Creditors using algorithms must explain credit denials

The Consumer Financial Protection Bureau (CFPB) confirmed on Thursday that companies must provide consumers with an explanation for denying credit applications, even if they use “black box” algorithms to make lending decisions.

The federal agency says that even though lenders are using alternative and complex technology to secure claims, the Equal Credit Opportunity Act stipulations that a creditor must provide notice of adverse action in the event denials are still in effect.

Key points to remember

  • The CFPB clarified that the notice of adverse action provision of the Equal Credit Opportunity Act applies to all credit rejections, regardless of the technology used by the lender.
  • The federal agency says the complexity of the technology is no excuse for not providing a specific explanation for the denial.
  • Lenders who fail to meet these requirements are breaking federal law.

CFPB says technology is no excuse to violate consumer rights

The Equal Opportunity Credit Act (ECOA) states that when a creditor takes adverse action against an applicant, they are required by law to provide notice with specific and specific reasons. This is to protect both consumers and businesses from credit discrimination.

But with consumer data being much more readily available in the internet age, many companies are using more complicated algorithms, including machine learning and artificial intelligence, to incorporate more information into their underwriting process.

While this can provide a more predictive analysis of a candidate’s creditworthiness, the problem is that technology users and even developers sometimes don’t understand the reasoning behind the algorithm’s decision.

With its circular, the CFPB asserts that the ECOA is enforceable whether or not the technology used by a creditor is transparent. If the process was not adequately tested, was poorly designed, or is misunderstood or opaque, that is no excuse for the creditor not to provide specific reasoning for the denial.

As a consumer, you are entitled to a Notice of Adverse Action if you are denied credit within 30 days of the creditor’s decision. This notice should give you specific reasons for your denial, which can help you take the right steps to improve your credit before you make the next application.

Sharon D. Cole