CFPB Emphasizes Adverse Action Responsibilities Related to Black-Box Credit Models

By John Zasada, JD, CAMS – Shareholder, Financial Institutions Group

On May 26, 2022, the Consumer Financial Protection Bureau (CFPB) released a Consumer Financial Protection Circular (2022-03) on verse action notification requirements in connection with credit decisions based on complex algorithms. It indicates if creditors make decisions based on complex algorithms that prevent creditors from accurately identifying the specific reasons for denying credit or taking other adverse actions, the creditors must still comply with the Equal Credit Opportunity Act’s (ECOA) requirement to provide a statement of specific reasons to applicants against whom adverse action is taken.

The ECOA and Regulation B require creditors to provide statements of specific reasons to applicants when taking adverse action. According to the CFPB, creditors can make credit decisions based on certain complex algorithms, sometimes referred to as uninterpretable or “black-box” models, that make it difficult or even impossible to accurately identify the specific reasons for denying credit or taking other adverse actions. Regardless, the adverse action notice requirements of ECOA and Regulation B apply equally to all credit decisions. The technology used does not make a difference. Consequently, the ECOA and Regulation B prohibit creditors from using complex algorithms when doing so means they cannot provide the specific and accurate reasons for adverse actions. According to the CFPB, a creditor’s lack of understanding of its own methods is not a cognizable defense against liability for violating the ECOA and Regulation B’s requirements.

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