Editorial: Caution is needed in use of AI for lending

Artificial intelligence has insinuated its way into our daily lives, whether we are aware. From opening our smartphones with facial recognition, to travel and commuting assistance, to personalizing our feeds on social media, AI is with us from dawn to dusk and beyond.

But, there is a concerning new use for AI on the horizon. AI and machine learning could be tapped by the lending industry in making loan decisions.

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It’s a prospect that has sparked warnings from consumer advocates, pundits and even banks.

Federal bank regulators have asked for comment on the matter, and while there’s interest in the prospect, there’s also rightly expressed concern about discrimination and fair lending.

FinRegLab, a Washington-based research group that has launched a broad inquiry into the use of AI in financial services, has said machine learning could be transformational. It could forestall increased cost and risk associated with using more traditional tools for assessing the worthiness of a particular customer (a person or a business.)

But there’s another kind of risk, a pitfall that must be avoided: AI and machine learning could fan historical discrimination and financial exclusion. One advocacy group put it bluntly: “The use of complex, opaque algorithmic models in consumer credit transactions also heightens the risk of unlawful discrimination and unfair deceptive and abusive practices,” wrote the National Consumer Law Center in Boston.

Jo Ann Barefoot, a former deputy comptroller of the currency and Senate Banking Committee staff member who now leads the Alliance for Innovative Regulation in Washington, said there are numerous possible benefits to the use of AI in credit underwriting. But she warned that regulators need to ensure that banks comply with fair lending laws and that machine learning doesn’t lead to denials of credit based on prohibited reasons such as race and gender.

And she acknowledged it would be a “very hard issue to regulate.”

The Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau and National Credit Union Administration are reported to be working together on information gathering toward the goal of uniformity and transparency.

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There is a history of bias in the financial industry. All measures must be taken to ensure that artificial intelligence and machine learning does not create or perpetuate unfairness.

Fair lending is essential. It is at the foundation of such American ideals as owning a home or starting a business. The watchword moving forward must be caution.