Fed's Barr: AI could 'perpetuate or even amplify' bias in mortgages

Bloomberg News

The Federal Reserve's top regulator is wary of the use of artificial intelligence in mortgage underwriting. 

Speaking at the National Fair Housing Alliance's national conference Tuesday morning, Fed Vice Chair for Supervision Michael Barr said advancements in mortgage origination technology could lead to discriminatory lending practices.

Barr called for transparency around the models used by artificial intelligence, or AI, programs. He also noted that the Fed is factoring tech advancements into its bank oversight responsibilities under the Fair Housing Act and Equal Credit Opportunity Act.

"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 said. "Through our supervisory process, we evaluate whether firms have proper risk management and controls, including with respect to those new technologies."

Barr's remarks on AI supervision were part of a broader speech commemorating the 55th anniversary of the Fair Housing Act, a landmark piece of legislation prohibiting racial discrimination in housing sales and rentals. 

Barr acknowledged that machine learning capabilities could be used to expand the availability of credit to prospective borrowers without credit scores. This can be done by capturing a wider array of information than what traditional credit rating agencies consider. If these programs operate at a large enough scale, he said, that could also enable them to expand credit more broadly.

Yet, he also noted that these AI programs could "perpetuate or even amplify" certain biases by drawing from data that is flawed or incomplete and thereby reach inaccurate conclusions about borrowers based on their race, color, national origin, religion, sex, familial status or disability. On the other hand, he added, inadequate technology could steer minority borrowers toward more expensive or lower quality financial products — a dynamic Barr described as "reverse redlining."

'But is it fair?': AI systems show promise but questions remain

Barr's concerns around algorithmic bias are shared by other regulators in Washington. Consumer Financial Protection Bureau Director Rohit Chopra has been a frequent skeptic of AI-based underwriting and customer engagement. He has pushed for banks and other financial firms to exercise caution when using such technologies. 

During his speech, Barr nodded to joint efforts by federal regulators to address bias in home appraisals. Last month, the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, the CFPB and the National Credit Union Administration issued two notices of proposed rulemaking, one that would establish best practices for the use of so-called automated valuation models, or AVMs, and another that would codify how borrowers could challenge appraisals that they believe to be inaccurate.

"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 said. "I am fully supportive of both these proposals because homeownership is an important way for families to build wealth, and we should give them every opportunity to share in those benefits."

Barr also gave a brief update on regulators' efforts to reform the Community Reinvestment Act, a 1970s-era regulation that encourages banks to lend in the underserved communities around their branches. The current push aims to modernize the act to account for the impacts of digital and mobile banking, which enable banks to serve areas well beyond their physical locations.

Barr did not say when a final rule would be proposed, but he noted that regulators are working to incorporate the suggestions and address the concerns raised by members of the public earlier this year.

"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," he said. "Once finalized, it is my hope and belief that this new CRA final rule, in parallel with the existing protections of the Fair Housing Act and ECOA, will support bank lending, investing and services that meet the needs of all communities, including those that continue to be underserved."