Anti-discrimination law applies to companies with black-box credit models using complex algorithms, according to a circular issued by the Consumer Financial Protection Bureau (CFPB) on May 26, 2022. According to the CFPB, the anti-discrimination law requires companies to explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms. In addition, the CFPB highlights creditors' adverse action notice requirements under the Equal Credit Opportunity Act (ECOA). This warning complements another recent CFPB announcement that it intends to use its general UDAAP authority to prosecute discrimination in any financial services category, whether it be banking (including deposits), servicing, collections, credit reporting, payments, or money transfers and remittances.
ECOA protects individuals and businesses against discrimination when they are seeking, applying for, or using credit. ECOA requires that a creditor provide a notice when it takes an adverse action against an applicant, which must contain the specific and accurate reasons for that adverse action. According to the CFPB, creditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.
Takeaways from the Circular
- Federal consumer financial protection laws and adverse action requirements should be enforced regardless of the technology used by creditors.
- 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.
- The risks associated with decision-making technologies extend beyond adverse action notices and ECOA. For example, recently, the CFPB began taking a close look at the use of automated valuation models within the home appraisal process to ensure home valuations are accurate and fair.
Call for Whistleblowers
In the press release, the CFPB also highlighted the role that whistleblowers play in uncovering information about companies using technologies, like black-box models, in ways that violate ECOA and other federal consumer financial protection laws.
The CFPB also says it is closely monitoring the work of the National Institute of Standards and Technology, within the U.S. Department of Commerce , and other government bodies around the world, to assess the benefits and risks associated with emerging technologies.
Consumer Financial Protection Circular 2022-03: Adverse action notification requirements in connection with credit decisions based on complex algorithms