[Federal Register Volume 89, Number 75 (Wednesday, April 17, 2024)]
[Rules and Regulations]
[Pages 27361-27363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08003]


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CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Chapter X


Consumer Financial Protection Circular 2023-03: Adverse Action 
Notification Requirements and Proper Use of Sample Forms

AGENCY: Consumer Financial Protection Bureau.

ACTION: Consumer financial protection circular.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) has issued 
Consumer Financial Protection Circular 2023-03, titled, ``Adverse 
action notification requirements and the proper use of the CFPB's 
sample forms provided in Regulation B.'' In this circular, the CFPB 
responds to the question, ``When using artificial intelligence or 
complex credit models, may creditors rely on the checklist of reasons 
provided in CFPB sample forms for adverse action notices even when 
those sample reasons do not accurately or specifically identify the 
reasons for the adverse action?''

DATES: The CFPB released this circular on its website on September 19, 
2023.

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

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation & Guidance Program Analyst, Office of Regulations, at 
202-435-7700 or at: https://reginquiries.consumerfinance.gov/.

SUPPLEMENTARY INFORMATION:

Question Presented

    When using artificial intelligence or complex credit models, may 
creditors rely on the checklist of reasons provided in CFPB sample 
forms for adverse action notices even when those sample reasons do not 
accurately or specifically identify the reasons for the adverse action?

Response

    No, creditors may not rely on the checklist of reasons provided in 
the sample forms (currently codified in Regulation B) to satisfy their 
obligations under ECOA if those reasons do not specifically and 
accurately indicate the principal reason(s) for the adverse action. 
Nor, as a general matter, may creditors rely on overly broad or vague 
reasons to the extent that they obscure the specific and accurate 
reasons relied upon.

Analysis

    The Equal Credit Opportunity Act (ECOA), implemented by Regulation 
B, 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 (including sexual 
orientation and gender identity), 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.\1\ ECOA and Regulation B require that, 
when taking adverse action against an applicant, a creditor must 
provide the applicant with a statement of reasons for the action 
taken.\2\ This statement of reasons must be ``specific'' and indicate 
the ``principal reason(s) for the adverse action''; \3\ moreover, the 
specific reasons disclosed must ``relate to and accurately describe the 
factors actually considered or scored by a creditor.'' \4\ Adverse 
action notice requirements promote fairness and equal opportunity for 
consumers engaged in credit transactions, by serving as a tool to 
prevent and identify discrimination through the requirement that 
creditors must affirmatively explain their decisions. In addition, such 
notices provide consumers with a key educational tool allowing them to 
understand the reasons for a creditor's action and take steps to 
improve their credit status or rectify mistakes made by creditors.\5\
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    \1\ See 15 U.S.C. 1691(a).
    \2\ See 15 U.S.C. 1691(d)(2); 12 CFR 1002.9(a)(2)(i); see also 
12 CFR 1002.9(a)(2)(ii) (allowing creditors the option of providing 
notice or following certain requirements to inform consumers of how 
to obtain such notice).
    \3\ 15 U.S.C. 1691(d)(3); 12 CFR 1002.9(b)(2).
    \4\ 15 U.S.C. 1691(d)(3); 12 CFR 1002.9(b)(2).
    \5\ See Fischl v. Gen. Motors Acceptance Corp., 708 F.2d 143, 
146 (5th Cir. 1983); S. Rep. 94-589, 94th Cong., 2d Sess., at 4, 
reprinted in 1976 U.S.S.C.A.N. 403, 406.
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    The CFPB provides sample forms (currently codified in Regulation B) 
that creditors may use to satisfy their adverse action notification 
requirements, if appropriate. These forms include a checklist of sample 
reasons for adverse action which ``creditors most commonly consider,'' 
\6\ as well as an open-ended field for creditors to provide other 
reasons not listed. The sample forms are used by creditors to satisfy 
certain adverse action notice requirements under ECOA and the Fair 
Credit Reporting Act (FCRA), though the statutory obligations under 
each remain distinct.\7\ While the

