveillance
The CFPB said 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,” the CFPB said. “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.”
A Note of Caution
The CFPB cautioned, however, that the Equal Credit Opportunity Act does not allow creditors to simply conduct check-the-box exercises when delivering notices of adverse action if doing so “fails to accurately inform consumers why adverse actions were taken.”
The Bureau reminded that in 2022 it published a circular to confirm the Equal Credit Opportunity Act requires creditors to explain the specific reasons for taking adverse actions.
“This requirement remains even if those companies use complex algorithms and black-box credit models that make it difficult to identify those reasons,” the CFPB said.
What the Guidance Does
The Bureau said its new guidance:
- Expands on the 2022 circular by explaining that sample adverse action checklists should not be considered exhaustive, nor do they automatically cover a creditor’s legal requirements
- Explains that even for adverse decisions made by complex algorithms, creditors must provide accurate and specific reasons. “Generally, creditors cannot state the reasons for adverse actions by pointing to a broad bucket. For instance, if a creditor decides to lower the limit on a consumer’s credit line based on behavioral spending data, the explanation would likely need to provide more details about the specific negative behaviors that led to the reduction beyond a general reason like ‘purchasing history’.”
- Makes clear that creditors that simply select the closest factors from the checklist of sample reasons are not in compliance with the law if those reasons do not sufficiently reflect the actual reason for the action taken. “Creditors must disclose the specific reasons, even if consumers may be surprised, upset, or angered to learn their credit applications were being graded on data that may not intuitively relate to their finances.”
Advisory Opinion
In addition to the circulars, the CFPB reminded it has issued an advisory opinion that consumer financial protection law requires lenders to provide adverse action notices to borrowers when changes are made to their existing credit.
For additional info: Read Consumer Financial Protection Circular 2023-03, Adverse action notification requirements and the proper use of the CFPB’s sample forms provided in Regulation B.