AI's potential is recognized by Barr, yet he cautions about the danger of inherent biases
In a speech at a National Fair Housing Alliance conference, Michael Barr, the Federal Reserve's Vice Chair of Supervision, emphasized the importance of adopting sound credit policies and maintaining strong compliance management practices to advance a safer and fairer financial system.
Barr's remarks came as part of the ongoing effort to revise the Community Reinvestment Act (CRA), an initiative jointly proposed by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation in May 2022. The revised CRA will focus on smaller-value loans and investments that would have a 'high impact' on underserved communities, particularly poor neighborhoods.
Large banks will now be able to consider community development activities nationwide as a separate metric. The revamped CRA will subject banks to up to four separate tests for retail lending, retail services and products, community development financing, and community development services.
Barr voiced his support for two efforts aimed at addressing discrimination in appraisals and bias in housing mortgage credit transactions. He warned about the potentially discriminatory consequences of too heavy a reliance on artificial intelligence, highlighting the risk of digital redlining or the use of criteria to exclude majority-nonwhite communities or nonwhite borrowers.
New technologies can also result in 'reverse redlining,' steering more expensive or inferior products to nonwhite communities. Barr emphasized that 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.'
The revised CRA proposal allows large banks to consider areas with concentrations of mortgage and small-business lending. Regulators will evaluate whether companies have proper risk management and controls, including with respect to new AI technology.
Barr also voiced his support for initiatives to ensure the credibility and integrity of automated valuation models and 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.
Deficient collateral valuations can contain inaccuracies because of errors, omissions, or discrimination that affects the value of the appraisal. A reconsideration of value may help to properly value the real estate.
In conclusion, Barr stressed that fair lending is safe and sound lending. He urged banks to adopt sound credit policies that include fair lending principles and controls on loan officer discretion to ensure a safer and fairer financial system for all. The agencies involved are currently working on finalizing the rule, although specific names and details about who is currently participating in the latest revision process or the exact expected publication date of the revised regulation are not available at this time.
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