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On July 18, 2023, Federal Reserve Vice Chair for Supervision
Michael Barr cautioned banks against fair lending violations
arising from their use of artificial intelligence (AI). Training on
data reflecting societal biases; data sets that are incomplete,
inaccurate, or nonrepresentative; algorithms specifying variables
unintentionally correlated with protected characteristics; and
other problems can produce discriminatory results.
Vice Chair Barr’s remarks come against
a backdrop of increased concern among federal financial regulators
about the deployment of AI and other automated systems. These
authorities fear that deployment without appropriate guardrails can
lead financial institutions to breach various laws and to take on
unnecessary risks to their safety and soundness. Similar fears are
shared across the federal government, causing leaders of key U.S.
federal enforcement agencies this spring to stress their common
intent to crack down against algorithmic discrimination. (For more
on their joint statement, see our previous Blog Post here).
Vice Chair Barr welcomed the appropriate use of new AI
technology, recognizing its potential to leverage digital data
sources at scale and at low cost to expand access to credit.
However, because AI use also carries risks of violating fair
lending laws and perpetuating disparities in credit transactions,
Vice Chair Barr called it “critical” for regulators to
update their applications of the Fair Housing Act (FHA) and Equal
Credit Opportunity Act (ECOA) to keep pace with these new
technologies and prevent new versions of old harms. Violations can
result both from disparate treatment (treating credit applicants
differently based on a protected characteristic) and disparate
impact (apparently neutral practices that produce different results
based on a protected characteristic). As an example, Vice Chair
Barr cited digital redlining, with majority-minority communities or
minority applicants being denied access to credit and housing
opportunities. He also called out reverse redlining, with
“more expensive or otherwise inferior products” being
pushed to minority communities. Relatedly, Vice Chair Barr also
mentioned expected changes to the implementing regulations under
the Community Reinvestment Act (CRA), which was enacted following
the FHA and ECOA to further address redlining and other systemic
inequities in access to credit, investment, and banking services.
As part of CRA exams, bank examiners evaluate whether there is any
evidence of discriminatory or other illegal credit practices
inconsistent with helping to meet community credit needs. Vice
Chair Barr noted the interagency work on adapting CRA regulations
and evaluations to address technological advancements in
banking.
Financial institutions that don’t take heed of these
warnings may face problems in compliance exams or be subjected to
investigations. Identified patterns or practices of discrimination
by financial institutions could result in referrals by the federal
banking regulators to the Department of Justice for
enforcement.
During his speech, Vice Chair Barr also supported two recent
policy initiatives to address appraisal discrimination and bias in
mortgage transactions. On June 1, 2023, the Federal Reserve and
several federal financial agencies issued a Notice of Proposed
Rulemaking on the use of AI and other algorithmic systems in
appraising home values (Proposed Rule). For more information about
the Proposed Rule, check out our prior Advisory. On June 8, 2023, the same agencies
invited public comment on guidance to assist financial institutions
to incorporate “reconsiderations of value” into their
home appraisal process, which could help mitigate the risk of
improperly valuing real estate.
With all these changes (and others in the pipeline), financial
institutions should consider establishing comprehensive AI
risk-management programs now and keep a close watch on the evolving
legal landscape.
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