cfpb adverse action reasons

Consumer Financial Protection Circulars 12 CFR part 1002 (app. 1691(d)(2)(A); 12 CFR 1002.9(b)(2). 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. 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. 16. Federal Register. The CFPB recently terminated several company-friendly policies of the past, dismissing them as ineffective. Some creditors may make credit decisions based on certain complex algorithms, That same blog post even stated that the Bureau would consider resolving this uncertainty by amending Regulation B or its official commentary. 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. [5]12 CFR 1002.9(b)(2)-3 and 1002.9(b)(2)-4. [12]See 201510_cfpb_ecoa-narrative-and-procedures.pdf (consumerfinance.gov). Using Consumer Reports for Credit Decisions: What to Know About Adverse Big tech platforms, with their vast consumer surveillance and data harvesting infrastructure, have the potential to undermine fairness and competition. Indeed, vast troves of sensitive data available about consumers that institutions using more traditional methods would never have used in a credit decisioning context are now fueling highly complex, black box algorithms.. 14. 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). satisfy the notice requirement by simply checking the closest identifiable factor listed.[8] Note: Not only does the CFPBs interpretation allow it to evaluate companies practices for potentially discriminatory conduct outside of the fair lending context, but it provides a basis for finding conduct to be illegal when it evaluates a companys algorithms and decision making processes. Technology companies and financial institutions are amassing massive amounts of data and using it to make more and more decisions about our lives, including loan underwriting and advertising. Information about this document as published in the Federal Register. This feature is not available for this document. Accordingly, the CFPB affirms that ECOA does not permit the use of black-box models or complex algorithms for credit decisions when doing so means [creditors] cannot provide the specific and accurate reasons for adverse action. Ultimately, a creditors lack of understanding of the decisioning technology it employs does not justify noncompliance with ECOA.[11]. [1]15 U.S.C. C), comment 4 (emphasis added). The CFPB regularly enforces (and supervises and writes rules regarding, etc.) Innovation spotlight: Delivering a faster and more affordable home equity experience. The CFPB issued aFair Lending Reportin May of 2022 (Report), in which it provided updates on its involvement with ongoing litigation, including its amicus program. Federal Register provide legal notice to the public and judicial notice ADVERSE ACTION If you take adverse action against a consumer based on information in a consumer report, you must tell the consumer. The CFPB cited adverse action violations in an enforcement action in September 2021, and in an amicus brief and advisory opinion in December 2021 and May 2022, respectively, argued that adverse action and other Regulation B and Equal Credit Opportunity Act protections apply to an applicant throughout the credit cycleand have since 1974. 5536(a)(1)(B), and 18 other enumerated consumer laws, 12 U.S.C. [10]See Consumer Financial Protection Circular 2022-03: Adverse action notification requirements in connection with credit decisions based on complex algorithms | Consumer Financial Protection Bureau (consumerfinance.gov). Report: CFPB monitoring developments in fair lending technology This lack of access into or understanding of the models decisioning and rationale, can prevent creditors from being able articulate the specific reason(s) for an adverse credit decision. While black-box models and complex algorithms are widely used among creditors for credit-making decisions, the reasoning behind some of the model and algorithmic outputs may not be known or fully understood by creditors or model developers. [3] [4]See Innovation spotlight: Providing adverse action notices when using AI/ML models | Consumer Financial Protection Bureau (consumerfinance.gov). o ) [Content_Types].xml ( MK@!U About Consumer Financial Protection Circulars, https://www.federalregister.gov/d/2022-12729, MODS: Government Publishing Office metadata. 1976 U.S.S.C.A.N. 1002.9, para. 4 Pursuant to Regulation B, a statement of reasons for adverse action taken "must be specific and indicate the principal reason(s . Currency, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration. I), sec. [6]See https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/ On December 21, 2011, the CFPB restated FCRA regulations under its authority at 12 CFR Part Learn more here. American Bankers Association The statement of reasons must be specific and indicate the principal reason(s) for the adverse action.