2022Credit Reports

Written By ESR News Blog Editor Thomas Ahearn

On May 26, 2022, the Consumer Financial Protection Bureau (CFPB) – an agency that implements and enforces Federal consumer financial law – published a Consumer Financial Protection Circular to remind the public and those responsible for enforcing federal consumer financial protection law of adverse action notice requirements for creditors using complex algorithms under the Equal Credit Opportunity Act (ECOA).

Data harvesting gives firms the ability to know highly detailed information about their customers and many firms rely on detailed datasets to power their algorithmic decision-making, which is sometimes marketed as “artificial intelligence.” The information from data analytics has a range of commercial uses by financial firms, including for targeted advertising and in credit decision-making.

However, some creditors may make credit decisions based on the outputs from complex algorithms, sometimes called “black-box” models. The reasoning behind some of these models’ outputs may be unknown to the model’s users, including the model’s developers. With such models, adverse action notices that meet ECOA’s requirements may not be possible.

The ECOA protects individuals and businesses against discrimination when seeking, applying for, and using credit. To help ensure a creditor does not discriminate, the ECOA requires that a creditor provide a notice when it takes an adverse action against an applicant, which must contain the specific and accurate reasons for that adverse action. The CFPB Circular makes clear that:

  • Federal consumer financial protection laws and adverse action requirements should be enforced regardless of the technology used by creditors.
  • 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.

Whistleblowers play a central role in uncovering information about companies using technologies, like black-box models, in ways that violate ECOA and other federal consumer financial protection laws. Having clear, actionable information is critical for the CFPB and other consumer protection enforcers. The CFPB encourages tech workers to visit the CFPB’s Whistleblower Program webpage.

The CFPB Circular confirms 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. Creditors cannot lawfully use technologies for decision-making processes if they are unable to provide required explanations.

“Companies are not absolved of their legal responsibilities when they let a black-box model make lending decisions,” CFPB Director Rohit Chopra stated in a news release. “The law gives every applicant the right to a specific explanation if their application for credit was denied, and that right is not diminished simply because a company uses a complex algorithm that it doesn’t understand.”

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