New guidance was issued this month focused on the use of artificial intelligence in credit processes. As lenders expand their practices to utilize new tools, such as artificial intelligence and other complex models, they should remain cognizant of regulatory requirements.
In connection with this, the CFPB has issued new guidance focused on the increased use of complex algorithms and the reliance on it by lenders in underwriting. As the CFPB Director Chopra opined:
“Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied. Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”
What Should We Know About the CFPB Guidance?
In keeping up with this topic, lenders should be aware of two primary Consumer Financial Protection Circulars issued by the CFPB:
Circular 2022-03 – The CFPB issued this Circular in May 2022. The focus of this Circular addressed a question about adverse action notification requirements in connection with credit decisions based on complex algorithms. More specifically, it addressed situations where a creditor’s credit decision was based on a complex algorithm that prevented the creditor from accurately identifying the specific reasons for taking adverse action and whether the creditor needed to comply with ECOA to provide specific reasons for denial.
Key Takeaway – The CFPB is aware that some complex algorithms can make it difficult, if not impossible, to identify the specific reasons for taking adverse action. However, the requirements of ECOA and Regulation B still apply. As the Circular states, “ECOA and Regulation B do not permit creditors to use complex algorithms when doing so means they cannot provide the specific and accurate reasons for adverse action.”
Circular 2023-03 – In its newest issuance in September 2023, the CFPB once again addresses adverse action notification requirements and implications from using artificial intelligence and other complex models in the underwriting of credit. However, this Circular expands on the topic and focuses in on the use of CFPB model adverse action notices that include a checklist of reasons.
Key Takeaway – While lenders may utilize CFPB forms that include a checklist of reasons, they cannot do so if those reasons do not specifically and accurately indicate the principal reason(s) for adverse action. Also, lenders are reminded that they cannot rely on vague reasons for adverse action if they make unclear the specific reasons relied upon.
How Should Lenders Proceed?
As the use of newer technology infiltrates our processes and procedures, lenders should remain aware of what tools are being utilized within their credit underwriting processes. While ECOA and Regulation B represent longstanding factors in adverse action processes, it is important to not become complacent about compliance.
Interested persons are encouraged to review Circulars 2022-03 and 2023-03 in their entirety for additional details, followed by reviewing for the use of complex underwriting tools and determining any impact on adverse action notification requirements.