CFPB warns users of algorithms, AI and machine learning of anti-discrimination compliance requirements | Venable LLP

According to a circular issued by the Consumer Financial Protection Bureau (CFPB) on May 26, 2022. According At the CFPB, the anti-discrimination law obliges companies to explain to applicants the specific reasons for refusing a credit application or taking other adverse measures, even if the creditor relies on credit models using complex algorithms. In addition, the CFPB highlights adverse creditor action notification requirements under the Equal Credit Opportunity Act (ECOA). This warning complements another recent CFPB announcement that it intends to use its UDAAP general authority to prosecute discrimination in any category of financial services, whether banking (including deposits), servicing, collection, appraisal credit, payments or transfers and remittances.

ECOA Requirements

The ECOA protects individuals and businesses from discrimination when seeking, applying for, or using credit. The ECOA requires a creditor to provide notice when taking adverse action against a plaintiff, which must contain specific and specific reasons for such adverse action. According to the CFPB, creditors cannot legally use technologies in their decision-making processes if their use prevents them from providing the required explanations.

To remember from the Circular
  • Federal consumer financial protection laws and adverse action requirements must be applied regardless of the technology used by creditors.
  • Creditors cannot justify non-compliance with the ECOA on the basis of the simple fact that the technology they use to assess 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 the ECOA. For example, recently the CFPB has begun to look closely at the use of automated valuation models in the home appraisal process to ensure that home appraisals are accurate and fair.
Call for whistleblowers

In the press release, the CFPB also highlighted the role 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.

Emerging technologies

The CFPB also indicates that it is closely following the work of the National Institute of Standards and Technologywithin the US Department of Commerce and other government agencies around the world, to assess the benefits and risks associated with emerging technologies.

Consumer Financial Protection Circular 2022-03: Adverse Action Notification Requirements in Relation to Credit Decisions Based on Complex Algorithms

Sharon D. Cole