Increased Focus by Federal Regulators on AI and Consumer Protection in the Financial Sector
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Key takeaways:
- On October 22, 2021, the DOJ, CFPB, and OCC announced a new interagency initiative to combat redlining that suggests greater scrutiny of black box underwriting algorithms and the use of potential proxies for protected classes, as well as an enforcement focus on disparate impact claims.
- Noting the speed with which financial institutions are turning their lending decisions over to algorithms, CFPB Director Rohit Chopra warned that both banks and non-bank lenders will not be able to use black box algorithms as a shield from liability and that the Bureau will focus particularly on large companies and repeat offenders, with some leeway given to companies that self-identify violations.
- Concerns around the use of technology extend beyond discrimination in lending. The FTC has become increasingly vocal about consumer disclosures and transparency around AI, recently publishing blog posts emphasizing that companies must ensure their AI tools are transparent, explainable, fair, empirically sound, and accountable. Additionally, public statements and recent enforcement actions by the SEC also signal the regulator’s intent to scrutinize the use of AI in the provision of financial services, including automated trading and wealth management tools.
- These developments suggest an increased focus by federal regulators on consumer protections related to the use of artificial intelligence in the financial industry. Companies should prepare for potential supervisory examinations and enforcement actions by adopting measures to mitigate legal, regulatory, and reputational risks related to their AI use.