[16] In particular, the CFPB will be sharpening its focus on digital redlining and algorithmic bias. 403, 406. Staying ahead of the curve: The latest website and marketing trends for banks, Survey: Bank customers see BNPL as helpful, Poll: U.S. economic optimism ticks up but remains low, Report: CFPB monitoring developments in fair lending technology, Agencies finalize updated statement on CRE loan accommodations, Fed certifies first round of FedNow adopters, ABA Foundation, AMBA partner to improve veterans financial health, Rep. Mooney introduces ABA-backed bill to help small banks raise capital. [7]See https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-modelshttps://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/ . S. Rep. 94-589, 94th Cong., 2d Sess., at 4, Contact ABA. 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?. Her 2020 blog post evoked a spirit more accommodating of innovation by industry participants and experimentation with AI models, citing ECOA[5] in acknowledging that the existing regulatory framework has built-in flexibility that can be compatible with AI algorithms.[6], The CFPB, however, has since added a disclaimer to that 2020 blog post, warning that it conveys an incomplete description of the adverse action notice requirements of ECOA and Regulation B and that ECOA does not permit creditors to use technology for which they cannot provide accurate reasons for adverse actions, referring readers instead to the Circular. The CFPB pointed to a circular it published last year stating that creditors must follow the law and provide statements of specific reasons to applicants against whom adverse action is taken, regardless of the technology they use. 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. Her 2020 blog post evoked a spirit more accommodating of innovation by industry participants and experimentation with AI models, citing ECOA[5] in acknowledging that the existing regulatory framework has built-in flexibility that can be compatible with AI algorithms.[6], The CFPB, however, has since added a disclaimer to that 2020 blog post, warning that it conveys an incomplete description of the adverse action notice requirements of ECOA and Regulation B and that ECOA does not permit creditors to use technology for which they cannot provide accurate reasons for adverse actions, referring readers instead to the Circular. CFPB Releases a Warning But No Helpful Guidance on Machine Learning 2004) (quoting DOCX CFPB: Adverse Action Notice - Federal Housing Finance Agency . However, these laws are also enforced by State attorneys general and State regulators, 12 U.S.C. [8]See Prepared Remarks of Commissioner Rohit Chopra at FTC Hearings on Competition and Consumer Protection, George Mason University, Antonin Scalia Law School - October 15, 2018; Comment of Commissioner Chopra on the Department of Housing and Urban Developments Proposed Rule Regarding the Fair Housing Acts Discriminatory Effects Standard - October 16, 2019 (ftc.gov); Prepared Remarks of Commissioner Rohit Chopra at Silicon Flatirons Conference (ftc.gov); Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC Press Conference on the Trustmark National Bank Enforcement Action | Consumer Financial Protection Bureau (consumerfinance.gov). In 2017, the CFPB granted its first No-Action Letter to Upstart. and services, go to CFPB Warns Complex Consumer Credit Decision Models May Violate - Cooley 1. 6. 1983); S. Rep. No. S. Rep. 94-589, 94th Cong., 2d Sess., at 4, Written By ESR News Blog Editor Thomas Ahearn. Copyright 2015-2022, American Bankers Association. The OFR/GPO partnership is committed to presenting accurate and reliable 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 The CFPB also communicated in a recent advisory opinion that ECOAs protections continue after the application stage and apply to all aspects of a credit arrangement. [15] Id. 5 U.S.C. [FR Doc. More recently, however, the financial industry has begun relying on models and algorithms with increasingly detailed data sets and complex methodologies, often including some form of artificial intelligence (AI) that processes large volumes of data, making it exceedingly difficult to identify the specific criteria that led to the denial of a consumers request for credit. that agencies use to create their documents. On May 26th, 2022, the Consumer Financial Protection Bureau (CFPB) published a Consumer Financial Protection Circular (the Circular), confirming that creditors must provide specific reasons for taking adverse action against an applicant, even when the creditor relies on black-box models or complex algorithms for credit-making decisions. 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? Section 615 (a) of the Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when . 