Adverse Action Notice
Required disclosure when AI-driven decisions negatively affect consumers.
Definition
An Adverse Action Notice is a legally required disclosure when a decision negatively affects a consumer. For AI systems, adverse action requirements create specific challenges:
- ECOA/Regulation B: Creditors must provide specific reasons for credit denial—AI must identify principal factors
- FCRA: Notice required when consumer reports (including AI scores) influence adverse decisions
- State laws: Various disclosure requirements for AI-driven employment, insurance, and housing decisions
The CFPB has clarified that creditors cannot use AI complexity as an excuse to provide vague reasons. AI systems must be designed to generate specific, accurate adverse action reasons. This requirement drives demand for explainable AI in regulated contexts.
Sources
- •Fair Credit Reporting Act
- •Equal Credit Opportunity Act
Related Terms
Fair Lending (AI Context)
Anti-discrimination requirements in credit decisions as applied to AI lending systems....
Right to Explanation
A legal entitlement for a person affected by an AI-driven decision to receive a clear, meaningful account of the AI system’s role and the main elements that led to that decision....
Explainability
The ability to understand and articulate how an AI system reaches its decisions....