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The CFPB Tuesday issued a circular on adverse action notices required under the Equal Credit Opportunity Act (ECOA) and Regulation B to provide specific and accurate reasons for taking adverse actions against consumers when using artificial intelligence (AI) and complex algorithms.

In the circular, the bureau states that relying on the sample adverse action forms and checklists provided in Regulation B is insufficient, and lenders cannot use a “check-the-box” approach. The guidance explains that even for adverse actions made by complex algorithms, creditors must provide accurate and specific reasons, even if consumers may be “surprised, upset, or angered to learn their credit applications were being graded on data that may not intuitively relate to their finances.”

The bureau also points to a circular from 2022, which confirms that the ECOA requires creditors to explain the specific reasons for taking adverse actions, even if those companies use complex algorithms and black-box credit models that make it difficult to identify those reasons. The circular states that "creditors must be able to provide applicants against whom adverse action is taken with an accurate statement of reasons." In addition, the statement of reasons "must be specific and indicate the principal reason(s) for the adverse action."

“Today’s guidance expands on last year’s circular by explaining that sample adverse action checklists should not be considered exhaustive, nor do they automatically cover a creditor’s legal requirements,” wrote the bureau.

In addition to Tuesday’s and last year’s circulars, the CFPB has issued an advisory opinion that consumer financial protection law requires lenders to provide adverse action notices to borrowers when changes are made to their existing credit.

NAFCU will continue to monitor this topic and update credit unions on the latest from the bureau via NAFCU Today.