On September 19, 2023, the CFPB issued guidance about certain legal requirements that lenders must adhere to when using artificial intelligence and other complex models. The guidance describes how lenders must use specific and accurate reasons when taking adverse actions against consumers.
In light of lenders’ increasing use of complex algorithms, marketed as artificial intelligence, and other predictive decision-making technologies in their underwriting models, the CFPB’s guidance reiterates 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 guidance explains that even for adverse decisions made by complex algorithms, creditors must provide accurate and specific reasons. According to the CFPB, selecting the closest factors from the checklist of sample reasons is not in compliance with the law if those reasons do not adequately reflect the actual reason for the action. 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.
Read the CFPB’s release here.
The full guidance can be found here.
