CFPB signals focus on AI in loan underwriting

The Consumer Financial Protection Bureau indicated it will focus on the use of artificial intelligence in loan underwriting and will take enforcement action if algorithmic underwriting models create a disparate impact on borrowers.

Algorithm Attention: In its latest report to Congress describing its fair lending enforcement priorities and statistics, the CFPB said:

• Advanced algorithmic technologies, as well as older technology marketed as AI, are often used throughout the life cycle of financial services products.

• It is keenly focused on the risks that these technologies present to individual consumers, small businesses, communities, and the market.

• It was founded in the wake of the 2008 financial crisis, when products initially billed as new and innovative resulted in harm to consumers and communities, and it will heed the lessons from that crisis.

• Product benefits based on atypical use cases should be questioned and tested to protect consumers and small businesses from future harm “cloaked in vague promises of innovation and inclusion.”

AVM Proposal: The CFPB also spotlighted an interagency proposed rule designed to implement quality control standards for automated valuation models, or AVMs, used by mortgage originators and secondary market issuers in valuing real estate collateral securing mortgage loans. Under the proposed rule, the agencies would require institutions that engage in covered transactions to adopt systems to ensure AVMs adhere to quality control standards designed to ensure the credibility and integrity of valuations.

ICBA View: In a comment letter to the CFPB last year, ICBA said regulators should avoid burdensome rules on AVMs, particularly for the community banks using these models to make underwriting decisions and find comparable values in rural areas. ICBA plans to submit comments on the interagency proposal.