August 14, 2022

Volume XII, Number 226

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August 12, 2022

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August 11, 2022

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CFPB Affirms Compliance with ECOA Adverse Action Notice Requirements

On May 26, the CFPB published a circular affirming that federal anti-discrimination laws require companies to explain to consumers the specific reason a credit application was denied, even if the creditor is relying on complex algorithms.

The circular explains that some creditors rely on credit decisions based on the outputs from complex algorithms, sometimes called “black-box” models. Oftentimes the creditor may not understand or know the reasoning of the algorithm. Nevertheless, the CFPB makes clear that ECOA requires the creditor to supply a specific explanation to an applicant that has been denied credit. CFPB Director Rohit Chopra added that this “right is not diminished simply because a company uses a complex algorithm that it doesn’t understand.” Additionally, the circular makes clear that creditors cannot be in compliance with the ECOA if using these black-box models means that they are unable to provide the required explanations.

Putting It Into Practice: In this circular, the CFPB affirmed that noncompliance with ECOA based on the mere fact that the technology they use to evaluate credit applications is too complicated, too opaque in its decision-making, or too new, is not justified. Therefore, it is crucial for creditors to understand and supply the reasoning of the algorithms used to avoid becoming the next target of a CFPB enforcement action.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 160
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About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm
Partner

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

213-617-4171
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