The Consumer Financial Protection Bureau is trying to build more guardrails around how companies in the financial services industry use artificial intelligence, issuing a warning that when sending credit denial letters to consumers, lenders must receive accurate and specific reasons and not just a checklist detailing why a credit request was denied.
A copy of the guidance can be accessed by clicking here.
More lenders are using advanced algorithms and artificial intelligence to make decisions about whether individuals should be approved for credit. But the reasons why a credit application is denied must be explained in detail to consumers to improve their chances at obtaining credit in the future and ensuring that consumers are not being discriminated against.
“Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied,” said CFPB Director Rohit Chopra in a statement. “Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”
If an individual’s spending limit were lowered based on his or her spending patterns, the explanation provided to the individual would have to be more than just referencing his or her’s “purchasing history,” the CFPB noted in an example. “Creditors that simply select the closest factors from the checklist of sample reasons are not in compliance with the law if those reasons do not sufficiently reflect the actual reason for the action taken,” the Bureau wrote in its circular.
The timing of the release is opportune, given that the overall rejection rate for credit applications is at its highest level in more than five years, according to data released by the Federal Reserve Bank of New York.
This guidance expands on another circular the CFPB published last year that warned lenders that usage of advanced algorithms to make underwriting decisions could potentially violate the Equal Credit Opportunity Act.