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CFPB Issues Warning to Lenders Using AI for Credit Decisioning

Federal law requires lenders to tell consumers why an adverse credit decision has been made, even if an algorithm made the decision.

CFPB headquarters. CFPB headquarters. (Source: Shutterstock)

The CFPB reminded lenders Thursday that per the Equal Credit Opportunity Act (ECOA), denying a loan application or taking another adverse action against an applicant must be followed with an explanation to the applicant as to why they were denied or the action was taken – even if the lender used advanced algorithms to make the credit decision.

The reminder was published in the CFPB’s latest Consumer Financial Protection Circular, which contain policy statements and are released periodically to advise parties with authority to enforce federal consumer financial law. It was issued at a time when a growing number of lenders, including credit unions, are turning to artificial intelligence-based technology as an option for evaluating loan applicants (this process is sometimes referred to as a “black-box” credit decisioning model). The CFPB warned that if the technology does not inform lenders of the specific reasons behind a denial or other adverse action, they will not be able to comply with the federal discrimination law.

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Natasha Chilingerian

Natasha Chilingerian

Natasha Chilingerian has been immersed in the credit union industry for over a decade. She first joined CU Times in 2011 as a freelance writer, and following a two-year hiatus from 2013-2015, during which time she served as a communications specialist for Xceed Financial Credit Union (now Kinecta Federal Credit Union), she re-joined the CU Times team full-time as managing editor. She was promoted to executive editor in 2019. In the earlier days of her career, Chilingerian focused on news and lifestyle journalism, serving as a writer and editor for numerous regional publications in Oregon, Louisiana, South Carolina and the San Francisco Bay Area. In addition, she holds experience in marketing copywriting for companies in the finance and technology space. At CU Times, she covers People and Community news, cybersecurity, fintech partnerships, marketing, workplace culture, leadership, DEI, branch strategies, digital banking and more. She currently works remotely and splits her time between Southern California and Portland, Ore.

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