Earlier this week, the Consumer Financial Protection Bureau (CFPB) issued guidance about requirements lenders must follow when using artificial intelligence and other complex models in deciding approvals and denials.
The guidance said lenders must use specific and accurate reasons when denying credit to consumers. Creditors cannot use the CFPB’s sample adverse action form or checklist if they do not reflect the actual reason for credit denial or a change in credit conditions.
CFPB Director Rohit Chopra said: “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.”
The CFPB said explaining the reasons for denying credit helps improve consumers’ chances to access future credit and protects consumers from illegal discrimination.
The guidance specifically said adverse credit decisions made by algorithms require credits to provide accurate and specific reasons for denial.
“Generally, creditors cannot state the reasons for adverse actions by pointing to a broad bucket,” the CFPB’s guidance letter said. “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.’”
Creditors selecting the closest factors from the CFPB’s checklist of sample reasons are not in compliance with the law, the bureau said, if those reasons “do not sufficiently reflect the actual reason for the action taken.” Creditors must disclose specific reasons, even if consumers may be surprised, upset or angered to learn their credit applications were being graded on data unrelated to their finances.
“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 CFPB said. “In fact, the CFPB confirmed in a circular from last year that 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. Today’s guidance expands on last year’s circular by explaining that sample adverse action checklists should not be considered exhaustive, nor do they automatically cover a creditor’s legal requirements.”