[[Page 27362]]

sample forms provide examples of commonly considered reasons for taking 
adverse action, ``[t]he sample forms are illustrative and may not be 
appropriate for all creditors.'' \8\ Reliance on the checklist of 
reasons provided in the sample forms will satisfy a creditor's adverse 
action notification requirements only if the reasons disclosed are 
specific and indicate the principal reason(s) for the adverse action 
taken.
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    \6\ 12 CFR part 1002, (app. C), comment 3.
    \7\ Like ECOA, FCRA also includes adverse action notification 
requirements. See 15 U.S.C. 1681m(a)(2). For example, when a person 
takes adverse action based in whole or in part on any information 
contained in a consumer report and has used a credit score, the 
person must disclose the credit score and, among other items, the 
``key factors that adversely affected the score of the consumer,'' 
the total of which shall generally not exceed four (except if a key 
factor was the number of inquiries made with respect to a consumer 
report). 15 U.S.C. 1681g(f)(1)(C), 1681m(a)(2). Although this 
circular is focused on ECOA's adverse action notification 
requirements, similar principles apply under FCRA when a person must 
disclose the ``key factors that adversely affected the credit score 
of the consumer.'' 15 U.S.C. 1681g(f)(1)(C); see also 1681g(f)(2)(B) 
(defining ``key factors'' to mean ``all relevant elements or reasons 
adversely affecting the credit score of the particular individual, 
listed in the order of their importance based on their effect on the 
credit score''). Despite similar underlying principles, the 
statutory obligations under FCRA and ECOA are distinct. See 12 CFR 
part 1002 (supp. I), sec. 1002.9, para. 9(b)(2)-9 (``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.''). Moreover, while ECOA's requirements only 
apply to creditors, FCRA's adverse action notice requirements apply 
to ``any person'' that takes adverse action based in whole or in 
part on any information contained in a consumer report, including 
employers, landlords, insurers, and other users of consumer reports. 
15 U.S.C. 1681m(a). This circular focuses on ECOA's adverse action 
notification requirements and does not address requirements under 
FCRA.
    \8\ 12 CFR part 1002 (app. C), comment 3.
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    Some creditors use complex algorithms involving ``artificial 
intelligence'' and other predictive decision-making technologies in 
their underwriting models.\9\ These complex algorithms sometimes rely 
on data that are harvested from consumer surveillance or data not 
typically found in a consumer's credit file or credit application. The 
CFPB has underscored the harm that can result from consumer 
surveillance and the risk to consumers that these data may pose. Some 
of these data may not intuitively relate to the likelihood that a 
consumer will repay a loan. The CFPB and the prudential regulators have 
previously noted that these data may create additional consumer 
protection risk.\10\ This circular addresses adverse action notice 
requirements under ECOA and Regulation B; financial institutions also 
must ensure their use of data and advanced technologies fully complies 
with other legal requirements, such as the prohibition against illegal 
discrimination. The CFPB, along with the Department of Justice and 
other enforcement agencies, have pledged to vigorously use the 
agencies' collective authorities to protect individuals' rights 
regardless of whether legal violations occur through traditional means 
or advanced technologies.\11\
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    \9\ The CFPB has previously issued guidance affirming that 
creditors are not excused from their adverse action notice 
obligations under ECOA simply because they rely on complex 
algorithmic underwriting models in making credit decisions. See 
CFPB, Consumer Financial Protection Circular 2022-03: Adverse action 
notification requirements in connection with credit decisions based 
on complex algorithms (May 26, 2022) (``Consumer Financial 
Protection Circular 2022-03''), https://www.consumerfinance.gov/compliance/circulars/circular-2022-03-adverse-action-notification-requirements-in-connection-with-credit-decisions-based-on-complex-algorithms/. Building on that previous guidance, this Circular 
focuses on the accuracy and specificity requirements of those 
notices, even when such models, driven by data gathered outside of 
traditional credit reports or applications, are utilized.
    \10\ See Bd. of Governors of the Fed. Reserve Sys., Consumer 
Fin. Prot. Bureau, Fed. Deposit Insurance Corp., Nat'l Credit Union 
Admin., and Office of the Comptroller of the Currency, Interagency 
Statement on the Use of Alternative Data in Credit Underwriting, at 
2 (``For example, using . . . data such as cashflow data, that are 
directly related to consumers' finances and how consumers manage 
their financial commitments may present lower risks than other 
