The CFPB recently released Circular 2022-03 to reiterate that Regulation B requires creditors to disclose specific reasons for taking adverse action. This includes instances where a decision is based on “complex algorithms.”
When creditors rely on internal systems that use complex formulas, artificial intelligence, or even third-party automated underwriting systems, it can be difficult to truly know what the specific reasons are that lead to taking the adverse action. Regardless, Regulation B requires that reasons for adverse action … be specific and indicate the principal reason(s) for…the action taken. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant…failed to achieve a qualifying score…are insufficient.
If creditors are unable to decipher the specific reasons due to the complexity of the system, the system should not be used.
Appendix C of Regulation B includes sample adverse action notices, which provide some potential reasons a creditor might take adverse action. The Circular, however, cautions creditors from selecting a reason on a form just because it’s the “closest” option. …If the reasons listed…are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed. The Commentary also states that, if you use a credit scoring system, …the reasons disclosed must relate only to those factors actually scored in the system.
The Circular explains that the purpose of providing specific reasons is really two-fold. Doing so: 1) helps prevent discrimination…If creditors know they must explain their decisions…they [will] effectively be discouraged from discriminatory practices; and 2) educates applicants by alerting them to potential weaknesses and/or of potential errors in their credit history.
If you want to learn more about Adverse Action Notices, check out the webinar we held. It’s available now OnDemand. Get up to speed on the Regulation B and Fair Credit Reporting Act notification requirements with respect to:
- Denied Applications
- Notices of Incompleteness
- Counteroffers / Counteroffer Denials
- Withdrawals
- Notification Timing Requirements
- Fair Lending Intersections
- Multiple Applicants, Record Retention & Much More!
Published
2022/06/10
