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Financial Services Law Insights and Observations

CFPB reminds creditors of ECOA adverse action notice requirements

Federal Issues CFPB Consumer Finance Agency Rule-Making & Guidance ECOA Regulation B Consumer Credit

Federal Issues

On May 26, the CFPB released Circular 2022-03 to reiterate creditors’ adverse action notice requirements under ECOA. The Circular, among other things, explains that ECOA and Regulation B require companies to explain 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. Specifically, the Circular stated that “[l]aw-abiding financial companies have long used advanced computational methods as part of their credit decision-making processes, and they have been able to provide the rationales for their credit decisions.” While the Bureau recognized that some creditors “make credit decisions based on the outputs from complex algorithms, sometimes called ‘black-box’ models,” it stressed that the adverse action notice requirements of ECOA and Regulation B apply equally to all credit decisions, regardless of the technology used to make them. The Bureau expressed that “the reasoning behind some of these models’ outputs may be unknown to the model’s users, including the model’s developers,” and that “with such models, adverse action notices that meet ECOA’s requirements may not be possible.” The Bureau further explained that, “[c]reditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.” Stated differently, 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.”