Fair lending obligations and decision-making algorithms

A few weeks ago, the Consumer Financial Protection Bureau (CFPB or bureau) issued Consumer Financial Protection Circular 2022-03 to remind creditors of their obligations under the Equal Credit Opportunity Act (ECOA) and Regulation B regarding adverse action notices when algorithms or automated models are used in the decision-making process.

Section 1002.9(b)(2) of Reg B require a creditor to provide a list of reasons for adverse action and requires the list to be “specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor’s credit scoring system are insufficient.” The commentary to this section adds “the specific reasons disclosed under §§ 1002.9(a)(2) and (b)(2) must relate to and accurately describe the factors actually considered or scored by a creditor” and also notes, “if a creditor bases the denial or other adverse action on a credit scoring system, the reasons disclosed must relate only to those factors actually scored in the system. Moreover, no factor that was a principal reason for adverse action may be excluded from disclosure.”

In other words, creditors are required to identify exactly why adverse action is taken and convey that information to an applicant. It is not enough for a creditor to tell an applicant that the decision was based on a complex series of models and algorithms. The CFPB’s reiterates these opinions in its circular.

Additionally, in its press release, the bureau explains the circular was issued specifically to make these two points:


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