The Consumer Financial Protection Bureau recently warned companies that, under federal anti-discrimination laws, they still owe consumers an explanation of specific reasons for denying credit applications, even if they use complex algorithms to determine creditworthiness. The move is both a reminder of the agency’s continued focus on anti-discrimination enforcement as well as the enduring responsibility of companies using new technology in consumer interactions.
On May 26, the agency published a circular confirming its position that creditors’ adverse action notice requirements under the Equal Credit Opportunity Act apply when using artificial intelligence or other algorithm-based credit models—even if the company claims it does not fully understand how the technology it uses to make those decisions works. Beyond denied credit applications, adverse actions can include closing or changing the terms of an existing credit account or denying a request to increase credit limits.
“Companies are not absolved of their legal responsibilities when they let a black-box model make lending decisions,” CFPB Director Rohit Chopra said in a press release.
“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 circular comes after the CFPB announced in mid-March that it would prioritize targeting unfair discrimination even if fair lending laws don’t apply, citing prohibitions against unfair, deceptive and abusive practices under the Consumer Financial Protection Act (CFPA). In a move signaling closer collaboration with states, including state attorneys general, the CFPB is also empowering states to enforce provisions under the CFPA, recently publishing an interpretive rule clarifying that Section 1042 permits states to enforce any provision of the law. The interpretive rule notes a CFPB action would not preempt a parallel state action. Further evidence of federal-state partnerships is the fact that the CFPB has memoranda of understanding with nearly two dozen state attorneys general, all 50 states, the District of Columbia and Puerto Rico.
In the end, creditors and lenders are still liable under federal law if they do not provide specific reasons for adverse actions, and a lack of understanding of how credit modeling technology works is not a legal defense for noncompliance. More broadly, companies are operating in a regulatory environment at the state and federal level that is increasingly focused on protecting consumers from algorithmic discrimination. Companies would be wise to review their algorithms for disparate treatment and disparate impact.
