[Federal Register Volume 87, Number 114 (Tuesday, June 14, 2022)]
[Rules and Regulations]
[Pages 35864-35866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12729]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1002


Consumer Financial Protection Circular 2022-03: Adverse Action 
Notification Requirements in Connection With Credit Decisions Based on 
Complex Algorithms

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Consumer financial protection circular.

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SUMMARY: The Consumer Financial Protection Bureau (Bureau or CFPB) has 
issued Consumer Financial Protection Circular 2022-03, titled, 
``Adverse Action Notification Requirements in Connection with Credit 
Decisions Based on Complex Algorithms.'' In this circular, the Bureau 
responds to the question, ``When creditors make credit decisions based 
on complex algorithms that prevent creditors from accurately 
identifying the specific reasons for denying credit or taking other 
adverse actions, do these creditors need to comply with the Equal 
Credit Opportunity Act's requirement to provide a statement of specific 
reasons to applicants against whom adverse action is taken?''

DATES: The Bureau released this circular on its website on May 26, 
2022.

ADDRESSES: Enforcers, and the broader public, can provide feedback and 
comments to [email protected].

FOR FURTHER INFORMATION CONTACT: Christopher Davis, Attorney-Advisor, 
Office of Fair Lending and Equal Opportunity, at (202) 435-7000. If you 
require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION: 

Question Presented

    When creditors make credit decisions based on complex algorithms 
that prevent creditors from accurately identifying the specific reasons 
for denying credit or taking other adverse actions, do these creditors 
need to comply with the Equal Credit Opportunity Act's (ECOA's) 
requirement to provide a statement of specific reasons to applicants 
against whom adverse action is taken?

Response

    Yes. ECOA and Regulation B require creditors to provide statements 
of specific reasons to applicants against whom adverse action is taken. 
Some creditors may make credit decisions based on certain complex 
algorithms,

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sometimes referred to as uninterpretable or ``black-box'' models, that 
make it difficult--if not impossible--to accurately identify the 
specific reasons for denying credit or taking other adverse actions.\1\ 
The adverse action notice requirements of ECOA and Regulation B, 
however, apply equally to all credit decisions, regardless of the 
technology used to make them. Thus, ECOA and Regulation B do not permit 
creditors to use complex algorithms when doing so means they cannot 
provide the specific and accurate reasons for adverse actions.
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    \1\ While some creditors may rely upon various post-hoc 
explanation methods, such explanations approximate models and 
creditors must still be able to validate the accuracy of those 
approximations, which may not be possible with less interpretable 
models.
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Analysis

    ECOA makes it unlawful for any creditor to discriminate against any 
applicant, with respect to any aspect of a credit transaction, on the 
basis of race, color, religion, national origin, sex or marital status, 
age (provided the applicant has the capacity to contract), because all 
or part of the applicant's income derives from any public assistance 
program, or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act.\2\ In addition, ECOA provides 
that a creditor must provide a statement of specific reasons in writing 
to applicants against whom adverse action is taken.\3\ ``Adverse 
action[s]'' include denying an application for credit, terminating an 
existing credit account, making unfavorable changes to the terms of an 
existing account, and refusing to increase a credit limit.\4\
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    \2\ 15 U.S.C. 1691(a).
    \3\ 15 U.S.C. 1691(d)(2)(A), (B); see also 15 U.S.C. 1691(d)(3). 
A creditor may either provide the notice or follow certain 
requirements to inform consumers on how to obtain such notice. 15 
U.S.C. 1691(d)(2)(B).
    \4\ 12 CFR 1002.2(c).
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    Pursuant to Regulation B, a statement of reasons for adverse action 
taken ``must be specific and indicate the principal reason(s) for the 
adverse action.'' \5\ Regulation B explains that ``[s]tatements that 
the adverse action was based on the creditor's internal standards or 
policies or that the applicant, joint applicant, or similar party 
failed to achieve a qualifying score on the creditor's credit scoring 
system are insufficient.'' \6\ The Official Interpretations to 
Regulation B explain that ``[t]he specific reasons disclosed . . . must 
relate to and accurately describe the factors actually considered or 
scored by a creditor.'' \7\ Moreover, while appendix C of Regulation B 
includes sample forms intended for use in notifying an applicant that 
adverse action has been taken, ``[i]f the reasons listed on the forms 
are not the factors actually used, a creditor will not satisfy the 
notice requirement by simply checking the closest identifiable factor 
listed.'' \8\ With respect to adverse actions based on a credit scoring 
system specifically, the Official Interpretations explain that--
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    \5\ 12 CFR 1002.9(b)(2) (emphasis added); see also 12 CFR part 
1002 (supp. I), sec. 1002.9, para. 9(b)(2)-9 (``The Fair Credit 
Reporting Act (FCRA) requires a creditor to disclose when it has 
based its decision in whole or in part on information from a source 
other than the applicant or its own files. . . . The FCRA also 
requires a creditor to disclose, as applicable, a credit score it 
used in taking adverse action along with related information, 
including up to four key factors that adversely affected the 
consumer's credit score (or up to five factors if the number of 
inquiries made with respect to that consumer report is a key 
factor). Disclosing the key factors that adversely affected the 
consumer's credit score does not satisfy the ECOA requirement to 
disclose specific reasons for denying or taking other adverse action 
on an application or extension of credit.'').
    \6\ 12 CFR 1002.9(b)(2).
    \7\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(1)-2. A 
creditor, however, ``need not describe how or why a factor adversely 
affected an applicant.'' 12 CFR part 1002 (supp. I), sec. 1002.9, 
para. 9(b)(1)-3.
    \8\ 12 CFR part 1002 (app. C), comment 4 (emphasis added). The 
sample forms are illustrative and may not be appropriate for all 
creditors. If a creditor chooses to use the checklist of reasons 
provided in one of the sample forms and if reasons commonly used by 
the creditor are not provided on the form, the creditor should 
modify the checklist by substituting or adding other reasons. 12 CFR 
part 1002 (app. C), comment 3.

