CFPB Addresses How AI Interacts with Adverse Action Requirements of FCRA

Fair Credit Reporting Act (FCRA)

Written By ESR News Blog Editor Thomas Ahearn

On July 7, 2020, the Consumer Financial Protection Bureau (CFPB) – a government agency that helps businesses comply with federal consumer financial law – published a blog addressing industry concerns about how the use of Artificial Intelligence (AI) interacts with the existing regulatory framework, specifically the adverse action notice requirements in the federal Fair Credit Reporting Act (FCRA) that regulates background checks.

The CFPB helps ensure that consumer financial products and services operate transparently and efficiently. “Financial institutions are starting to deploy AI across a range of functions, including as virtual assistants that can fulfill customer requests, in models to detect fraud or other potential illegal activity, or as compliance monitoring tools. One additional area where AI may have a profound impact is in credit underwriting,” the blog stated.

One area of innovation the CFPB is monitoring in consumer financial products and services is AI, particularly a subset of AI called Machine Learning (ML). However, industry uncertainty about how AI fits into the existing regulatory framework may be slowing its adoption, especially for credit underwriting. One important issue is how complex AI models address the adverse action notice requirements in the FCRA, according to the blog.

“FCRA also includes adverse action notice requirements. For example, when adverse action is based in whole or in part on a credit score obtained from a consumer reporting agency (CRA), creditors must disclose key factors that adversely affected the score, the name and contact information of the CRA, and additional content. These notice provisions serve important anti-discrimination, educational, and accuracy purposes,” the blog stated.

“There may be questions about how institutions can comply with these requirements if the reasons driving an AI decision are based on complex interrelationships. Industry continues to develop tools to accurately explain complex AI decisions… These developments hold great promise to enhance the explainability of AI and facilitate use of AI for credit underwriting compatible with adverse action notice requirements,” the blog concluded.

In the wake of the Financial Crisis of 2007-2008, Congress established the CFPB, an independent regulatory agency tasked with ensuring that consumer debt products are safe and transparent, as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress transferred the administration of 18 existing federal statutes to the CFPB, including the FCRA. The CFPB enforces the FCRA.

Employers using automated hiring platforms powered by AI in the belief that they are less biased and discriminatory than processes performed by humans will discover using AI technology in background screening will remain a work in progress even though it has potential, according to the “ESR Top Ten Background Check Trends” for 2020 compiled by leading global background check firm Employment Screening Resources® (ESR).

“AI has potential with screening, but is unlikely to be used as quickly as predicted. Between the myriad of federal, state, and local laws regulating screening, as well as discrimination and privacy concerns, the reality is going to be much different than many people predict from a purely technological viewpoint,” explained Attorney Lester Rosen, founder and chief executive officer (CEO) of Employment Screening Resources® (ESR).

“Background checks impact the highly regulated area of employment that requires accuracy specific to the individual. Technology helps to some degree, but each individual is entitled to an ‘individualized assessment,’ and the law and court cases weigh heavily against the mass processing and categorizing of people for employment,” said Rosen, the author of “The Safe Hiring Manual,” a comprehensive guide to background checks.

Employment Screening Resources® (ESR) – a leading global background check provider – offers fast, accurate, and affordable background checks that comply with FCRA regulations that are enforced by the CFPB. In November 2019, ESR was named as one of the top pre-employment screening services for enterprise-level businesses by HRO Today Magazine’s Baker’s Dozen. To learn more about ESR, visit www.esrcheck.com.

NOTE: Employment Screening Resources® (ESR) does not provide or offer legal services or legal advice of any kind or nature. Any information on this website is for educational purposes only.

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