Global: CFPB Requires Lenders to Offer Detailed Explanations for AI-Driven Credit Denials

The Consumer Financial Protection Bureau (CFPB) has issued guidance for lenders employing artificial intelligence (AI) and complex models in their credit assessment procedures.

The guidance underscores the necessity for lenders to furnish precise and comprehensive explanations when rejecting credit applications, as indicated in a press release by the regulator on Tuesday, September 19.

With the increasing use of advanced algorithms and consumer data in credit evaluations, the reasons behind adverse credit decisions have become more intricate. Lenders frequently rely on intricate algorithms and AI technologies to make predictive judgments in their credit evaluation models.

These algorithms are often fed with extensive datasets, which may include information collected through consumer surveillance. Consequently, consumers may have their credit applications declined based on factors they may not consider relevant to their financial situation.

In response to this issue, the CFPB stresses that creditors must be capable of articulating their reasons for rejection in a precise and accurate manner. The utilization of generic adverse action forms and checklists provided by the CFPB is insufficient if they do not accurately reflect the actual rationale behind the credit denial or a modification in credit conditions. This requirement applies even when complex algorithms and opaque credit models are employed, making it challenging to pinpoint the exact causes for adverse actions.

The CFPB’s guidance makes it clear that creditors cannot depend on broad justifications or select factors from a checklist to elucidate adverse actions. Instead, they must provide comprehensive explanations that transcend general terms. For instance, if a creditor reduces a consumer’s credit limit based on behavioral spending data, the explanation should encompass specific negative behaviors that led to the reduction, rather than a generic explanation like “purchasing history.”

The CFPB underscores the significance of creditors ensuring compliance with the law by disclosing specific reasons for adverse actions. This requirement remains applicable even if consumers may be surprised or displeased to discover that their credit applications were evaluated based on data that may not intuitively relate to their financial circumstances.

The CFPB asserts that the Equal Credit Opportunity Act mandates creditors to furnish precise and explicit explanations for adverse actions, regardless of the complexity of the algorithms or models employed.

This guidance comes approximately 18 months after the CFPB reminded consumers that federal law obliges companies to offer specific reasons for denying credit applications, even when using a “black-box model” for decision-making.

“The law grants every applicant the right to a specific explanation if their credit application is denied, and that right remains intact even if a company employs a complex algorithm it doesn’t fully comprehend,” noted CFPB Director Rohit Chopra at the time.