The Consumer Financial Protection Bureau (CFPB) warned lenders using artificial intelligence (AI) in credit denials that consumers must receive accurate and specific reasoning—and not checklists—for why a credit request was denied.

In a press release Tuesday, the agency said, “[C]reditors 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.”

In June, the Federal Reserve Bank of New York released its quarterly credit analysis survey. The survey found the overall rejection rate for credit applicants increased to 21.8 percent, the highest level since June 2018.

With the growth of advanced algorithms and personal consumer data in credit underwriting, the CFPB is trying to thwart discrimination in the loan approval process.

The agency noted the guidance expands upon a circular issued in May 2022 that warned lenders about black-box credit models using complex algorithms. Such practices do not comply with the Equal Credit Opportunity Act, the CFPB said.

Creditors conducting check-the-box exercises when delivering notices of credit denial should understand they do not cover their legal requirements due to not being exhaustive enough, the agency said.

For example, the CFPB said if a lender lowered a consumer’s credit limit based on behavioral spending data, the explanation would need to provide more details than a general reason like “purchasing history.”

“Creditors that simply select the closest factors from the checklist of sample reasons are not in compliance with the law if those reasons do not sufficiently reflect the actual reason for the action taken,” the agency stated.