USA: CFPB issues guidance on use of AI for credit denial
On September 19, 2023, the Consumer Financial Protection Bureau (CFPB) published Consumer Financial Protection Circular 2023-02 'Adverse action notification requirements and the proper use of the CFPB's sample forms provided in Regulation B.' In particular, the Circular concerns the use of artificial intelligence (AI) or complex credit models in creditors' decision-making processes. The Circular stipulates that creditors may not rely on the checklist of reasons provided in the sample forms (currently Regulation B) of the Equal Credit Opportunity Act (ECOA) to satisfy their obligations under the ECOA if those reasons do not specifically and accurately indicate the principal reasons for an adverse action. Creditors may also not rely on overly broad or vague reasons to the extent that they obscure the specific and accurate reasons relied on.
Notably, the Circular establishes that the harm that can result from consumer surveillance and the data from the use of AI in creditors underwriting models, may not intuitively relate to the likelihood that a consumer will repay a loan. Further, creditors must provide applicants with a statement of the specific reasons for an adverse action and the reasons disclosed must relate to and accurately describe the factors actually considered or scored by a creditor. For example, the Circular clarifies that the use of AI to deny a credit applicant owing to their profession on the grounds that the applicant has 'insufficient projected income' or 'income insufficient for the amount of credit requested' would likely fail to meet the credit's legal obligations. Likewise, the use of behavioral data, such as the establishment where the consumer shops or goods purchased would also fail to constitute a sufficient reason for adverse action.