data.''); see also Consumer Fin. Prot. Bureau, Dep't of Just., Equal 
Emp. Opportunity Comm'n, Fed. Trade Comm'n, Joint Statement on 
Enforcement Efforts Against Discrimination and Bias in Automated 
Systems, at 3 (Apr. 23, 2023) (``Joint Statement on Enforcement'') 
(``Automated system outcomes can be skewed by . . . datasets that 
incorporate historical bias'' and ``can correlate data with 
protected classes, which can lead to discriminatory outcomes.'').
    \11\ See Joint Statement on Enforcement at 3.
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    Under ECOA and Regulation B a creditor must provide an applicant 
with a statement of specific reason(s) for an adverse action; these 
reasons must ``relate to and accurately describe the factors actually 
considered or scored by a creditor.'' \12\ A creditor therefore may not 
rely solely on the unmodified checklist of reasons in the sample forms 
provided by the CFPB if the reasons provided on the sample forms do not 
reflect the principal reason(s) for the adverse action. As explained in 
Regulation B, ``[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.'' \13\ Rather, the sample forms merely provide an illustrative 
and non-exclusive list.\14\ Thus, if the principal reason(s) a creditor 
actually relies on is not accurately reflected in the checklist of 
reasons in the sample forms, it is the duty of the creditor--if it 
chooses to use the sample forms--to either modify the form or check 
``other'' and include the appropriate explanation, so that the 
applicant against whom adverse action is taken receives a statement of 
reasons that is specific and indicates the principal reason(s) for the 
action taken. Creditors that simply select the closest, but 
nevertheless inaccurate, identifiable factors from the checklist of 
sample reasons are not in compliance with the law. Creditors may not 
evade this requirement, even if the factors actually considered or 
scored by the creditor may be surprising to consumers, as may be the 
case when a creditor relies on complex algorithms that, for instance, 
consider data that are not typically found in a consumer's credit file 
or credit application.
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    \12\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(2)-2 
(emphasis added).
    \13\ 12 CFR part 1002 (app. C), comment 4.
    \14\ See 12 CFR part 1002 (app. C), comment 3.
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    Because it is unlawful for a creditor to fail to provide a 
statement of specific reasons for the action taken,\15\ a creditor will 
not be in compliance with the law by disclosing reasons that are overly 
broad, vague, or otherwise fail to inform the applicant of the specific 
and principal reason(s) for an adverse action. Just as an accurate 
description of the factors actually considered or scored by a creditor 
is critical to ensuring compliant adverse action notifications, 
sufficient specificity is also required. Such specificity is necessary 
to ensure consumer understanding is not hindered by explanations that 
obfuscate the principal reason(s) for the adverse action taken. For 
instance, Regulation B provides the example that a creditor should 
disclose ``insufficient bank references'' and not ``insufficient credit 
references,'' which is listed on the CFPB's sample form, if the 
creditor considers only references from banks and other depository 
institutions and not from other institutions.\16\
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    \15\ See 15 U.S.C. 1691(d)(2); 12 CFR 1002.9(a)(2)(i).
    \16\ 12 CFR part 1002 (app. C), comment 4.
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    Specificity is particularly important when creditors utilize 
complex algorithms. Consumers may not anticipate that certain data 
gathered outside of their application or credit file and fed into an 
algorithmic decision-making model may be a principal reason in a credit 
decision, particularly if the data are not intuitively related to their 
finances or financial capacity. As noted in the Official Commentary to 
Regulation B, a creditor must ``disclose the actual reasons for denial 
. . . even if the relationship of that factor to predicting 
creditworthiness may not be clear to the applicant.'' \17\ For 
instance, if a complex algorithm results in a denial of a credit 
application due to an applicant's chosen profession, a statement that 
the applicant had ``insufficient projected income'' or ``income 
insufficient for amount of credit requested'' would likely fail to meet 
the creditor's legal obligations. Even if the creditor believed that 
the reason for the adverse action was broadly related to future income 
or earning potential, providing such a reason likely would not satisfy 
its duty to provide the specific reason(s) for adverse action. Concerns 
regarding specificity may also arise when creditors take adverse action 
against consumers with existing credit lines. For example, if a 
creditor decides to lower the limit on, or close altogether,

