CFPB Acts to Protect the Public from Black-Box Credit Models Using Complex Algorithms

The CFPB recently announced its issuance of Consumer Financial Protection Circular 2022-03, "Adverse action notification requirements in connection with credit decisions based on complex algorithms." The circular confirms that federal anti-discrimination law—the Equal Credit Opportunity Act (ECOA)—requires companies to explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms.

ECOA protects individuals and businesses against discrimination when seeking, applying for, and using credit. To help ensure a creditor does not discriminate, ECOA requires that a creditor provide a notice when it takes an adverse action against an applicant, which must contain the specific and accurate reasons for that adverse action (or a disclosure of the applicant's right to a statement of those specific reasons). Creditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations. Creditors cannot justify noncompliance with ECOA based on the mere fact that the technology they use to evaluate credit applications is too complicated, too opaque in its decision-making, or too new.