Lenders who use complex algorithms to determine creditworthiness must detail to applicants the reasoning behind the denial of credit, the Consumer Financial Protection Bureau (CFPB) said in a circular on Thursday.
The Equal Credit Opportunity Act (ECOA) requires creditors to give denied applicants a Notice of Adverse Action disclosing the specific primary reasons they denied or revoked credit or why existing credit terms have changed.
However, companies cannot justify non-compliance with the 1974 law simply because the credit model they use “is too complicated, too opaque in its decision-making or too new”, writes the CFPB.
“Creditors cannot legally use technology in their decision-making processes if their use means they are unable to provide the required explanations,” the office added, without offering a solution for companies to meet the law if they rely on such “blacks”. box models.
“The reasoning behind some of the outputs of these models may be unknown to users of the model, including the model’s developers,” the office wrote. “With such models, adverse action notices that meet ECOA requirements may not be possible. … [However]the use of complex algorithms by creditors should not limit the application of the ECOA or other federal consumer financial protection laws. »
In its circular, the office encouraged whistleblowers and government partners to notify the agency of potential violations of the ECOA. Nearly 200 financial institutions were flagged last year for violating the ECOA and associated Regulation B, American Banker reported, citing figures from the Federal Financial Institutions Examination Council.
“Companies are not exempt from their legal responsibilities when they let a black box model make lending decisions,” CFPB Director Rohit Chopra said in a statement Thursday. “The law gives every applicant the right to an accurate explanation if their credit application has been denied, and that right is not diminished simply because a company uses a complex algorithm that it does not understand.”
Finance companies “have a long history of using advanced computational methods” to determine credit “and have been able to provide rationales for their credit decisions,” the bureau said. “There is no exception for breach of law because a creditor uses technology that has not been properly designed, tested or understood.”