2022-12729 Filed 6-13-22; 8:45 am]. CFPB Circular 2022-03 Confirms Adverse Action Requirements 1691(d)(2)(A), (B); Consumer financial protection circular. It was viewed 19 times while on Public Inspection. New CFPB actions portend increasing scrutiny and potential enforcement Start Printed Page 35866 The CFPB also notes that it is considering the use of black-box models and algorithms beyond adverse action notices, referencing its recent spotlight on automated valuation models. Adverse Reasons Chart | Bankers Online vS" word/_rels/document.xml.rels ( j0Ei))l[UaI[}E C6{W#J&`]o4#y0u[F>'8h`dG $Gu#L(R3;/mK.x%s Rh&5i^;XPsh^4GP#zfvy rM,EIer8J?!q:di}!43LYK_1[98A/ PK ! In a January 2022 blog post regarding religious discrimination, the CFPB said: Were particularly concerned about how financial institutions might be making use of artificial intelligence and other algorithmic decision tools. 12 CFR 1002.9(b)(2) (emphasis added); For specific recommendations on how to mitigate your compliance risk in light of the CFPBs recent focus on black-box models and algorithms, or if you would like additional information about any of the issues discussed in this client alert, please contact Natasha Dempsey, Josh Burlingham, Kimberly Monty Holzel, Tony Alexis, Thomas M. Hefferon, or the Goodwin lawyer with whom you typically consult. Accordingly, the CFPB affirms that ECOA does not permit the use of black-box models or complex algorithms for credit decisions when doing so means [creditors] cannot provide the specific and accurate reasons for adverse action. Ultimately, a creditors lack of understanding of the decisioning technology it employs does not justify noncompliance with ECOA.[11]. [2]15 U.S.C. Also in November, in comments to the CFPBs Consumer Advisory Board, Deputy Director Martinez said: We know one of the main risks currently emerging is that of Big Techs entry into consumer markets, including consumer reporting. 1. 1002.9, para. . This repetition of headings to form internal navigation links CFPB Issues Circular on Adverse Action Notice Requirements for Credit All rights reserved. Treadway The CFPB emphasized that its amicus program provides courts with its views and helps ensure that consumer financial protection statutes are correctly and consistently interpreted., CFPBs Data Broker Probe Hints At Potential Rule Expansion, CFPB Proposes Databases Highlighting UDAAP Judgments, Form Contract Provisions, Rohit Chopra is cracking down on big banks and Big Tech and business groups claim hes out of control, Future of Minority Depository Institutions, CFPB zeros in on Servicemembers Civil Relief Act, OCC Reports Quarterly Improvement in Mortgage Performance, Powersports and the CFPB: Fair lending, fees, repossessions, and voluntary products, CFPB Update on the Amicus Program and Other Litigation, UDAAP) Supervision and Examination Manual. In accompanying remarks, Director Chopra stated that: When background screening companies and their algorithms carelessly assign a false identity to applicants for jobs and housing, they are breaking the law.. The documents posted on this site are XML renditions of published Federal It is not a defense that the technology used to make the determination is too . 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. The OCC has a long history of recognizing the value of these institutions, and we will continue our efforts to ensure they remain a bedrock of financial access and inclusion.. It also encouraged creditors to use the CFPBs No-Action Letter or Compliance Assistance Sandbox policies to reduce potential uncertainty. [3]See CFPB Announces First No-Action Letter to Upstart Network | Consumer Financial Protection Bureau (consumerfinance.gov). servicing portfolios. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. Gen. Motors Acceptance Corp., Creditors should be attentive to the potential for consumer harm that could arise out of the models or technology they choose to employ in the credit-decisioning process and take reasonable steps to ensure an understanding of and transparency in such models or technology. CFPB Announces First No-Action Letter to Upstart Network | Consumer Financial Protection Bureau (consumerfinance.gov), Innovation spotlight: Providing adverse action notices when using AI/ML models | Consumer Financial Protection Bureau (consumerfinance.gov), https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/, Prepared Remarks of Commissioner Rohit Chopra at FTC Hearings on Competition and Consumer Protection, George Mason University, Antonin Scalia Law School - October 15, 2018; Comment of Commissioner Chopra on the Department of Housing and Urban Developments Proposed Rule Regarding the Fair Housing Acts Discriminatory Effects Standard - October 16, 2019 (ftc.gov); Prepared