    [T]he reasons disclosed must relate only to those factors 
actually scored in the system. Moreover, no factor that was a 
principal reason for adverse action may be excluded from disclosure. 
The creditor must disclose the actual reasons for denial (for 
example, ``age of automobile'') even if the relationship of that 
factor to predicting creditworthiness may not be clear to the 
applicant.\9\
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    \9\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(1)-4.

    ECOA's notice requirements ``were designed to fulfill the twin 
goals of consumer protection and education.'' \10\ In terms of consumer 
protection, ``the notice requirement is intended to prevent 
discrimination ex ante because `if creditors know they must explain 
their decisions . . . they [will] effectively be discouraged' from 
discriminatory practices.'' \11\ The notice requirement ``fulfills a 
broader need'' as well by educating consumers about the reasons for the 
creditor's action.\12\ As a result of being informed of the specific 
reasons for the adverse action, consumers can take steps to try to 
improve their credit status or, in cases ``where the creditor may have 
acted on misinformation or inadequate information[,] . . . to rectify 
the mistake.'' \13\ In addition, Congress also believed ECOA's notice 
requirement would have ``a beneficial competitive effect on the credit 
marketplace.'' \14\
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    \10\ Fischl v. Gen. Motors Acceptance Corp., 708 F.2d 143, 146 
(5th Cir. 1983); see also id. (calling these provisions ``[p]erhaps 
the most significant of the 1976 amendments to the ECOA'').
    \11\ Treadway v. Gateway Chevrolet Oldsmobile, Inc., 362 F.3d 
971, 977-78 (7th Cir. 2004) (quoting Fischl, 708 F.2d at 146); see 
also S. Rep. 94-589, 94th Cong., 2d Sess., at 4, reprinted in 1976 
U.S.S.C.A.N. 403, 406 (calling the notice requirement ``a strong and 
necessary adjunct to the antidiscrimination purpose of the 
legislation'').
    \12\ S. Rep. 94-589, 94th Cong., 2d Sess., at 4, reprinted in 
1976 U.S.S.C.A.N. 403, 406.
    \13\ Id.
    \14\ S. Rep. No. 94-589, at 4, 7 (1976).
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    Creditors who use complex algorithms, including artificial 
intelligence or machine learning, in any aspect of their credit 
decisions must still provide a notice that discloses the specific 
principal reasons for taking an adverse action. Whether a creditor is 
using a sophisticated machine learning algorithm or more conventional 
methods to evaluate an application, the legal requirement is the same: 
Creditors must be able to provide applicants against whom adverse 
action is taken with an accurate statement of reasons.\15\ The 
statement of reasons ``must be specific and indicate the principal 
reason(s) for the adverse action.'' \16\ A creditor cannot justify 
noncompliance with ECOA and Regulation B's requirements based on the 
mere fact that the technology it employs to evaluate applications is 
too complicated or opaque to understand. A creditor's lack of 
understanding of its own methods is therefore not a cognizable defense 
against liability for violating ECOA and Regulation B's requirements.
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    \15\ 15 U.S.C. 1691(d)(2)(A), (B); 12 CFR 1002.9(a)(2)(i), (ii).
    \16\ 12 CFR 1002.9(b)(2).
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About Consumer Financial Protection Circulars

    Consumer Financial Protection Circulars are issued to all parties 
with authority to enforce Federal consumer financial law. The CFPB is 
the principal Federal regulator responsible for administering Federal 
consumer financial law, see 12 U.S.C. 5511, including the Consumer 
Financial Protection Act's prohibition on unfair, deceptive, and 
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other 
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws 
are also enforced by State attorneys general and State regulators, 12 
U.S.C. 5552, and prudential regulators including the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the

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Currency, the Board of Governors of the Federal Reserve System, and the 
National Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 
5581(c)(2) (exclusive enforcement authority for banks and credit unions 
with $10 billion or less in assets). Some Federal consumer financial 
laws are also enforceable by other Federal agencies, including the 
Department of Justice and the Federal Trade Commission, the Farm Credit 
Administration, the Department of Transportation, and the Department of 
Agriculture. In addition, some of these laws provide for private 
enforcement.
    Consumer Financial Protection Circulars are intended to promote 
consistency in approach across the various enforcement agencies and 
parties, pursuant to the CFPB's statutory objective to ensure Federal 
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
    Consumer Financial Protection Circulars are also intended to 
provide transparency to partner agencies regarding the CFPB's intended 
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C. 
5552(b) (consultation with CFPB by State attorneys general and 
regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB 
and other agencies).
    Consumer Financial Protection Circulars are general statements of 
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They 
provide background information about applicable law, articulate 
considerations relevant to the Bureau's exercise of its authorities, 
and, in the interest of maintaining consistency, advise other parties 
with authority to enforce Federal consumer financial law. They do not 
restrict the Bureau's exercise of its authorities, impose any legal 
requirements on external parties, or create or confer any rights on 
external parties that could be enforceable in any administrative or 
civil proceeding. The CFPB Director is instructing CFPB staff as 
described herein, and the CFPB will then make final decisions on 
individual matters based on an assessment of the factual record, 
applicable law, and factors relevant to prosecutorial discretion.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-12729 Filed 6-13-22; 8:45 am]
BILLING CODE 4810-AM-P