August 8, 2022

Volume XII, Number 220

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August 08, 2022

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CFPB Circular 2022-03: Complex Lending Algorithms Cannot Excuse Failure to Provide Specific, Principal Reasons for an Adverse Credit Determination

On May 26, the Consumer Financial Protection Bureau (the Bureau or CFPB) issued its third Circular, emphasizing that creditors must adhere to the Equal Credit Opportunity Act (ECOA) and Regulation B, even when they employ complex algorithms, sometimes referred to as uninterpretable or “black-box” models, to render credit decisions. The Circular explains that companies must provide an applicant with the precise reasons for the denial of a credit application or adverse action, even if the creditor company uses complex credit algorithm models that do not allow even the creditor itself to “accurately identify[] the specific reasons for denying credit or taking other adverse actions.” Thus, the CFPB will not accept a generic statement that a consumer did not meet a lender’s proprietary lending standards model as a sufficiently precise, compliant explanation for an adverse credit determination.

The Circular makes clear that federal consumer protection laws apply, and are enforced, regardless of the technology a creditor employs. It also declares that noncompliance with ECOA and Regulation B—which require a creditor to state the main reason or reasons for an adverse action—cannot be justified where the technology a creditor “employs to evaluate applications is too complicated or opaque to understand.” CFPB Director Rohit Chopra explained, “[c]ompanies are not absolved of their legal responsibilities when they let a black-box model make lending decisions[.]” Thus, in the CFPB’s view, a creditor violates Regulation B where it uses a system that fails (either by design or inadvertence) to produce an accurate, specific explanation for every credit decision.

The press release announcing the Circular highlights third parties that aid the Bureau in enforcement efforts. The Bureau explains that whistleblowers play a “central role” in providing information about companies using these so-called “black-box” models and encourages company employees—in particular, tech workers—to be forthcoming with information. Government partners are also, the CFPB notes, “vital” in aiding enforcement. To that end, the CFPB explains that it continues to monitor the work of government entities, including the National Institutes of Standards and Technology, to assess the risks and benefits of emerging technologies.

This latest development aligns with the Bureau’s other recent proactive measures. A creditor’s bare explanation that its “system” or “model” made the decision is not acceptable to the CFPB, especially where the creditor itself cannot pinpoint the specific reason(s) that caused its technology to render a particular adverse decision. Further, the CFPB’s warning that it will not accept a company’s explanation that technology is “too new” shows that a creditor defending lending-law violations because its technology is immature and did not perform as intended or expected is unlikely to find a receptive audience. Fintechs and other affected companies may wish to evaluate whether their technology and lending models adequately inform them and consumers of the specific reasons for credit decisions.

* Special thanks to Summer Associate Miranda Carnes, a 3L at the American University Washington College of Law, for her valuable contributions to this GT Alert.

©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 158
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About this Author

Tonya M. Esposito Shareholder Greenberg Traurig, LLP
Shareholder

Tonya M. Esposito focuses her practice on a variety of consumer issues, including financial services, antitrust, and marketing and advertising. She has considerable experience representing clients in private litigation, as well as in government investigations brought by state attorneys general, the Federal Trade Commission (FTC), the U.S. Department of Justice (DOJ), the Food and Drug Administration (FDA), and the Consumer Financial Protection Bureau (CFPB).

With deep experience representing a variety of financial institutions in both litigation...

202-331-3111
Benjamin Saul Financial Compliance Attorney Greenberg Traurig Law Firm DC
Shareholder

Benjamin Saul is a shareholder in the firm’s Financial Regulatory and Compliance Practice. For two decades, Ben has handled high-stakes regulatory, enforcement, and litigation matters for corporate and individual clients in the consumer finance, specialty finance, fintech, and banking sectors. 

Ben has helped clients navigate dozens of contentious supervisory, enforcement, and litigation matters involving the Consumer Financial Protection Bureau (CFPB), and has been a leader in the private bar on CFPB matters since the Bureau’s inception in 2011...

202-331-3123
ASSOCIATE

Anne V. Dunne focuses her practice on commercial litigation, concentrating on financial services, class action defense, government investigations, and whistleblower litigation. She handles claims in both state and federal courts on behalf of a wide range of clients, including consumer banks, financial services companies, national banks, mortgage lenders and servicers, credit card issuers, short-term lenders, student lenders, manufacturers, and large national retailers. Anne counsels clients on compliance with state and federal statutes and regulations, including TILA,...

617-310-6000
ASSOCIATE

Michael E. Jusczyk represents national financial institutions in escalated defensive litigation, including foreclosure-related and bankruptcy matters, and defends complaints alleging violations of state and federal financial regulation and consumer protection statutes. He appears on clients’ behalf in state and federal trial and appellate courts for proceedings at all states of litigation and guides them through the mediation and arbitration processes when appropriate.

Michael advises national banks on compliance with federal and state...

617-310-6000
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Jonathan Huie has deep experience in the areas of government enforcement and regulatory matters across the technology, financial services, and food and drug industries. He advises businesses of all sizes on internal investigations and consumer issues. Jonathan works closely with clients on risk management issues with the goal of avoiding costly litigation and represents them in antitrust and complex commercial disputes when litigation cannot be avoided.

202-533-2356
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