On February 23, the Consumer Financial Protection Bureau (CFPB) issued an outline of proposals and alternatives (Outline) under consideration related to an automated valuation model (AVM) rulemaking. Despite the lack of imminency on a final rule, the Outline serves as further proof that fair lending and its application to algorithmic systems is a top priority for the CFPB, as well as other regulators at both the federal and state levels.

The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Section 1125 requires that AVMs meet quality control standards designed to:

  • ensure a high level of confidence in the estimates produced by automated valuation models;
  • protect against the manipulation of data;
  • seek to avoid conflicts of interest;
  • require random sample testing and reviews; and
  • account for any other such factor that the agencies determine to be appropriate.

Section 1125 also provides that the CFPB, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA) “shall promulgate regulations to implement the quality control standards required” under Section 1125. The CFPB prepared the Outline for use in the Small Business Regulatory Enforcement Fairness Act (SBREFA) Small Business Review Panel process, during which the panel will solicit feedback and assess the impact of the potential rule on small entities.

Among other things, the Outline covers the scope of potential eventual rule requirements. In regard to the first four standards listed above, the CFPB appears to be set on requiring regulated institutions to maintain policies and procedures to ensure that AVMs used for covered transactions adhere to the specified quality control standards. However, the CFPB is weighing whether to (1) provide regulated institutions flexibility in developing these policies and procedures, or (2) impose prescriptive requirements that would be more detailed and specific.

For the fifth standard, the CFPB is considering specifying “nondiscrimination quality control criteria” as an additional standard. Noting that the use of algorithmic systems, such as AVMs, are subject to the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA), the CFPB states that it is considering the potential positive and negative consumer and fair lending implications of the use of AVMs. In its discussion of fair lending concerns, the CFPB reiterates several points that have become the hallmark of CFPB Director Rohit Chopra’s views on algorithmic systems. The Outline provides the following:

The “black box” nature of many algorithms, including those used in AVMs, introduces additional fair lending concern. The complex interactions that machine learning algorithms engage in to form a decision can be so opaque that they are not easily audited or understood. This makes it challenging to prevent, identify, and correct discrimination.

The Outline goes on to note that algorithmic systems can “replicate historical patterns of discrimination or introduce new forms of discrimination because of the way a model is designed, implemented, and used.”

A final rule is not on the immediate horizon. The CFPB is requesting all small entity feedback on the Outline by April 8, and then feedback from other stakeholders by May 13. From there, the CFPB will still need to issue a notice of proposed rulemaking, which will go through its own comment process, before issuing a final rule. In the Outline, the CFPB notes that it is looking at a 12-month implementation period once the final rule is issued.

The Outline’s comments about the fair lending concerns arising from the use of algorithmic decision-making are part of a larger regulatory and consumer advocacy effort to address perceived algorithmic bias. In November 2021, House Financial Services Committee Chairwoman Maxine Waters sent a letter to the leaders of multiple federal regulators, asking them to monitor technological development in the financial services industry to ensure that algorithmic bias does not occur (see our blog post here). Then, in December 2021, the D.C. attorney general transmitted the “Stop Discrimination by Algorithms Act of 2021” for consideration and enactment by the Council of the District of Columbia (see our blog post here).

We know that algorithms can be transparent in their decision-making, fairer than models built using traditional techniques, and can make credit decisions both more accurate and more inclusive. We will continue to monitor developments related to regulation of algorithmic models at both the federal and state level.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Chris Capurso Chris Capurso

Chris’ practice focuses on consumer financial services law, primarily on federal and state law compliance matters. Chris regularly advises financial institutions, lenders, and sales finance companies in the development and maintenance of closed-end and open-end lending, automobile finance, fintech, point-of-sale, small dollar, and…

Chris’ practice focuses on consumer financial services law, primarily on federal and state law compliance matters. Chris regularly advises financial institutions, lenders, and sales finance companies in the development and maintenance of closed-end and open-end lending, automobile finance, fintech, point-of-sale, small dollar, and other credit programs. He provides guidance on federal consumer protection laws and regulations, including TILA, ECOA, ESIGN, and GLBA.

Photo of David N. Anthony David N. Anthony

David is an experienced trial attorney with a concentration in litigating financial services and business disputes, including class actions related to the FCRA, FDCPA, TCPA and other consumer protection statutes.

Photo of Chris Willis Chris Willis

Chris is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He advises financial services institutions facing state and federal government investigations and examinations, counseling them on compliance issues including UDAP/UDAAP, credit reporting, debt collection, and fair lending, and defending…

Chris is the co-leader of the Consumer Financial Services Regulatory practice at the firm. He advises financial services institutions facing state and federal government investigations and examinations, counseling them on compliance issues including UDAP/UDAAP, credit reporting, debt collection, and fair lending, and defending them in individual and class action lawsuits brought by consumers and enforcement actions brought by government agencies.

Chris also leverages insights from his litigation and enforcement experience to help clients design new products and processes, including machine learning marketing, fraud prevention and underwriting models, product structure, advertising, online application flows, underwriting, and collection and loss mitigation strategies.

Chris brings a highly practical focus to his legal advice, informed by balancing a deep understanding of the business of consumer finance and the practical priorities of federal and state regulatory agencies.

Chris speaks frequently at conferences across the country on consumer financial services law and has been featured in numerous articles in publications such as the Wall Street Journal, the New York Times, the Washington PostAmerican BankerNational Law JournalBNA Bloomberg, and Bank Safety and Soundness Advisor.

Photo of Alan D. Wingfield Alan D. Wingfield

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance…

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance counseling to help businesses with the myriad federal and state consumer protection laws and laws regulating financial services companies.