Rule2022-12729
Consumer Financial Protection Circular 2022-03: Adverse Action Notification Requirements in Connection With Credit Decisions Based on Complex Algorithms
Primary source
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Published
June 14, 2022
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (Bureau or CFPB) has issued Consumer Financial Protection Circular 2022-03, titled, "Adverse Action Notification Requirements in Connection with Credit Decisions Based on Complex Algorithms." In this circular, the Bureau responds to the question, "When creditors make credit decisions based on complex algorithms that prevent creditors from accurately identifying the specific reasons for denying credit or taking other adverse actions, do these creditors need to comply with the Equal Credit Opportunity Act's requirement to provide a statement of specific reasons to applicants against whom adverse action is taken?"
Full Text
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<title>Federal Register, Volume 87 Issue 114 (Tuesday, June 14, 2022)</title>
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[Federal Register Volume 87, Number 114 (Tuesday, June 14, 2022)]
[Rules and Regulations]
[Pages 35864-35866]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12729]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1002
Consumer Financial Protection Circular 2022-03: Adverse Action
Notification Requirements in Connection With Credit Decisions Based on
Complex Algorithms
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Consumer financial protection circular.
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SUMMARY: The Consumer Financial Protection Bureau (Bureau or CFPB) has
issued Consumer Financial Protection Circular 2022-03, titled,
``Adverse Action Notification Requirements in Connection with Credit
Decisions Based on Complex Algorithms.'' In this circular, the Bureau
responds to the question, ``When creditors make credit decisions based
on complex algorithms that prevent creditors from accurately
identifying the specific reasons for denying credit or taking other
adverse actions, do these creditors need to comply with the Equal
Credit Opportunity Act's requirement to provide a statement of specific
reasons to applicants against whom adverse action is taken?''
DATES: The Bureau released this circular on its website on May 26,
2022.
ADDRESSES: Enforcers, and the broader public, can provide feedback and
comments to <a href="/cdn-cgi/l/email-protection#e4a78d96879188859697a487829486ca838b92"><span class="__cf_email__" data-cfemail="75361c0716001914070635161305175b121a03">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Christopher Davis, Attorney-Advisor,
Office of Fair Lending and Equal Opportunity, at (202) 435-7000. If you
require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#97d4d1c7d5c8d6f4f4f2e4e4fef5fefbfee3eed7f4f1e7f5b9f0f8e1"><span class="__cf_email__" data-cfemail="d0939680928f91b3b3b5a3a3b9b2b9bcb9a4a990b3b6a0b2feb7bfa6">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Question Presented
When creditors make credit decisions based on complex algorithms
that prevent creditors from accurately identifying the specific reasons
for denying credit or taking other adverse actions, do these creditors
need to comply with the Equal Credit Opportunity Act's (ECOA's)
requirement to provide a statement of specific reasons to applicants
against whom adverse action is taken?
Response
Yes. ECOA and Regulation B require creditors to provide statements
of specific reasons to applicants against whom adverse action is taken.
Some creditors may make credit decisions based on certain complex
algorithms,
[[Page 35865]]
sometimes referred to as uninterpretable or ``black-box'' models, that
make it difficult--if not impossible--to accurately identify the
specific reasons for denying credit or taking other adverse actions.\1\
The adverse action notice requirements of ECOA and Regulation B,
however, apply equally to all credit decisions, regardless of the
technology used to make them. Thus, ECOA and Regulation B do not permit
creditors to use complex algorithms when doing so means they cannot
provide the specific and accurate reasons for adverse actions.
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\1\ While some creditors may rely upon various post-hoc
explanation methods, such explanations approximate models and
creditors must still be able to validate the accuracy of those
approximations, which may not be possible with less interpretable
models.
