Adverse Action Notice Compliance Considerations for Creditors That Use AI

16 August 2023
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Key Takeaways:
  • Both the Fair Credit Reporting Act (the “FCRA”) and the Equal Credit Opportunity Act (the “ECOA”) require provision of adverse action notices to consumers in certain circumstances. Notices under both statutes are required when a creditor takes adverse action with respect to a consumer who applies for an extension of credit.
  • To comply with the notice requirements, a creditor must understand both the sources of information upon which the credit decision relies as well as the manner in which those sources and any other factors are assessed to justify the adverse action. Where that decision is made by artificial intelligence (“AI”), models in which inputs or outputs lack transparency or are not explainable may pose regulatory and litigation risks to creditors.
  • Implementing appropriate governance around the use of these models, as well as legal and/or compliance oversight of the adverse action notices, will help reduce regulatory risks.