DOEREN MAYHEW
Fair Lending & Third-Party Liability Considerations
The Consumer Financial Protection Bureau ( CFPB ) has made it clear – they are dead set on pursuing what it deems fair lending-related infractions . A new and developing theme in this pursuit has been to chip away at any deference extended to financial institutions and servicing entities when the alleged violation occurs at least inpart , at the hands of a third-party partner , including when it is artificial intelligence ( AI ).
Case in point : On June 24 , 2024 , the CFPB approved a new rule to address the current and future applications of complex algorithms and AI used to estimate the value of a home . Generally , the final rule ( effective the first day of the calendar quarter following 12 months after date of publication ) requires financial institutions engaging in certain credit decisions or securitization determinations to adopt policies , practices , procedures and control systems for its automated valuation models ( AVMs ). This ensures the AVMs used in these transactions to determine the value of mortgage collateral adhere to quality control standards that ensure a high level of confidence in the estimates they produce . Further , institutions must :
• Protect against the manipulation of data .
• Seek to avoid conflicts of interest .
• Require random sample testing and reviews .
• Comply with applicable nondiscrimination laws .
This final rule puts an additional exclamation point on the agency ’ s stance on third-party liability and appraisals . Just about a year ago , they joined forces with the Department of Justice in issuing a joint statement of interest related to appraisal bias ( See Case 1:22-cv-02048-SAG Document 45 Filed March 13 , 2023 ). The statement warned mortgage lenders , and therefore , financial institutions who provide mortgage lending , can be liable under the Equal Credit Opportunity Act and Federal Housing Administration for relying on discriminatory appraisals . The statement of interest underscores lenders cannot rely on a discriminatory appraisal if they knew , or should have known , the appraisal was discriminatory .
Third-party fair lending-related liability extends beyond the appraisal playing field . In September 2023 , the CFPB reminded lenders using third-party AI , and other complex models to make credit decisions , that they must use specific and accurate reasons when taking adverse actions against consumers . The guidance states “ creditors cannot simply use CFPB sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit or a change of credit conditions .” Director Rohit Copra underscored the point that lenders themselves must understand why the loan was denied and further communicate this rationale to a
06 | VIEWPOINTS : REGULATORY COMPLIANCE EDITION