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CFPB Issues Guidance on Adverse Action Notice Requirements

The CFPB has issued guidance on adverse action notice requirements and the proper use of the Regulation B’s sample forms when utilizing artificial intelligence and other complex models. Consumer Financial Protection Circular 2023-03 addresses the following question:

Question: When using artificial intelligence or complex credit models, may creditors rely on the checklist of reasons provided in CFPB sample forms for adverse action notices even when those sample reasons do not accurately or specifically identify the reasons for the adverse action?

Answer: No, creditors may not rely on the checklist of reasons provided in the sample forms (currently codified in Regulation B’s Appendix C) to satisfy their obligations under ECOA if those reasons do not specifically and accurately indicate the principal reason(s) for the adverse action (e.g., credit denial, termination of an existing credit account, etc.). Nor, as a general matter, may creditors rely on overly broad or vague reasons to the extent that they obscure the specific and accurate reasons relied upon.

“…As explained in Regulation B, “if the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed.” Rather, the sample forms merely provide an illustrative and non-exclusive list. Thus, if the principal reason(s) a creditor actually relies on is not accurately reflected in the checklist of reasons in the sample forms, it is the duty of the creditor—if it chooses to use the sample forms—to either modify the form or check “other” and include the appropriate explanation, so that the applicant against whom adverse action is taken receives a statement of reasons that is specific and indicates the principal reason(s) for the action taken. Creditors that simply select the closest, but nevertheless inaccurate, identifiable factors from the checklist of sample reasons are not in compliance with the law.”

Further, “specificity is particularly important when creditors utilize complex algorithms. Consumers may not anticipate that certain data gathered outside of their application or credit file and fed into an algorithmic decision-making model may be a principal reason in a credit decision, particularly if the data are not intuitively related to their finances or financial capacity. As noted in the Official Commentary to Regulation B, a creditor must “disclose the actual reasons for denial . . . even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant.”

This is only a snapshot of the CFPB’s analysis.  Please click here to read the circular in its entirety: https://www.consumerfinance.gov/compliance/circulars/circular-2023-03-adverse-action-notification-requirements-and-the-proper-use-of-the-cfpbs-sample-forms-provided-in-regulation-b/

(From the Credit Union National Association’s Compliance Blog)

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