Artificial Intelligence's potential applauded, yet concern over bias raised by Barr
Michael Barr, the Federal Reserve's vice chair of supervision, recently spoke at a National Fair Housing Alliance conference, discussing the status of the proposed revision of the Community Reinvestment Act (CRA). Barr, who is set to step down as the Fed chair, emphasized the importance of fair lending in the financial system.
Barr highlighted two key efforts to address discrimination in appraisals and bias in housing mortgage credit transactions. He stressed that "fair lending is safe and sound lending," underscoring the importance of fair practices in the financial sector.
The proposed revision of the CRA, first announced in May 2022, is yet to have a finalized version, with no timeline given as of the conference. The agencies are working diligently to finalize the rule, aiming to ensure a fair and inclusive financial system.
Barr also warned about the potential discriminatory consequences of over-reliance on artificial intelligence (AI). He pointed out that the risk of bias is amplified when a model is opaque and lacks a sufficient degree of explainability. This is particularly concerning in the context of appraisals, where deficient collateral valuations can contain inaccuracies due to errors, omissions, or discrimination that affects the value of the appraisal. A reconsideration of value may help to properly value the real estate, Barr suggested.
Regulators are evaluating whether companies have proper risk management and controls, including with respect to new AI technology. Lenders should be aware of potential digital redlining or steering more expensive or inferior products to nonwhite communities, Barr cautioned.
In concluding his speech, Barr emphasized the role banks can play in advancing a safer and fairer financial system. By adopting sound credit policies that include fair lending principles and controls on loan officer discretion, and by maintaining strong compliance management practices, banks can contribute to a fairer financial system, Barr stated.
The Federal Reserve, under Barr's leadership, continues to prioritize fair lending and the prevention of bias in the financial sector, setting a strong foundation for the future of the US banking industry.
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