Under Director Chopra’s leadership, the CFPB has regularly been sounding alarms about the potential for discrimination arising from the use of so-called “black box” credit models that use algorithms or other artificial intelligence (AI) tools.  Today, in the second of its recently-launched Consumer Financial Protection Circulars, the CFPB addresses ECOA adverse action notice requirements in connection with credit decisions based on algorithms.

The new Circular (2022-03) is intended to deliver the message that:

• ECOA/Regulation B adverse action notice requirements apply to all credit decisions, regardless of the technology used to make them.
• The fact that a creditor’s technology for evaluating applications is too complicated or opaque for it to understand is not a defense to noncompliance with adverse action notice requirements.
• It is a violation of the ECOA and Regulation B for a creditor to use algorithms or other technology if doing so makes a creditor unable to satisfy the requirement to provide a statement of reasons for adverse action that is “specific” and “indicate[s] the principal reason(s) for the adverse action.” 

While the issuance of the new Circular allows the CFPB to issue a press release announcing that it is “act[ing] to protect the public,” the CFPB does not share any new information about the ECOA/Regulation B requirements in the Circular.  Most notably absent from the Circular is any guidance that would assist creditors in meeting their compliance obligations.  Indeed, in a July 2020 blog post, the CFPB acknowledged the challenges that the use of AI and algorithms creates for providing compliant ECOA adverse action notices.  

In its press release about the new Circular, the CFPB renews its December 2021 call for tech workers to act as whistleblowers to report potential discrimination arising from the use of algorithms and other technologies.  The CFPB has previously acknowledged the potential consumer benefits of AI and other technologies.  We believe the CFPB could benefit both consumers and providers by providing guidance on how industry can best navigate the sometimes challenging compliance issues raised by new technologies.

In the absence of useful guidance from the Bureau, it is imperative that companies seek legal guidance so that they will be in a position to defend their approach to adverse action notices if challenged. 

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