Credit Union Client Alert – Compliance Considerations When Making Loan Decisions Using Artificial Intelligence (AI) and Machine Learning (ML)
By Lisa Hudson Kim, Credit Union
What are AI and ML?
AI is a method of making a computer, a computer-controlled robot, or software think intelligently like the human mind. AI is accomplished by studying the patterns of the human brain and by analyzing the cognitive process. The outcome of these studies develops intelligent software and systems. In essence, AI uses pre-existing data to train computers to do things humans currently do better.
ML is the process of using mathematical models of data to help a computer learn without direct instruction. It is considered a subset of AI. ML uses algorithms to identify patterns within data, and those patterns are then used to create a data model that can make predictions. With increased data and experience, the results of ML are more accurate; this is similar to how humans improve with more practice.
AI and ML in the Lending Space
The concept of using AI and ML as part of making loan decisions is not new. As a matter of fact, some financial institutions, including credit unions, having been using AI and ML for a long enough period of time that it has captured the attention of the five (5) federal financial regulatory agencies (collectively, the “Agencies”); Federal Reserve Board, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC). The Agencies, and more specifically the CFPB, have expressed concerns with using this technology when making loan decisions.
In 2021, the Agencies issued a Request for Information (RFI) to gain a better understanding of the use of AI and ML by credit unions and other respondents. The purpose of the RFI was to gather information from respondents on their views on the use of AI by financial institutions in their provision of services to customers and members, and for other business or operational purposes, appropriate governance, risk management, and controls over AI, as well as any challenges in developing, adopting and managing AI. It appears that since the issuance of this RFI and as a result of same, the CFPB gained a much better understanding of the use of AI and ML.
In early 2022, the CFPB issued the Consumer Financial Protection Circular 2022-03 (Circular). The Circular warned financial institutions and creditors, including credit unions, of their responsibilities to comply with fair lending laws when using AI and ML by having a full understanding of the algorithms used in making loan decisions so they can provide clear explanations as to why credit may be denied to applicants when the use of AI and ML tools are utilized. Financial institutions were reminded of their duty to comply with consumer financial protection laws, such as the Equal Credit Opportunity Act (ECOA) and its adverse action notice requirements. Specifically, the CFPB noted that just because a financial institution does not understand the complex algorithms it uses to develop its AI or ML technologies, it is not relieved of its obligations to provide the principal reasons for taking adverse action on credit applications. The CFPB further warned financial institutions and creditors that they “cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.”
The Circular also encouraged whistleblowers to provide the CFPB with information about companies using technologies in ways that violate the ECOA and other federal consumer protection laws. A link to a specific whistleblower webpage was provided in the Circular to learn more about the CFPB’s Whistleblower Program.
On the same day it announced its revised Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) Supervision and Examination Manual directing examiners to document the use of models, algorithms, and decision-making processes used in connection with consumer financial products, the CFPB issued a blog stating that it will focus on the widespread and growing reliance on machine learning models throughout the financial industry and their potential for perpetuating biased outcomes because new manifestations of discrimination, embedded within systems and technologies, harm communities even where such acts are not readily visible, transparent, or evident.
These are just a sampling of the CFPB’s actions taken to ensure that financial institutions and credit unions take a hard look at their processes when implementing AI and ML technologies. More recently, the White House’s Office of Science and Technology Policy issued a “Blueprint for an AI Bill of Rights” identifying a framework of five (5) core principles intended to guide the design, use, and deployment of automated systems and AI.
Some key take-aways credit unions should consider with regard to AI and ML include: (1) evaluate policies, procedures, and practices to ensure compliance with fair lending laws (without the intervention of AI and ML) to prevent discrimination in relation to all aspects of consumer financial products; (2) have a full understanding of the algorithms used in creating and using AI and ML technologies; (3) evaluate the data output and its impacts on the processes to which it applies, such as loan decision-making; and (4) adjust the algorithms as necessary if discriminatory or disparate treatment is identified. Information Technology (IT) departments and outside vendors may provide invaluable assistance in these efforts.
While most credit unions are not under the direct supervision of the CFPB, its actions tend to trickle down to other federal agencies, such as the NCUA. It is prudent for all credit unions to be mindful of this heightened focus and to take the necessary measures to ensure full compliance with fair lending laws. It is not acceptable to hide behind the technology or vendors who supply same. More is required of credit unions. Credit unions can rely on Kaufman & Canoles, P.C. to assist with implementing this technology or enhancing the technologies already employed. We look forward to navigating this particular technology with you.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.