On May 26, 2022, the CFPB confirmed that federal anti-discrimination law requires companies to explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms. The CFPB published a Consumer Financial Protection Circular to remind the public, including those responsible for enforcing federal consumer financial protection law, of creditors’ adverse action notice requirements under the ECOA.
According to the CFPB, some creditors use complex algorithms, sometimes called “black-box” models, to make credit decisions. However, the reasoning behind some of these models’ outputs may be unknown to the model’s users, including the model’s developers. With such, adverse action notices that meet ECOA’s requirements may not be possible.
The CFPB issued a circular on adverse action notification requirements in connection with credit decisions based on complex algorithms, which clarifies that:
Federal consumer financial protection laws and adverse action requirements should be enforced regardless of the technology used by creditors; and
Creditors cannot justify noncompliance with ECOA based on the mere fact that the technology they use to evaluate credit applications is too complicated, too opaque in its decision-making, or too new.
The CFPB is closely working with its government partners, including the National Institute of Standards and Technology to assess the risks associated with emerging technologies. The agency also encourages tech workers to act as whistleblowers and to provide the agency with actionable information through the CFPB’s Whistleblower Program.
Aside from the use of black-box technologies in credit decision-making, the CFPB is also taking a close look at the use of automated valuation models within the home appraisal process. Read our article: CFPB Outlines Options to Prevent Algorithmic Bias in Home Valuations.
The CFPB’s press release can be found here.
Read CFPB Circular 2022-03 here.