CFPB Issues Circular Explaining the Adverse Action Notification Requirements Applicable to Credit Decisions Based on Complex Algorithms

On May 26, 2022, the CFPB issued Circular 2022-03, explaining that ECOA and its implementing regulation, Regulation B, require creditors to provide a notice that accurately discloses the specific principal reasons for taking an adverse action even when complex algorithms or “black-box” models are used in any aspect of the credit decision. 

ECOA provides that a creditor must provide, in writing, a statement of reasons to applicants against whom adverse action is taken.  Under Regulation B, the statement “must be specific and indicate the principal reason(s) for the adverse action.”  As stated in the Circular, a creditor cannot justify noncompliance with ECOA and Regulation B’s adverse action notification requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.  The Circular also notes that where creditors rely on various post-hoc explanation methods that approximate the models themselves, creditors must be able to validate the accuracy of those approximations.

Accordingly, creditors risk violating ECOA and Regulation B where they use complex algorithms, including artificial intelligence and machine learning, when doing so means the creditor cannot provide the specific and accurate reasons for adverse actions.  The CFPB also communicated in a recent advisory opinion that ECOA’s protections continue after the application stage and apply to all aspects of a credit arrangement.  WBK wrote about that advisory opinion here.