The news: President Biden's recent executive order regulates the use of AI in banking, consumer finance, and housing to prevent discrimination and privacy violations.
- As a result, banking regulators will intensify oversight to ensure fair AI deployment, focusing on loan decisions, tenant screening, and housing-related AI applications.
Breaking down the executive order: The President's executive order underscores the urgent need to oversee AI development responsibly and safely, emphasizing a unified federal approach due to the rapid advancements in AI capabilities.
- Banking regulators and the Federal Trade Commission will use existing fair lending laws to ensure that AI-driven credit decisions are devoid of discriminatory practices.
- The Federal Reserve (Fed), Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) have proactively sought information from financial institutions (FIs) regarding their AI usage, cautioning against potential discriminatory elements within AI lending tools.
- The OCC recently established the Office of Financial Technology to monitor technological changes within the banking industry.
What’s new for FIs? Banks should anticipate heightened oversight as President Biden's recent executive order amplifies scrutiny on AI applications.
- The order instructs the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA) to vigilantly oversee AI use in lending decision-making processes.
- The agencies will examine underwriting and appraisal models for biases, aiming to prevent the exclusion of eligible tenants from rental housing.
- The President also advised the CFPB to issue similar guidance within the same timeframe.
How can FIs prepare? While federal agencies will issue their own guidance as a result of this executive order, FIs can start preparing for compliance.
- They should prioritize training staff to be well-versed in AI—and hiring AI experts.
- FIs should also implement comprehensive training programs focused on the legal, ethical, and regulatory aspects of AI, tailored to lending and financial services.
- Finally, FIs should align their internal processes and standards with the emerging regulatory standards.