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Analysis
ECOA makes it unlawful for any creditor to discriminate against any
applicant, with respect to any aspect of a credit transaction, on the
basis of race, color, religion, national origin, sex or marital status,
age (provided the applicant has the capacity to contract), because all
or part of the applicant's income derives from any public assistance
program, or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act.\2\ In addition, ECOA provides
that a creditor must provide a statement of specific reasons in writing
to applicants against whom adverse action is taken.\3\ ``Adverse
action[s]'' include denying an application for credit, terminating an
existing credit account, making unfavorable changes to the terms of an
existing account, and refusing to increase a credit limit.\4\
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\2\ 15 U.S.C. 1691(a).
\3\ 15 U.S.C. 1691(d)(2)(A), (B); see also 15 U.S.C. 1691(d)(3).
A creditor may either provide the notice or follow certain
requirements to inform consumers on how to obtain such notice. 15
U.S.C. 1691(d)(2)(B).
\4\ 12 CFR 1002.2(c).
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Pursuant to Regulation B, a statement of reasons for adverse action
taken ``must be specific and indicate the principal reason(s) for the
adverse action.'' \5\ Regulation B explains that ``[s]tatements 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.'' \6\ The Official Interpretations to
Regulation B explain that ``[t]he specific reasons disclosed . . . must
relate to and accurately describe the factors actually considered or
scored by a creditor.'' \7\ Moreover, while appendix C of Regulation B
includes sample forms intended for use in notifying an applicant that
adverse action has been taken, ``[i]f 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.'' \8\ With respect to adverse actions based on a credit scoring
system specifically, the Official Interpretations explain that--
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\5\ 12 CFR 1002.9(b)(2) (emphasis added); see also 12 CFR part
1002 (supp. I), sec. 1002.9, para. 9(b)(2)-9 (``The Fair Credit
Reporting Act (FCRA) requires a creditor to disclose when it has
based its decision in whole or in part on information from a source
other than the applicant or its own files. . . . The FCRA also
requires a creditor to disclose, as applicable, a credit score it
used in taking adverse action along with related information,
including up to four key factors that adversely affected the
consumer's credit score (or up to five factors if the number of
inquiries made with respect to that consumer report is a key
factor). Disclosing the key factors that adversely affected the
consumer's credit score does not satisfy the ECOA requirement to
disclose specific reasons for denying or taking other adverse action
on an application or extension of credit.'').
\6\ 12 CFR 1002.9(b)(2).
\7\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(1)-2. A
creditor, however, ``need not describe how or why a factor adversely
affected an applicant.'' 12 CFR part 1002 (supp. I), sec. 1002.9,
para. 9(b)(1)-3.
\8\ 12 CFR part 1002 (app. C), comment 4 (emphasis added). The
sample forms are illustrative and may not be appropriate for all
creditors. If a creditor chooses to use the checklist of reasons
provided in one of the sample forms and if reasons commonly used by
the creditor are not provided on the form, the creditor should
modify the checklist by substituting or adding other reasons. 12 CFR
part 1002 (app. C), comment 3.
[T]he 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.
The creditor must disclose the actual reasons for denial (for
example, ``age of automobile'') even if the relationship of that
factor to predicting creditworthiness may not be clear to the
applicant.\9\
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\9\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(1)-4.
ECOA's notice requirements ``were designed to fulfill the twin
goals of consumer protection and education.'' \10\ In terms of consumer
protection, ``the notice requirement is intended to prevent
discrimination ex ante because `if creditors know they must explain
their decisions . . . they [will] effectively be discouraged' from
discriminatory practices.'' \11\ The notice requirement ``fulfills a
broader need'' as well by educating consumers about the reasons for the
creditor's action.\12\ As a result of being informed of the specific
reasons for the adverse action, consumers can take steps to try to
improve their credit status or, in cases ``where the creditor may have
acted on misinformation or inadequate information[,] . . . to rectify
the mistake.'' \13\ In addition, Congress also believed ECOA's notice
requirement would have ``a beneficial competitive effect on the credit
marketplace.'' \14\
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\10\ Fischl v. Gen. Motors Acceptance Corp., 708 F.2d 143, 146
(5th Cir. 1983); see also id. (calling these provisions ``[p]erhaps
the most significant of the 1976 amendments to the ECOA'').
