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Cole BraunThe Consumer Financial Protection Bureau (CFPB) issued a circular on September 19, 2023, addressing its concerns about a creditor’s use of artificial intelligence or complex credit models to review and make decisions concerning a consumer’s credit application. In particular, the CFPB circular advises that creditors do not comply with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, where the creditor’s use of the CFPB sample forms for adverse action notices do not accurately reflect the actual reason for the credit denial.

Specifically, the CFPB warns that 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 CFPB’s circular further notes that this is particularly important “when creditors utilize complex algorithms [because] [c]onsumers 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.” 

As explained below, the CFPB’s circular does seem to deviate from the official comments pertinent to the requirements for adverse action notices, as well as the extant case law providing “safe harbor” to creditors who relied upon the CFPB’s accepted forms.

Regulation B and ECOA require that creditors provide written notice to consumers of any “adverse action” concerning the consumer’s existing or application for credit. See 12 C.F.R. § 1002.9(a)(1). This “adverse action” notice must contain specific information including “a statement of the action taken” and a “statement of specific reasons for the action taken.” See 12 C.F.R. § 1002.9(a)(2). Regulation B further specifies the statement of reasons “must be specific and indicate the principal reason(s) for the adverse action” and vague references to internal standards or policies are insufficient. See 12 C.F.R. § 1002.9(b)(2).

The Official Interpretation to Section 1002.9(b) also indicates that where “a creditor uses a judgmental system, the reasons for the denial or other adverse action must relate to those factors in the applicant’s record actually reviewed by the person making the decision.” See 12 C.F.R. § 1002.9(b)(2), Official Interpretation No. 6. Somewhat contrary, the Official Interpretations also provide that a “creditor need not describe how or why a factor adversely affected an applicant.” See 12 C.F.R. § 1002.9(b)(2), Official Interpretation No. 3.

As part of its advisory services, the CFPB issued sample adverse action forms for the use by creditors to comply with Regulation B and ECOA. See 12 C.F.R. § 1002, Appendix C, Form C-1, Form C-2. The CFPB comments indicate that the “Proper use of Forms C-1 through C-4 will satisfy the requirement of § 1002.9(a)(2)(i).” See 12 C.F.R. § 1002, Appendix C, Comment 5.

However, the comments to Appendix C also explicitly note a creditor should modify the forms “if reasons commonly used by the creditor are not provided on the form” and that if “the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirements by simply checking the closes identifiable factor listed.” See 12 C.F.R. § 1002, Appendix C, Comment 3, 4. 

As explained by the Seventh Circuit, the adverse action notice requirement exists so that in “those cases where the creditor may have acted on misinformation or inadequate information, the statement of reasons gives the applicant a chance to rectify the mistake.”  Treadway v. Gateway Chevrolet Oldsmobile, Inc., 362 F.3d 971, 977 (7th Cir. 2004)(citing Fischl v. Gen.. Motors Acceptance Corp., 708 F.2d 143, 146 (5th Cir. 1983)). Importantly, the use or reliance upon inaccurate information in denying credit is not in itself a violation of ECOA. See Wigod v. PNC Bank, N.A., 338 F.Supp.3d 758, 767 (N.D.Ill. 2018)

ECOA shields a creditor from liability for “any act done … in good faith in conformity with any official rule, regulation, or interpretation thereof by the [CFPB].”  15 U.S.C. § 1691e(e).  Courts interpreting this provision of ECOA have determined that a creditor’s use of the CFPB’s adverse action notice forms constitutes a “safe harbor” where the creditor’s reason for denial closely resembles the reasons approved by the CFPB. See e.g., Wigod, 338 F.Supp.3d at 766; King v. Police and Fire Federal Credit Union, Case No. 16-cv-6414, 2019 WL 2226049, *5 (E.D.Pa. May 22, 2019); Carr v. Capital One Bank (USA) N.A., Case No. 21-cv-2300, 2021 WL 8998918, *8 (N.D.Ga. Dec. 8, 2021).

In one respect, the CFPB’s circular does not appear to reflect a change in the requirements under ECOA and Regulation B, and is merely, reminding creditors of their obligations in light of industry innovation.  As suggested by the CFPB, as “data use and credit models continue to evolve, creditors have an obligation to ensure that these models comply with existing consumer protection laws.” However, the example provided in the circular supports the conclusion that the CFPB is actually attempting to deviate from its prior official interpretations and the “safe harbor” case law.

The example relied upon by the CFPB provides that “if a creditor decides to lower the limit on a consumer’s credit line based on behavioral spending data, the explanation would likely need to provide more details about the specific negative behaviors that led to the reduction beyond a general reason like ‘purchasing history.’” This example appears to be contrary to the official interpretation to Section 1002.9(b)(2) in that a “creditor need not describe how or why a factor adversely affected an applicant.” Similarly, the courts noted above have determined that a creditor’s use of the corresponding CFPB form responses are sufficient to obtain safe harbor from liability despite the apparent vague and general terms used by the CFPB.   

Notably, the CFPB uses its circulars “to promote consistency in approach across the various enforcement agencies and parties, pursuant to the CFPB’s statutory objective to ensure consumer financial law is enforced consistently.” See CFPB “About Consumer Financial Protection Circulars.” Consequently, creditors should take heed of the circular’s warnings, and review policies, procedures, and forms for adverse action notices, especially if the creditor has implemented some form of AI to review consumer’s applications and credit accounts.

About Cole Braun: Cole Braun is Counsel in the Adams and Reese Nashville office, representing business clients in commercial litigation, consumer credit litigation, financial services, and insurance recovery and advisory services.