Ruling says algorithms no defense against adverse action requirements
In response to the frequent use of algorithmic models to determine credit eligibility, the Consumer Financial Protection Bureau (CFPB) released a circular that clarifies that customers who are denied credit must be provided with specific reasons for the denial in an adverse action notice. This requirement is a part of the Equal Credit Opportunity Act (ECOA).
The CFPB noted that widespread data harvesting makes it possible to use a wealth of information to determine consumer eligibility for credit. While this information may be placed into a complex algorithm, consumers are still entitled to a statement of specific reasons for denial of credit.
“Companies are not absolved of their legal responsibilities when they let a black-box model make lending decisions,” said CFPB Director Rohit Chopra. “The law gives every applicant the right to a specific explanation if their application for credit was denied, and that right is not diminished simply because a company uses a complex algorithm that it doesn’t understand.”
The CFPB's interpretation of the ECOA serves to protect consumers by clarifying that:
- Federal consumer financial protection laws and adverse action requirements should be enforced regardless of the technology used by creditors. For example, ECOA does not permit creditors to use technology that prevents them from providing specific and accurate reasons for adverse actions. Creditors’ use of complex algorithms should not limit enforcement of ECOA or other federal consumer financial protection laws.
- Creditors cannot justify noncompliance with ECOA based on the mere fact that 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. There is no exception for violating the law because a creditor is using technology that has not been adequately designed, tested, or understood.