Remarks of Commissioner Rohit Chopra at Silicon Flatirons Conference (ftc.gov); Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC Press Conference on the Trustmark National Bank Enforcement Action | Consumer Financial Protection Bureau (consumerfinance.gov), Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC Press Conference on the Trustmark National Bank Enforcement Action | Consumer Financial Protection Bureau (consumerfinance.gov), Consumer Financial Protection Circular 2022-03: Adverse action notification requirements in connection with credit decisions based on complex algorithms | Consumer Financial Protection Bureau (consumerfinance.gov), CFPB Acts to Protect the Public from Black-Box Credit Models Using Complex Algorithms | Consumer Financial Protection Bureau (consumerfinance.gov), 201510_cfpb_ecoa-narrative-and-procedures.pdf (consumerfinance.gov), SR 11-7 attachment: Supervisory Guidance on Model Risk Management (federalreserve.gov); OCC 2011-12: Sound Practices for Model Risk Management: Supervisory Guidance on Model Risk Management (treas.gov); fil17022.pdf (fdic.gov); The Fed - SR 21-8: Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance (federalreserve.gov). see [2] It is paramount that the reasons provided in the adverse action notice be specific with respect to the consumers application information or circumstances that did not meet the creditors underwriting criteria. 1002.9, para. Your request for [a loan/a credit card/an increase in your credit limit] was carefully considered, and we regret that we are unable to approve your application at this time, for the following reason(s): . has no substantive legal effect. [5]12 CFR 1002.9(b)(2)-3 and 1002.9(b)(2)-4. [12]See 201510_cfpb_ecoa-narrative-and-procedures.pdf (consumerfinance.gov). 1691(d)(2)(A), (B); 12 CFR 1002.9(a)(2)(i), (ii). 5516(d), 5581(c)(2) (exclusive enforcement authority for banks and credit unions with $10 billion or less in assets). should verify the contents of the documents against a final, official In 2021, the CFPB issued an interpretive rule to clarify that, with respect to any aspect of a credit transaction, the prohibition against sex discrimination in ECOA and Regulation B encompasses . v. "GuLbg$(Z[i@;3dpl6&B}4~\uTdHX `W{,(IzNa"x^Br5eTYA'ROG.RSK~#I`QdokBT|se'&c^IN%Q1!_/3Tj1 yK9;42-;};Ry#B}1ROvJoEI|7] Each document posted on the site includes a link to the 403, 406 (calling the notice requirement a strong and necessary adjunct to the antidiscrimination purpose of the legislation). Auto loan servicers and dealerships may want to review their SCRA policies and procedures to ensure they comply with the law and provide the requisite protection for active military members prior to repossessing collateral. Podcast: Banking-as-a-service business models under pressure? The CFPB is keenly focused on the risks that these technologies present to individual consumers, small businesses, communities and the market as a whole, the agency said. electronic version on GPOs govinfo.gov. Many companies who develop or market these decision-making models to financial institutions consider the technology to be proprietary information, providing users with little insight into how, or on what basis, outputs are delivered. 12 CFR 1002.9(b)(2). On May 26, 2022, the CFPB issued Circular 2022-03, explaining that ECOA and its implementing regulation, Regulation B, require creditors to provide a notice that accurately discloses. In December 2021, the CFPB encouraged tech workers to whistleblow: data and technology, marketed as Artificial Intelligence (AI), have become commonplace in nearly every consumer financial market. The CFPB also warns that a creditor cannot justify noncompliance with these requirements based on the mere fact that the technology it employs to . While both the CFPB and the industry seem to acknowledge the potential benefits of these new technologies in the credit decisioning space, it is clear that the CFPB is focused on transparency in the credit-decisioning process and assured compliance with ECOA. Creditors should also establish and maintain a strong fair lending program[12] and model risk management framework,[13] leveraging industry standards and practices, to ensure models are appropriately onboarded, validated, and monitored. Use the PDF linked in the document sidebar for the official electronic format. 4. 5552(b) (consultation with CFPB by State attorneys general and regulators); 12 U.S.C. A creditor may either provide the notice or follow certain requirements to inform consumers on how to obtain such notice. 5511, including the Consumer Financial Protection Act's prohibition on unfair, deceptive, and abusive acts or practices, 12 U.S.C. are not part of the published document itself. The CFPB, however, has since added a disclaimer to that 2020 blog post, warning that it "conveys an incomplete description of the adverse action notice requirements of ECOA and Regulation B . 