On September 19, 2023, the Consumer Financial Protection Bureau issued Consumer Financial Protection Circular 2023-03 that expressly addresses the legal compliance requirements imposed by the Equal Credit Opportunity Act that a creditor must adhere to when using so-called artificial intelligence and other similar technologies in making underwriting and credit decisions. The key takeaway from the CFPB’s guidance is that a creditor that uses AI cannot rely on the checklist of reasons provided on the CFPB’s sample adverse action forms and instead must craft reasons that specifically disclose to the consumer the reason why the algorithmic technology caused the creditor to take adverse action against the consumer in a manner that is informative to the consumer.
In the press release that accompanied the guidance, CFPB Director Rohit Chopra commented that
“[t]echnology 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.”
Circular 2023-03 builds off the guidance established in Circular 2022-03, which was issued on May 26, 2022. In Circular 2022-03, the CFPB tackled the question of whether a creditor must comply with the ECOA’s requirement to provide a statement of specific reasons to an applicant against whom adverse action is taken when the credit decision is based on complex algorithms that could potentially make it difficult for the creditor to accurately identify the specific reasons for denying credit. The answer was an emphatic “yes.” Creditors that use algorithms (including AI and machine learning) in any aspect of a credit decision must provide a notice that discloses the specific reasons for taking adverse action. Furthermore, the CFPB concluded that a creditor cannot justify noncompliance with the ECOA and Regulation B requirements based on the fact that the technology it employs to evaluate a credit application is too complicated or opaque to provide a specific reason for the adverse action.
In Circular 2023-03, the CFPB addressed the question of whether a creditor may rely on the checklist of reasons provided in the CFPB’s sample forms of adverse action notices when those sample forms do not reflect the specific or principal reason for the adverse action. The answer was a categorical “no.”
First, the CFPB pointed out that, under the ECOA, as implemented by Reg. B, it is unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, sexual orientation, gender identity, marital status, age (provided that the applicant has the capacity to contract), whether the applicant’s income derives from a public assistance program, or whether the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act. In addition, when a creditor takes adverse action against an applicant, the ECOA and Reg. B require the creditor to provide the applicant with a statement of reasons for the action taken, which must be specific and indicate the principal reason or reasons for the adverse action. The reasons disclosed must relate to and accurately describe the factors actually considered or scored by the creditor when acting upon the application.
In order to help satisfy these requirements, the CFPB provides sample forms (codified in Reg. B) that a creditor may use, which include a checklist of sample reasons for adverse action that creditors most commonly consider as well as an open-ended field to provide reasons for adverse action that are not listed. Under Reg. B, if the reasons listed on the form are not the factors actually used, a creditor will not satisfy the notice requirement by checking the closest identifiable factor listed. The CFPB emphasized that sample forms merely provide an illustrative and non-exclusive list of reasons for adverse action.
Second, the CFPB reminded creditors that the adverse action notices have a two-fold purpose: (1) to promote fairness and equal opportunity for consumers engaged in credit transactions; and (2) to provide consumers with an educational tool that allows them to understand the reasons for a creditor’s action.
Finally, the CFPB emphasized that its concerns with regard to the specificity of reasons for adverse action apply equally to actions creditors take against consumers with existing credit lines (such as decisions to lower the limit on or close a credit line) and to new applications, which was also covered in an advisory opinion issued by the CFPB on May 9, 2022.
Accordingly, a creditor that employs algorithms involving AI and other predictive decision-making technologies in the creditor’s underwriting model (especially algorithms that rely on data that is harvested from consumer surveillance or data not typically found in a consumer’s credit file or credit application) may not rely solely on the unmodified checklist of reasons in the sample adverse action forms provided by the CFPB. It is the duty of the creditor to either modify the form or check the “other” field and include an appropriate explanation so that the applicant receives a statement of reasons that is specific and indicates the principal reason or reasons for the action taken. Moreover, a creditor will not be in compliance with the ECOA by disclosing reasons that are overly broad or vague, and specificity is particularly important to the CFPB when creditors use complex algorithms, because a consumer may not anticipate that certain data gathered outside of his or her application or credit file and fed into a decision-making model may be a principal reason for a credit decision.
Unfortunately, Circular 2023-03 does not provide any sample disclosures or examples that a creditor can use to populate the “other” field on the CFPB’s model adverse action forms when the action taken was based on an algorithm or AI or machine learning technology. Therefore, creditors that use such algorithms or AI should work with their attorneys to craft adverse action notices that accurately describe the factor or factors used by those technologies in arriving at a credit decision in a manner that is informative to consumers and that provides consumers with information that would allow them to take steps to improve their credit status or rectify mistakes that they have made.
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