In a time where artificial intelligence (AI) and intricate credit models are streamlining decision-making for lending institutions, it’s crucial to keep abreast of regulatory changes. This is especially true as these lending innovations elicit more scrutiny from regulatory bodies. Recently, on September 20, 2023, the Consumer Financial Protection Bureau (CFPB) released Circular 2023-03. The circular provides comprehensive guidelines for creditors who incorporate AI into their underwriting models on the notification requirements when undertaking adverse actions concerning consumer credit applications. This information comes courtesy of an update from leading law firm Kilpatrick Townsend & Stockton LLP.
Here is what legal professionals, particularly those working in large corporations and law firms, need to know.
- AI has modernized underwriting considerably. However, despite the process becoming more efficient, it has also attracted increased attention from bodies like CFPB. CFPB’s new directive aims to ensure the fair treatment of consumers applying for credit, regardless of the underwriting model employed by creditors.
- The traditional models of providing reasons for negative credit decisions have become increasingly convoluted with the adoption of AI and machine learning. This is largely due to the inherently complex nature of these technologies, which may use large and diverse sets of data and sophisticated algorithms, often seen as opaque or a “black box.”
- The new guidance stresses that creditors inform clients of specific reasons for adverse decisions. The evolving nature of credit models makes the task of conveying clear, informative reasons to applicants even more important for complying with regulatory requirements and maintaining trust in the credit application process.
In conclusion, AI and other transformative models are redefining lending practices and along with it the regulatory outlook. With directives like Circular 2023-03, it’s paramount for legal professionals to understand the complexities of emerging technologies, the changing regulatory environment, and how these changes affect their clients or institutions.