12 CFR part 1002 (app. Note: Based on the CFPBs (above) statement on appraisals, appraisal companies would appear to be on the CFPBs radar, but this no-longer dormant nonbank supervision authority conceivably covers Fintechs, finance companies, and any other provider of a consumer financial product or service or its service provider. Those options no longer exist, and the blog now comes with a warning label: ECOA and Regulation B do not permit creditors to use technology for which they cannot provide accurate reasons for adverse actions. While both the CFPB and the industry seem to acknowledge the potential benefits of these new technologies in the credit decisioning space, it is clear that the CFPB is focused on transparency in the credit-decisioning process and assured compliance with ECOA. 12 CFR 1002.2(c). PDF BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1002 AGENCY: ACTION [8] In 2021, Director Chopra again foreshadowed, [a]lgorithms can help remove bias, but black box underwriting algorithms are not creating a more equal playing field and only exacerbate the biases fed into them.[9], CFPB CONFIRMS THAT SPECIFIC REASONS FOR ADVERSE ACTION ARE REQUIRED, REGARDLESS OF THE TECHNOLOGY USED With respect to adverse actions based on a credit scoring system specifically, the Official Interpretations explain that, [T]he reasons disclosed must relate only to those factors actually scored in the system. 2. 15 U.S.C. Finally, the CFPBs big data and discrimination concerns may overlap, but they are not identical. PK ! Rather, the circular explains that the use of algorithmic models in credit decisioning violates ECOA and Regulation B if creditors are unable to articulate a specific reason for taking adverse action. Previously, the CFPB has appeared supportive of AI, machine learning, and the use of alternative data in expanding consumers access credit. Consumer Financial Protection Circulars 1691(a); 12 CFR 1002.1(b). ex ante It has exhorted the public to come forward with rulemaking petitions or as tech whistleblowers, and it has encouraged other regulators to join the CFPBs efforts. the official SGML-based PDF version on govinfo.gov, those relying on it for 1691(d)(2)(B). A Rule by the Consumer Financial Protection Bureau on 06/14/2022. It is insufficient to provide vague or general statements that the adverse action was based on the creditor's internal standards or policies or that the consumer failed to achieve a qualifying score on the creditor's credit scoring system. CFPB issues new circular on application of ECOA adverse action notice [9]See Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC Press Conference on the Trustmark National Bank Enforcement Action | Consumer Financial Protection Bureau (consumerfinance.gov). On July 26, 2022, the Office of the Comptroller of the Currency (OCC) issued anupdateto its 2013 policy statement on minority depository institutions (MDIs). The CFPB has previously acknowledged the potential consumer benefits of AI and other technologies. Financial Protection Bureau (CFPB). see also In 2017, the CFPB granted its first No-Action Letter to UpstartNetwork, Inc., a company using alternative data to make credit and pricing decisions. 5481(12). Accordingly, creditors risk violating ECOA and Regulation B where they use complex algorithms, including artificial intelligence and machine learning, when doing so means the creditor cannot provide the specific and accurate reasons for adverse actions. To embed, copy and paste the code into your website or blog: Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra: [Ongoing] Read Latest COVID-19 Guidance, All Aspects, [Hot Topic] Environmental, Social & Governance. [11]See CFPB Acts to Protect the Public from Black-Box Credit Models Using Complex Algorithms | Consumer Financial Protection Bureau (consumerfinance.gov). [12] [1]15 U.S.C. The notice requirement fulfills a broader need as well by educating consumers about the reasons for the creditor's action. [8]See Prepared Remarks of Commissioner Rohit Chopra at FTC Hearings on Competition and Consumer Protection, George Mason University, Antonin Scalia Law School - October 15, 2018; Comment of Commissioner Chopra on the Department of Housing and Urban Developments Proposed Rule Regarding the Fair Housing Acts Discriminatory Effects Standard - October 16, 2019 (ftc.gov); Prepared Remarks of Commissioner Rohit Chopra at Silicon Flatirons Conference (ftc.gov); Remarks of Director Rohit Chopra at a Joint DOJ, CFPB, and OCC Press Conference on the Trustmark National Bank Enforcement Action | Consumer Financial Protection Bureau (consumerfinance.gov).

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