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The Consumer Financial Protection Bureau appears to consider regulating technology to be critical to its mission of protecting consumers. Clearly, the growth of algorithms, machine learning, and artificial intelligence in financial services seems to be leading the Bureau to target problems caused by these tools.
Technophiles often present automated decision-making systems as a way to eliminate messy human biases and cognitive errors. The idea is that technology will produce a better outcome and that it is often so complex that it is beyond most peoples’ understanding.
For its part, the Bureau seems to be calling shenanigans on algorithms in general. Several examples demonstrate this. In August, the Bureau issued Consumer Financial Protection Circular 2022-03 in response to the follow question:
“When creditors make credit decisions based on complex algorithms that prevent creditors from accurately identifying the specific reasons for denying credit or taking other adverse actions, do these creditors need to comply with the Equal Credit Opportunity Act’s requirement to provide a statement of specific reasons to applicants against whom adverse action is taken?”
The Bureau’s answer was clear: complex algorithms are not an excuse to avoid complying with regulations. “A creditor’s lack of understanding of its own methods is therefore not a cognizable defense against liability for violating ECOA and Regulation B’s requirements,” the Bureau wrote.
The same month, the Bureau announced that it had fined Hello Digit LLC, San Francisco, in a press release entitled “CFPB Takes Action Against Hello Digit for Lying to Consumers About Its Automated Savings Algorithm.”
The Bureau said that Hello Digit’s algorithm failed to prevent overdrafts, that the company failed to reimburse customers for overdrafts that were incurred, and that it kept interest that should have gone to customers. It issued a fine of $2.7 million plus at least $68,145 to reimburse customers.
When the news broke, industry watchers questioned why the Bureau was going after Hello Digit rather than the banks that charge the overdraft fees. In his “Fintech Takes” newsletter, Alex John summed up the reaction: “[T]his one seemed to rile up the fintech Twitter community, with observers arguing that A.) the language used by the CFPB in its press release was overly harsh and B.) the penalty imposed by the CFPB was out of proportion to the actual harm caused by Digit…”
In the press release announcing the fine, CFPB Director Rohit Chopra is quoted as saying, “[C]ompanies have long been held to account when they engage in faulty advertising, and regulators must do the same when it comes to faulty algorithms.”
The language of the headline and Chopra’s quote seem to show the Bureau wants to put the focus on the underlying technology. In these quotes and in the Bureau’s order on credit notices, the Bureau is saying, in effect, regulators should be critical of technology and not believe that it will magically solve problems.
The CFPB is not stopping with algorithms. It has published a circular warning companies that they will violate consumer financial protection laws if they fail to protect consumer data. It also issued an interpretive rule indicating digital marketers that use targeting tools for advertising financial services are also subject to federal consumer financial protection laws.
Fintechs should recognize the pattern in all of these actions. Financial-services providers need to examine the role of technological decision making in their operations and how it fits with applicable consumer regulations. The Bureau will not let companies hide behind complex algorithms to escape compliance.
If technology is at the heart of a product, all departments need to play a role in running the machine.
—Ben Jackson bjackson@ipa.org
