On Sept. 19, 2023, the Consumer Financial Protection Bureau (CFPB) issued Consumer Financial Protection Circular 2023-03 on the proper usage of adverse action forms when using artificial intelligence (AI). The communication answered many common questions surrounding the use of AI, including the below. “When using AI or complex credit models, may creditors rely on the checklist of reasons provided in CFPB sample forms for adverse action notices even when those sample reasons do not accurately or specifically identify the reasons for the adverse action?” The CFPB’s response is creditors may not rely on the checklist of reasons provided in the sample forms if those reasons do not specifically indicate the principal reason(s) for the adverse action. Creditors are not permitted to use overly broad or vague reasons on adverse action forms for denying credit or account termination, or an unfavorable change in the terms of an account not affecting all, or substantially all, of a class of the creditor’s accounts. More and more creditors are using complex algorithms involving AI and other predictive decision-making technologies in their underwriting models. These complex algorithms sometimes rely on data harvested from consumer surveillance or that is not typically found in a consumer’s credit file or application. Consumers may not anticipate data gathered outside of their application or credit file being used and fed into an algorithmic decision-making model. Particularly if the data is not intuitively related to their finances or financial capacity. According to the CFPB, if a creditor takes adverse action using AI and denies a credit application due to an applicant’s chosen profession, a decline statement that the applicant had insufficient income or projected income, would likely fail to meet the creditor’s legal obligations. Another example from the CFPB is if a creditor decides to lower the limit on, or close altogether, a consumer’s credit line based on behavioral data. This could include a type of establishment at which a consumer shops or the type of goods purchased. In this instance, it would likely be insufficient for the creditor to simply state purchasing history or disfavored business patronage as the principal reason for adverse action. Instead, the creditor would likely need to disclose more specific details about the consumer’s purchasing history or patronage that led to the reduction or closure, such as:

• The type of establishment
• Location of the business
• The type of goods purchased
• Other relevant considerations

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