CFPB’s Opinion on Fair Lending Rules Could Extend to AI

The Consumer Financial Protection Bureau (CFPB) has published an advisory opinion to affirm that banks and other lenders need to follow fair lending laws when canceling loans or changing terms and not just during the application process.

According to the advisory opinion published on Monday (May 9), some lenders have been following the Equal Credit Opportunity Act (ECOA) only when issuing loans. But the CFPB interprets Regulation B, the ECOA’s implementing rule, as applying to “approval, denial, renewal, continuation or revocation of any open-end consumer credit account.” This means rules apply before and after the bank approves the credit, the CFPB argued.

“Today’s advisory opinion and accompanying analysis makes clear that anti-discrimination protections do not vanish once a customer obtains a loan,” said CFPB Director Rohit Chopra.

This opinion applies to all creditors as defined in section 702 of ECOA and it seeks to clarify that people should be protected from discrimination in all aspects of a credit arrangement. The advisory opinion focuses on two issues:

• Protecting borrowers after they have applied for and received credit. For example, ECOA prohibits lenders from lowering the credit limit of certain borrowers’ accounts or subjecting certain borrowers to more aggressive collections practices on a prohibited basis, such as race.
• Requiring lenders to provide “adverse action notices” to borrowers with existing credit: Adverse action notices explain why an unfavorable decision was made against a borrower. Credit applicants and borrowers receive these notices for reasons including that credit was denied, an existing account was terminated, or an account’s terms were unfavorably changed. According to the bureau these notices discourage discrimination, and they help applicants and borrowers learn the reasons for creditors’ decisions.

The Bureau has recently increased its efforts to educate consumers and financial institutions about their rights and obligations by issuing opinions, blog posts and reports. “The CFPB is ramping up its efforts to issue guidance and advisory opinions to assist entities with understanding their obligations under the law,” said Chopra.

As this advisory opinion is an interpretative rule under the Bureau’s authority to interpret ECOA and Regulation B, it is exempted from the notice-and-comment rulemaking requirements of the Administrative Procedure Act.

Artificial Intelligence in Lending

This advisory opinion came just a few days after the CFPB released its annual Fair Lending Report to Congress highlighting the Bureau’s fair lending work in 2021.

Interestingly, the report also includes areas where the CFPB is looking ahead to the future of financial services markets. One important area is predictive analytics, algorithms and machine learning. The CFPB director is concerned that “while the technology holds great promise, it can also reinforce historical biases.”

The CFPB will be sharpening its focus on digital redlining and algorithmic bias, it said in a statement. In the report to Congress, the CFPB also included the use of artificial intelligence (AI) and machine learning as enforcement priorities.

It may not be coincidental that the CFPB issued an advisory opinion calling on lenders not to discriminate either before or after a creditor applies for and receives credit just after treating AI as an emerging risk saying that it “will develop appropriate policy responses.”

As banks and financial institutions are resorting more often to AI and machine learning tools to assess applicants’ profiles and to grant loans, the Bureau is probably trying to ensure that applicants are not discriminated based on algorithms and data sets that may contain biased data and could eventually yield biased results.

Read also: CFPB Proposes New Algorithm-Based Home Valuation Guidelines