In a significant move, the Consumer Finance Protection Bureau (CFPB) has issued Circular 2023-03 elucidating the necessity for creditors employing artificial intelligence (AI) or complex credit models to provide specific and precise reasons for adverse action taken, in compliance with the Equal Credit Opportunity Act (ECOA). This recent update emerged in response to the rapidly increasing reliance on AI models within the credit granting process.
The underlying objective of the ECOA is to ensure fair lending practices by obligating creditors to provide rational explanations when they deny credit or extend it in different terms than requested by applicants, otherwise known as “adverse actions”. This becomes increasingly challenging as AI or complex credit models, by virtue of their complicated nature, do not readily offer simplistic explanations for their operations.
It’s being speculated that with the use of these AI models, lenders might face difficulties in providing detailed, accurate, and specific reasons when adverse actions are taken against applicants. As a result, CFPB’s recent directive reiterates the need for proactive compliance within the credit industry, notably where technology and complicated credit granting models are in use.
The CFPB Circular is expected to face apprehension and subsequent litigation due to the variegated interpretations of the ECOA and the lack of existing legal guidance concerning AI or complex credit models. As such, vigilance and adaptability in responding to any further regulatory developments on this front should be maintained by all legal professionals operating in the corporate sphere.