Federal Reserve Raises Alarm Over Illegal AI Lending Practices
Key takeaways
- The Fed’s vice-chair of supervision is worried an illegal lending practice, “redlining,” could make its way into AI in the sector
- He also noted the positive benefits of AI in the industry if it can be harnessed properly
- The U.S. Senate is set to have another hearing on regulating AI next week
The Fed is officially concerned about AI’s impact on the future of lending. While top executives have noted the positive impact the shiny new tech could have on the industry, there’s the potential for an old discriminatory tactic to rear its head again if AI is left unchecked. Find out what the issue is below.
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What’s the Fed said?
The Fed’s top banking regulator came out guns blazing in a speech for the National Fair Housing Alliance about AI being used to hinder fair access to lending. Michael S. Barr, the vice-chair for supervision at the Fed, said he thinks artificial intelligence could encourage a practice called ‘redlining’.
What is it? Redlining is where certain communities are excluded from housing and lending opportunities, and ‘reverse redlining’ is when more expensive loans and products are pushed onto those who can least afford them.
While Barr said AI could help get credit to “people who otherwise can’t access it,” the redlining danger would need to be carefully managed. “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 commented.
What’s the latest on AI regulation?
While Barr noted the Fed is apparently looking into reworking the Community Reinvestment Act to help safeguard against AI being used for nefarious purposes in lending, there’s a glaring hole in U.S. legislation right now that needs urgent attention.
A series of hearings are taking place to help lawmakers understand how to regulate AI: OpenAI’s CEO Sam Altman has already taken part in a congressional hearing alongside other AI experts. AI start-up Anthropic AI’s CEO, Dario Amodei, is set to testify at an upcoming U.S. Senate hearing next week.
The subcommittee chair, Democratic Senator Richard Blumenthal, said about the hearing “It’s our obligation to address AI’s potential threats and risks before they become real.” Well, better get cracking — the EU has already beaten the rest of the world to it.
The bottom line
The Fed’s comments around AI are perfectly valid, with AI having the potential to make lending more straightforward and accessible for certain communities as long as it’s properly regulated. We’re now left in the hands of U.S. lawmakers for any progress — and they can’t move fast enough to regulate the burgeoning tech.
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