CFPB Circular Sets Out Actions for Creditors Using Complex Algorithms

The CFPB Circular sets out adverse action notification requirements in connection with credit decisions based on complex algorithms under the Equal Credit Opportunity Act (ECOA). Law-abiding financial companies have long used advanced computational methods as part of their credit decision-making processes and they have been able to provide the rationales for their credit decisions. 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. ECOA requires a creditor to provide a notice when it takes an adverse action against an applicant, to explain the specific and accurate reasons for that adverse action. The Circular makes it clear that federal consumer financial protection laws and adverse action requirements should be enforced regardless of the technology used by creditors. It stipulates that companies relying on complex algorithms must provide specific and accurate explanations for denying applications. Creditors cannot justify non-compliance with ECOA just because the technology they use to evaluate credit applications is too complicated, too opaque in its decision-making, or too new. Creditors who use complex algorithms—including artificial intelligence or machine learning technologies—to engage in credit decisions must still provide a notice that discloses the specific, principal reasons for taking adverse actions.

Related Links

• Press Release on Credit Models Using Algorithms
• Circular on Credit Models Using Algorithms (PDF)
• Press Release on Interpretive Rule
• Press Release on Launch of New Office

Keywords: Americas, US, Banking, Credit Risk, Regtech, Artificial Intelligence, Machine Learning, ECOA, Lending, Basel, CFPB