Going Beyond Checklists: ECOA Adverse Action Notices in the Age of AI

The Equal Credit Opportunity Act (ECOA) and rules under Regulation B require lenders to notify consumers when adverse actions are taken on their credit applications or accounts. While Regulation B provides model forms for compliance, they aren’t a one-size-fits-all solution for compliance.

Recent guidance from the Consumer Financial Protection Bureau (CFPB)[1] emphasizes the need to specify the actual principal reason(s) for adverse actions, especially in the era of AI and complex credit models used in underwriting. Lenders using advanced technology must ensure that the disclosed reasons align with their actual decision factors even when the deciding factor may be unusual or unexpected.

The CFPB guidance includes an example where an applicant’s choice of profession, not income, is the principal factor in a lender’s decision. In this case, the applicant’s choice of profession should be explicitly stated as the reason for the adverse action as opposed to selecting “income insufficient . . . ” in the model form even though the applicant’s choice of profession may be related to income.

While Regulation B’s model forms are useful, they may not always provide for precise disclosure of adverse action reasons. Lenders, especially those employing AI and other advanced technology, should review their adverse action notification processes to make sure they align stated reasons with actual decision factors.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.

[1]  CFPB, Consumer Financial Protection Circular 2023-03 (September 19, 2023).