Understanding regulatory changes is crucial for credit unions to stay compliant and serve their members effectively. Recognizing this, the New York Credit Union Association (NYCUA) is here to break down the latest guidance from the Consumer Financial Protection Bureau (CFPB) on credit denials and artificial intelligence. Below, we’ve shared key points that are relevant to your credit union.

Takeaway: Lenders must provide clear and precise reasons when denying credit, even when using AI-driven models.

Background

The Consumer Financial Protection Bureau (CFPB) has recently rolled out new guidelines surrounding the use of artificial intelligence (AI) by lenders. This is an important update for credit union professionals to understand, especially in this age of AI-driven decisions.

What’s the Core Message?

If a consumer faces a credit denial, they deserve to know the exact reason behind that decision. Simply using a generic checklist won’t cut it, especially if it doesn’t capture the real reason for denial. This is even more crucial as AI and big data play a larger role in credit decisions.

Director Rohit Chopra’s Statement

Director Chopra emphasized that the growing use of AI in credit decisions means there’s a broader range of reasons a consumer might be denied credit. Irrespective of AI involvement, creditors must always provide clear explanations for their decisions.

AI in the Modern Credit Landscape

With more lenders using AI and complex algorithms, there’s a vast array of data influencing decisions, sometimes even from consumer surveillance. These methods might flag reasons not obvious or seemingly relevant to the consumer’s financial health. Therefore, vague reasons like “purchasing history” aren’t enough. Creditors need to be transparent and specific.

The Legal Angle

Creditors can’t just pick the nearest reasons from sample checklists; they need to provide the actual reasons. Even if the reasons might upset consumers or seem unrelated to their finances, transparency is key.

Additional Information

• The CFPB’s emphasis on clear communication isn’t new. They had already asserted the need for specific reasons in previous communications.
• The CFPB also stresses that landlords using AI scoring for potential tenants must notify them clearly if they’re denied housing.
• Concerns are raised about “digital redlining” in the mortgage market due to AI models. The CFPB is actively working on this issue.
• For a more detailed understanding, professionals can refer to the Consumer Financial Protection Circular 2023-03. It provides deeper insights into the requirements and the correct usage of the CFPB’s sample forms.

Have a Concern?

Consumers can lodge complaints via the CFPB website or by phone. Similarly, employees in relevant sectors, including AI development, can report potential breaches of federal consumer financial protection laws.

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