CFPB Says Creditors Using Complex Algorithms Must Explain Credit Denials

The federal agency has confirmed that adverse action notices are still required.

The Consumer Financial Protection Bureau (CFPB) confirmed Thursday that companies must provide consumers with an explanation for denying credit applications, even if they're using "black-box" algorithms to make lending decisions.

The federal agency says that even if lenders are using alternative, complex technology to underwrite applications, the stipulations under the Equal Credit Opportunity Act that a creditor provide an adverse action notice upon denial are still in force.

Key Takeaways

  • The CFPB has clarified that the Equal Credit Opportunity Act's adverse action notice provision applies to all credit denials, regardless of which technology the lender used.
  • The federal agency says that the complexity of the technology is not an excuse for not providing an accurate explanation for the denial.
  • Lenders who don't meet these requirements are in violation of federal law.

CFPB Says Technology Not an Excuse for Violating Consumer Rights

The Equal Opportunity Credit Act (ECOA) stipulates that when a creditor takes adverse action against an applicant, it's required by law to provide a notice with specific and accurate reasons why. This is to protect both consumers and businesses from credit discrimination.

But with consumer data much more readily available in the internet age, many companies are using more complicated algorithms, including machine learning and artificial intelligence, to incorporate more information in their underwriting process.

While this may be able to provide a more predictive analysis of an applicant's creditworthiness, the problem is that the technology's users and even developers sometimes don't understand the reasoning behind the algorithm's decision.

With its circular, the CFPB affirms that ECOA is enforceable, regardless of whether or not the technology a creditor is using is transparent. If the process hasn't been tested adequately, was poorly designed or is misunderstood or opaque, that's not an excuse for the creditor to not provide accurate reasoning for denial.

As a consumer, you're entitled to an adverse action notice if you're denied credit within 30 days of the creditor's decision. This notice should give you specific reasons for your denial, which can help you take the right steps to improve your credit before you apply the next time.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Consumer Financial Protection Bureau. "Consumer Financial Protection Circular 2022-03."

  2. Consumer Financial Protection Bureau. "1002.9 Notifications."