Circular 2023-03: Adverse Action Notification Requirements and the proper use of the CFPB’s sample forms provided in Regulation B.
Consumer Financial Protection Bureau (CFPB) Summary re Consumer Financial Protection Circular 2023-03: Adverse Action Notification Requirements and the proper use of the CFPB’s sample forms provided in Regulation B.
The Bureau issued Circular 2023-03 to clarify the Equal Credit Opportunity Act (ECOA) notification requirements and the proper use of the CFPB’s sample for adverse action notices for entities that utilize artificial intelligence and complex credit models. The circular can be found here, https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-guidance-on-credit-denials-by-lenders-using-artificial-intelligence/
Question Presented:
When using artificial intelligence or complex credit models, may creditors rely on the checklist of reasons provided in the CFPB sample forms for adverse action notices even when those sample reasons do not accurately or specifically identify the reasons for the adverse action?
Response:
No, creditors may not rely on the checklist of reasons provided in the sample forms to satisfy their obligations under ECOA if those reasons do not specifically and accurately indicate the principal reason(s) for the adverse action. In addition, creditors are unable to rely on overly broad or vague reasons to the extent that they obscure the specific and accurate reasons relied upon for the decision.
Analysis:
The Equal Credit Opportunity Act (ECOA), implemented by Regulation B, requires that when taking an adverse action against an applicant, a creditor must provide the applicant with a statement of reasons for the action taken. The statement of reasons must be “specific” and indicate the “principal reason(s) for the adverse action. Additionally, the specific reasons disclosed must “relate to and accurately describe the factors actually considered or scored by a creditor.” Reliance on the checklist reasons provided in the sample forms would satisfy a creditor’s adverse action notification requirements only if the reasons disclosed are specific and indicate the principal reason(s) for the adverse action taken.
Adverse action notice requirements promote fairness and equal opportunity for consumers engaged in credit transactions, by serving as a toll to prevent and identify discrimination through the requirement that creditors must affirmatively explain their decisions. Such notices provide consumers with a key educational tool allowing them to understand the reasons for a creditor’s action and take steps to improve their credit status or rectify mistakes made by creditors.
The Bureau is aware that some creditors use complex algorithms involving “artificial intelligence” and other predictive decision-making technologies in their underwriting models. This Circular reminds institutions that their use of data and advanced technologies must be in compliance with all relevant legal requirements. The CFPB makes it clear that adverse action notice requirements apply equally to all credit decisions, regardless of whether the technology used to make them involves complex or “black box” algorithmic models or other technology that creditors may not understand sufficiently to meet their legal obligations.