[[Page 27363]]

a consumer's credit line based on behavioral data, such as the type of 
establishment at which a consumer shops or the type of goods purchased, 
it would likely be insufficient for the creditor to simply state 
``purchasing history'' or ``disfavored business patronage'' as the 
principal reason for adverse action.\18\ Instead, the creditor would 
likely need to disclose more specific details about the consumer's 
purchasing history or patronage that led to the reduction or closure, 
such as the type of establishment, the location of the business, the 
type of goods purchased, or other relevant considerations, as 
appropriate.\19\
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    \17\ 12 CFR part 1002 (supp. I), sec. 1002.9, para. 9(b)(2)-4. 
Indeed, because a creditor is not required to explain the 
relationship of a factor to the credit decision, see id. at para. 3, 
transparency about the specific reason for a denial may be even more 
important to help consumers understand which factors drove the 
credit decision in instances where the relationship between that 
factor and the credit decision may not be intuitive to the consumer.
    \18\ See, e.g., Complaint, FTC v. CompuCredit, No. 1:08-cv-1976-
BBM-RGV, 34-35 (N.D. Ga. filed June 10, 2008) (alleging that 
creditor made decisions to limit active credit lines based on 
behavioral data including shopping at certain disfavored merchants, 
such as pawn shops and night clubs), https://www.ftc.gov/sites/default/files/documents/cases/2008/06/080610compucreditcmplt.pdf; 
see also Fed. Trade Comm'n, Big Data: A Tool for Inclusion or 
Exclusion, at 9 (Jan. 2016), https://www.ftc.gov/system/files/documents/reports/big-data-tool-inclusion-or-exclusion-understanding-issues/160106big-data-rpt.pdf (describing use of 
shopping or other spending behavior to make credit decisions).
    \19\ However, inclusion of such factors in a credit model may be 
improper for other reasons, including that use of such factors may 
violate ECOA or other laws if they constitute unlawful 
discrimination on a prohibited basis. As noted previously, this 
circular focuses on a creditor's obligation to accurately and 
specifically identify the principal reason(s) for adverse action, 
and not whether any particular type of factor or data otherwise 
complies with the law.
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    As discussed in an advisory opinion, these requirements under ECOA 
extend to adverse actions taken in connection with existing credit 
accounts (i.e., an account termination or an unfavorable change in the 
terms of an account that does not affect all or substantially all of a 
class of the creditor's accounts \20\), as well as new applications for 
credit.\21\ The CFPB has also made clear that adverse action notice 
requirements apply equally to all credit decisions, regardless of 
whether the technology used to make them involves complex or ``black-
box'' algorithmic models, or other technology that creditors may not 
understand sufficiently to meet their legal obligations.\22\ As data 
use and credit models continue to evolve, creditors have an obligation 
to ensure that these models comply with existing consumer protection 
laws.
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    \20\ See 12 CFR 1002.2(c) (defining ``adverse action'').
    \21\ See CFPB, Revocations or Unfavorable Changes to the Terms 
of Existing Credit Arrangements, 87 FR 30097 (May 18, 2022) 
(discussing ECOA's application to changes to existing credit 
arrangements); see also CFPB, Credit Card Line Decreases (June 29, 
2022), https://www.consumerfinance.gov/data-research/research-reports/credit-card-line-decreases/ (describing industry practices 
related to credit line decreases and attendant consumer impacts).
    \22\ Consumer Financial Protection Circular 2022-03.
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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 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. 2024-08003 Filed 4-16-24; 8:45 am]
BILLING CODE 4810-AM-P