Michael Barr, the Federal Reserve’s vice chair of supervision, warned Tuesday of the potentially discriminatory consequences of too heavy a reliance on artificial intelligence, while commemorating the 55th anniversary of the Fair Housing Act.
While speaking at a National Fair Housing Alliance conference, Barr also gave an update on the status of the proposed revision of the Community Reinvestment Act, and voiced his support for two efforts meant to address discrimination in appraisals and bias in housing mortgage credit transactions.
Here are five highlights from his speech Tuesday:
1. “Use of machine learning or other artificial intelligence may perpetuate or even amplify bias or inaccuracies inherent in the data used to train the system or make incorrect predictions if that data set is incomplete or nonrepresentative.”
Lenders should be wary that data points can be correlated with a protected class of people and can also “lack a sufficient nexus to creditworthiness,” Barr said, citing the potential, in marketing, for digital redlining, or the use of criteria to exclude majority-nonwhite communities or nonwhite borrowers.
New technologies can also result in "reverse redlining," such as by steering more expensive or inferior products to nonwhite communities, Barr said.
But he acknowledged the promise such products showed.
“While these technologies have enormous potential, they also carry risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address,” he said.
2. “While banks are still in the early days of adopting artificial intelligence and other machine learning technologies, we are working to ensure that our supervision keeps pace.”
Barr assured conference attendees that regulators evaluate whether companies have proper risk management and controls, including with respect to new AI technology. He also emphasized that the risk of bias is “amplified when a model is opaque and lacks a sufficient degree of explainability,” or how well a bank understands how data, variables and other features inform credit decisions.
3. “The agencies are benefiting from the thoughtful comment letters we received on the proposal, and all three agencies are hard at work finalizing the rule.”
Barr didn’t give a timeline by which banks can expect a finalized version of the CRA that the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed in May 2022.
Under changes the agencies proposed, branch-centric “facility-based assessment areas” would still be used to measure how banks are meeting CRA specifications. But large banks must also consider areas with concentrations of mortgage and small-business lending.
The proposal also would let large banks consider community development activities nationwide as a separate metric. And it would emphasize smaller-value loans and investments that would have a “high impact” on poor neighborhoods.
The revamped CRA would subject banks to up to separate tests for retail lending; retail services and products; community development financing; and community development services.
And the proposal adjusts the asset totals categorizing small, intermediate and large banks.
The comment period for the proposal ended last August.
4. “Deficient collateral valuations can contain inaccuracies because of errors, omissions, or discrimination that affects the value of the appraisal, and a reconsideration of value may help to properly value the real estate.”
Barr voiced his support Tuesday for two June initiatives: one “designed to ensure the credibility and integrity of automated valuation models” and another meant to “highlight risks associated with deficient home appraisals.”
The guidance describes how financial institutions may incorporate "reconsiderations of value" into their processes and controls around home appraisals, Barr said.
“Homeownership is an important way for families to build wealth, and we should give them every opportunity to share in those benefits,” he said.
5. “Fair lending is safe and sound lending.”
“By adopting sound credit policies that include fair lending principles and controls on loan officer discretion, and by maintaining strong compliance management practices, banks can help advance a safer and fairer financial system,” Barr added.