On May 26, 2022, the Consumer Financial Protection Bureau warned via Consumer Financial Protection Circular 2022-03 that creditors using complex algorithmic credit reporting models are not immune from complying with the Equal Credit Opportunity Act (ECOA) requirement that consumers be told why a lender has taken adverse action on an existing credit application or account. If a model is so complex that the creditor cannot explain why a consumer was denied credit, use of the model may violate ECOA.

Circular 2022-03

The ECOA has long required that creditors who take adverse action on a consumer’s credit application, such as denying a credit application or terminating an existing account, provide consumers with notice of that action. . Where the Notice of Adverse Action contains a statement of the reasons for the adverse action taken, the statement must “be specific and state the primary reason(s) for the adverse action”.¹ Where the adverse action is based on a credit rating system, “no factor that was the primary reason for the adverse action can be excluded from disclosure”.² General statements that the adverse action was based on the creditor’s internal standards or policies, or that the plaintiff did not achieve a qualifying rating on the creditor’s credit rating system, are insufficient to comply with the ECOA and Regulation B.

The circular does not provide guidance to creditors on how to comply with the requirements of the ECOA and Regulation B. On the contrary, the circular explains that the use of algorithmic models in the credit decision violates the ECOA and Settlement B if creditors are unable to articulate a specific reason for taking adverse action. The CFPB also warns that a creditor cannot justify failing to meet these requirements simply because the technology it uses to assess claims is too complicated or opaque to understand. All creditors, even those using algorithmic credit-decision systems, must provide clear statements to consumers when taking adverse action, either in the notice itself or when the consumer requests information about why. adverse action. These statements should identify the primary reason(s) the consumer was denied credit and should be written clearly so that consumers understand why they received adverse action. Thus, a creditor’s lack of understanding of its own methods is no defense against liability for violation of the requirements of ECOA and Regulation B.

What does this mean for you?

When the CFPB released its annual Fair Lending Report on May 6, 2022, Director Rohit Chopra said that “CFPB will place greater emphasis on digital redlining and algorithmic biases. As more and more technology platforms, including large technology companies, influence the financial services market, the CFPB will work to identify emerging risks and develop appropriate policy responses. Circular 2022-03 is the latest concrete example of how the CFPB will screen creditors using advanced credit assessment techniques.

Creditors who operate their own complex algorithmic systems in credit decision making need to ensure that they have a sufficient understanding of how these models work so that they can provide consumers with clear and specific reasons for taking adverse action. Creditors using third-party models are not exempt from complying with the ECOA, and they should engage with their vendors to ensure they understand the factors driving the credit decision – and can communicate those factors. to consumers in a clear and effective way.

Remarks

1. 12 CFR § 1002.9(b)(2).
2. 12 CFR Part 1002 (Supp. I), § 1002.9, para. 9(b)(1)-2.