Weekly Fintech Focus

  • The CFPB issued a blog post on AI/ML credit underwriting models and adverse action notices to encourage the industry to engage with the CFPB on these innovations.
  • FinCEN issued an advisory on FATF jurisdictions of concern for financial institution monitoring purposes.
  • California tables proposal to create state version of the CFPB.
  • Instagram launches Instagram Shop in the U.S.

CFPB Publishes Blog on AI/ML Credit Underwriting Models and Adverse Action Notices

The Consumer Financial Protection Bureau (CFPB) published a blog post about adverse action notices using artificial intelligence and machine learning (AI/ML) models. The blog post was authored by the head of the CFPB’s Office of Innovation, the soon-to-be deputy director of the CFPB, and the director of the CFPB’s Office of Fair Lending. The blog post discusses compliance issues raised by the use of AI/ML models for credit underwriting under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), as well as the flexibility available to creditors under those two laws when using AI/ML models. The CFPB also notes its desire to engage with industry on issues raised by AI/ML models.

The CFPB opens the blog post with an acknowledgement that AI/ML models have the potential to expand credit access to so-called “credit invisibles”—those consumers that are unscorable with traditional underwriting techniques. Using AI/ML models, creditors may be able to make credit decisions more efficiently for more types of borrowers at a lower cost. However, the CFPB recognizes that AI/ML models could create or amplify risks of unlawful discrimination, transparency in underwriting, and consumer privacy issues.

The CFPB is concerned that the industry has been slow to adopt AI/ML models in credit underwriting due to regulatory risks and uncertainty. Under FCRA and ECOA, creditors have requirements to provide consumers with adverse action notices when denying credit or taking other adverse action notices. Adverse action notices provide consumers with information about why their application was denied or they did not receive the type of credit they wanted.

AI/ML models take in and analyze amounts and kinds of information and provide non-intuitive decisions in such a way that creditors are challenged to explain the credit decision as required by law. The CFPB notes in its blog post that there is flexibility under ECOA for a creditor because the law does not require a creditor to describe how or why a disclosed factor adversely affected the application, or how the factor relates to creditworthiness. As a result, a creditor using an AI/ML model may disclose a reason for the adverse action, even if the factor is not entirely clear to the applicant. Further, the CFPB notes that although the laws contain model forms for adverse action notices, the lists of reasons for an adverse action are not exclusive, and a creditor can include additional reasons that reflect alternative data sources or different underwriting models.

The CFPB also reiterates in its blog post the numerous tools the CFPB has developed to engage with industry on financial innovation, including: (1) the Policy to Encourage Trial Disclosure Programs (TDP Policy), (2) the No-Action Letter Policy (NAL Policy), and (3) the Compliance Assistance Sandbox Policy (CAS Policy). The TDP Policy specifically addresses adverse action notices as a type of covered disclosure. Creditors engaging with the NAL Policy and CAS Policy may obtain a legal safe harbor that could reduce regulatory uncertainty. The CFPB’s first NAL involved an AI/ML credit underwriting model.

Industry is encouraged to engage with the CFPB on this issue, and the blog post lists three issues of particular interest for the CFPB:

  • Models: Methodologies for determining the principal reasons for an adverse action.
  • Explainability: Accuracy of explainability methods, particularly for deep learning and other complex ensemble models.
  • Disclosure: How to convey the principal reasons for an adverse action in a way that accurately reflects the factors used in the model in a way that is understandable to the consumer.

FinCEN Issues Advisory on FATF Jurisdictions of Concern

The Financial Crimes Enforcement Network (FinCEN) issued an advisory (1) informing financial institutions on updates to the Financial Action Task Force’s (FATF) updated list of jurisdictions with strategic anti-money laundering, and (2) combating the financing of terrorism and counter-proliferation financing deficiencies. FinCEN encourages financial institutions to consider FATF’s statements when reviewing the institution’s risk-based policies and procedures regarding the jurisdictions in FATF’s statement.

In April 2020, due to COVID-19, FATF temporarily paused its review for most countries with strategic deficiencies, so the countries listed by FATF in its February 2020 review remain the same.

California Tables Proposal to Create a State Version of the CFPB

California lawmakers removed a line item from the proposed spending plan that would have created a state consumer financial protection agency, known as the Department of Financial Protection and Innovation (DFPI). Instead, California lawmakers will try to establish the DFPI through a standalone bill rather than a line item in the state budget as it “would allow the change to be vetted by the policy committees that have expertise on the specific issues that are raised,” according to the Legislative Analyst’s Office.

The DFPI would be under the California Department of Business Oversight if established and would have the authority to bring enforcement actions against companies, issue fines, and root out unfair, deceptive, and abusive acts or practices.

The original budget proposal intended to self-fund the DFPI through licensing fees and fines following the first-year pilot phase.

Industry Developments

Instagram Launches Instagram Shop in the U.S.

Instagram, a subsidiary of Facebook, launched a new feature, known as Instagram Shop, that allows users to browse and purchase goods from brands and content creators without leaving the app with the intent to expand globally.

The shopping section will initially be available in the “Explore” section but will get its own tab later this year. The social media company also intends to integrate Facebook Pay in the next few weeks to expand its payments services across all apps.