NEWS: On September 19, 2023, the Consumer Financial Protection Bureau (CFPB) issued guidance addressing the legal requirements lenders must follow when using artificial intelligence (AI) or other complex models to make lending decisions. On the same day, the CFPB also issued an updated Consumer Financial Protection Circular 2023-03 outlining adverse action notice requirements and the proper use of the CFPB’s sample forms provided in Regulation B.
What information is included in the updated CFPB Circular?
The Circular reinforces that existing Reg. B requirements should continue to apply when AI is used. For instance, if a credit union uses an AI model and/or program where data factors are incorporated into the “principal reason” for taking adverse action, then Regulation B will require the credit union to state specific and accurate reasons when taking adverse actions against consumers.
Reg. B § 1002.9(a) requires credit unions to provide an adverse action notice when adverse action is taken on a credit application or an existing account. The notice must include a statement of specific reasons for the action taken.
Appendix C to Part 1002 includes sample forms to be used when notifying an applicant that an adverse action has been taken on an application or account. The forms include sample reasons for taking adverse action that creditors may commonly consider. Creditors often use these sample forms to satisfy adverse action notice requirements under the Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA). However, as the CFPB points out in the Circular…“[t]he sample forms are illustrative and may not be appropriate for all creditors.”
Using sample checklists from the CFPB
Reliance on the checklist of reasons provided in the sample forms will only satisfy a creditor’s adverse action notification requirements if the reasons disclosed are specific and indicate the principal reason(s) for the adverse action taken. Therefore, credit unions should not rely solely on unmodified checklists of reasons as provided in the sample forms if the reasons in the sample do not reflect the principal reason(s) for the adverse action.
Regulation B explains, “[i]if the reasons listed on the forms are not factors usually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed.”
The future of AI models
As credit unions begin to integrate AI models with complex algorithms, it is important to include data consumers may not anticipate is gathered outside the application or credit file used in the decision-making process as the principal reason(s) in the credit decision – especially if the data is not related to finances or financial capacity.
The Official Commentary to Regulation B, states that a creditor must “disclose the reasons for denial…even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant.”
For example, if an AI model uses data that results in a denial of a credit application due to an applicant’s profession, a statement that the applicant had “insufficient projected income” or “income insufficient for amount of credit requested” would fail to meet the creditor’s legal obligations.
Regulation B explains that even if the creditor believes the reason for the adverse action was broadly related to future income or earning potential, providing such reasons would likely not satisfy the credit union’s duty to provide the specific reason(s) for the adverse action.
Key Takeaway
Credit unions need to understand the complexity of their AI programs when using integrated data to make credit decisions that may result in an adverse action. The reasons for the adverse action must be disclosed. If the credit union is using the sample forms provided in Appendix C, then the credit union may need to select “other” or modify the form to include the actual reasons for the denial.
Resources
- CFPB Circular (September 19, 2023): Consumer Financial Protection Circular 2023-03
- CFPB Circular (May 26, 2023): Consumer Financial Protection Circular 2022-03
- CFPB Guidance (September 19, 2023): Credit Denials by Lenders using AI
- CFPB – Equal Credit Opportunity Act (Regulation B): § 1002.9 Notifications
- CFPB – Appendix C to Part 1002: Sample Notification Forms
- CFPB Joint Statement: Enforcement Efforts Against Discrimination and Bias in Automated Systems
- Office of the Comptroller of the Currency (OCC): Interagency Statement on the Use of Alternative Data in Credit Underwriting
You can also reference The League’s June 8, 2023, Compliance Courier, CFPB Analyzes “Artificial Intelligence” Chatbots by Financial Institutions.