\11\ Treadway v. Gateway Chevrolet Oldsmobile, Inc., 362 F.3d
971, 977-78 (7th Cir. 2004) (quoting Fischl, 708 F.2d at 146); see
also S. Rep. 94-589, 94th Cong., 2d Sess., at 4, reprinted in 1976
U.S.S.C.A.N. 403, 406 (calling the notice requirement ``a strong and
necessary adjunct to the antidiscrimination purpose of the
legislation'').
\12\ S. Rep. 94-589, 94th Cong., 2d Sess., at 4, reprinted in
1976 U.S.S.C.A.N. 403, 406.
\13\ Id.
\14\ S. Rep. No. 94-589, at 4, 7 (1976).
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Creditors who use complex algorithms, including artificial
intelligence or machine learning, in any aspect of their credit
decisions must still provide a notice that discloses the specific
principal reasons for taking an adverse action. Whether a creditor is
using a sophisticated machine learning algorithm or more conventional
methods to evaluate an application, the legal requirement is the same:
Creditors must be able to provide applicants against whom adverse
action is taken with an accurate statement of reasons.\15\ The
statement of reasons ``must be specific and indicate the principal
reason(s) for the adverse action.'' \16\ A creditor cannot justify
noncompliance with ECOA and Regulation B's requirements based on the
mere fact that the technology it employs to evaluate applications is
too complicated or opaque to understand. A creditor's lack of
understanding of its own methods is therefore not a cognizable defense
against liability for violating ECOA and Regulation B's requirements.
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\15\ 15 U.S.C. 1691(d)(2)(A), (B); 12 CFR 1002.9(a)(2)(i), (ii).
\16\ 12 CFR 1002.9(b)(2).
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About Consumer Financial Protection Circulars
Consumer Financial Protection Circulars are issued to all parties
with authority to enforce Federal consumer financial law. The CFPB is
the principal Federal regulator responsible for administering Federal
consumer financial law, see 12 U.S.C. 5511, including the Consumer
Financial Protection Act's prohibition on unfair, deceptive, and
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws
are also enforced by State attorneys general and State regulators, 12
U.S.C. 5552, and prudential regulators including the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the
[[Page 35866]]
Currency, the Board of Governors of the Federal Reserve System, and the
National Credit Union Administration. See, e.g., 12 U.S.C. 5516(d),
5581(c)(2) (exclusive enforcement authority for banks and credit unions
with $10 billion or less in assets). Some Federal consumer financial
laws are also enforceable by other Federal agencies, including the
Department of Justice and the Federal Trade Commission, the Farm Credit
Administration, the Department of Transportation, and the Department of
Agriculture. In addition, some of these laws provide for private
enforcement.
Consumer Financial Protection Circulars are intended to promote
consistency in approach across the various enforcement agencies and
parties, pursuant to the CFPB's statutory objective to ensure Federal
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
Consumer Financial Protection Circulars are also intended to
provide transparency to partner agencies regarding the CFPB's intended
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C.
5552(b) (consultation with CFPB by State attorneys general and
regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB
and other agencies).
Consumer Financial Protection Circulars are general statements of
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They
provide background information about applicable law, articulate
considerations relevant to the Bureau's exercise of its authorities,
and, in the interest of maintaining consistency, advise other parties
with authority to enforce Federal consumer financial law. They do not
restrict the Bureau's exercise of its authorities, impose any legal
requirements on external parties, or create or confer any rights on
external parties that could be enforceable in any administrative or
civil proceeding. The CFPB Director is instructing CFPB staff as
described herein, and the CFPB will then make final decisions on
individual matters based on an assessment of the factual record,
applicable law, and factors relevant to prosecutorial discretion.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-12729 Filed 6-13-22; 8:45 am]
BILLING CODE 4810-AM-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.