QUESTION
I am the General Counsel and Compliance Officer of a mortgage lender. Our footprint is currently in 35 states. Recently, we have begun to use Artificial Intelligence in our loan origination process. However, I have some concerns about proper consumer disclosure.
In my view, we should be disclosing our specific use of AI to borrowers. We should disclose the role AI plays in our loan applications from the point of sale to close, and, if applicable, beyond. But I do not find much regulatory guidance to lean on. I would appreciate your views on AI disclosure and, if possible, which areas would be subject to such disclosure.
Is there a requirement for a mortgage lender to issue an AI consumer disclosure?
What regulatory areas are potentially impacted by AI, thereby causing AI disclosure?
COMPLIANCE SOLUTIONS
Artificial Intelligence Statement
RESPONSE
There is currently no broad legal requirement for lenders to disclose the general use of AI in loan applications. However, under existing consumer protection and fair lending laws, lenders are legally required to disclose specific, accurate reasons for adverse actions, such as a loan denial, even if a complex AI or algorithmic system made the decision.
This transparency is mandated by the Equal Credit Opportunity Act (ECOA), and regulatory bodies like the Consumer Financial Protection Bureau (CFPB) have issued guidance emphasizing that the complexity of AI is not an excuse for failing to provide a clear explanation.
Regulatory Mandates
Take, for instance, the regulatory mandates involving adverse action disclosure. The CFPB has directly addressed the issue of "black-box" models, which are AI systems whose logic is not clear even to their developers. The CFPB emphasizes that lenders cannot point to a broad category from a checklist, such as "purchasing history," if a consumer is denied credit based on AI analysis. Instead, the lender must provide specific details, such as the types of goods or places that influenced the decision.
Also, there is no "AI exemption." A lender's use of AI or machine learning does not create a special exemption from fair lending laws. The CFPB has made it a priority to ensure that the use of technology does not allow lenders to circumvent established consumer protection regulations. In addition to the CFPB, regulators and the Federal Trade Commission have warned that there is no "AI exemption" for existing fair lending and consumer protection laws. Therefore, undisclosed AI could be found to violate these laws, leading to enforcement actions.
The Colorado Artificial Intelligence Act
Some state laws specifically address AI disclosure. For example, the Colorado Artificial Intelligence Act (CAIA) requires developers to test for algorithmic discrimination in consequential decisions, and some state consumer protection statutes allow for prosecution if an AI's biased outcomes cause consumer harm. This is a landmark act in many ways. If you are originating loans in Colorado, you should review the relevant regulations. However, you would do well to conduct a statewide review of AI legislation in all states where you are licensed to originate mortgage loans.
CAIA may be a model for the direction states are going with respect to AI disclosure. The Act defines algorithmic discrimination, which is the unlawful differential treatment that disfavors an individual or group on the basis of protected characteristics. The algorithmic discrimination would be caused by high-risk artificial intelligence systems, defined as any system that, when deployed, makes — or is a substantial factor in making — a "consequential decision," which generally relates to those involving education, employment, financial services, housing, health care, or legal services.
Under the CAIA, there are stipulated requirements for developers to clearly display on their website or in public use an up-to-date disclosure of any high-risk AI systems they have developed and make available how they manage known or reasonably foreseeable risks of algorithmic discrimination. Any determination that the AI system has caused or is reasonably likely to cause algorithmic discrimination must be brought to the attention of the Colorado attorney general, among others.
