After investigating whether companies claiming exemption because they rely on “complex algorithms” violated federal anti-discrimination law, the Consumer Financial Protection Bureau confirmed on Thursday, May 23rd, that all lenders must explain their rationale when denying credit to loan applicants.

According to legal experts, the rule also applies to mortgage lenders. According to the Consumer Financial Protection Bureau, lenders are not exempt from the Equal Credit Opportunity Act’s adverse action notice requirements if they use complicated algorithms, nicknamed “black-box models” by CFPB Director Rohit Chopra.

The Consumer Financial Protection Bureau (CFPB) released a statement warning creditors that technological complexity is not an excuse for noncompliance.

Creditors who employ sophisticated algorithms, such as artificial intelligence or machine learning, to make credit decisions must nonetheless publish a notice that explains the precise, primary reasons for taking adverse action. According to Kris Kully, an attorney at Mayer Brown, the notification will affect mortgage lenders because many of the underwriting systems lenders use to assess default risk contain proprietary algorithms.

The Consumer Financial Protection Bureau is worried that automated valuation algorithms may be biased in their design and function. For example, the agency stated that mathematical models could be based on skewed data, resulting in erroneous appraisals. In addition, according to the EPA, without sufficient controls, these models might digitally redline neighborhoods and perpetuate historical imbalances.

The CFPB collaborated with other regulators, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Housing Finance Agency, to consider a possible interagency requirement to address those potential risks. To read further on this, click the link below

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