CFPB to lenders: Algorithms, AI used in credit decisions must be explainable

In a new circular issued today, the CFPB said that under the Equal Credit Opportunity Act and Regulation B, creditors are not permitted to use complex algorithms in credit decision-making if doing so means they are unable to provide “the specific and accurate reasons for adverse actions.” Under ECOA and Reg B, creditors are required to provide such reasons to any applicant against whom adverse action is taken.

“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,” that are specific and indicate the principal reasons for the adverse action, the CFPB said in the circular, adding that “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.”