A bipartisan House committee has concluded that artificial intelligence (AI) will revolutionize finance and housing, bringing both groundbreaking benefits and troubling new risks that require close scrutiny.
The House Financial Services Committee’s AI Working Group was established in January by Chairman Patrick McHenry (R-Ill.) and Ranking Member Maxine Waters (D-Calif.) to examine AI’s impact on finance through a series of roundtables with regulators, market participants, and consumer advocacy groups.
In a report released Thursday, the group highlighted AI’s potential to expand access to credit, enhance fraud detection and improve customer service, but also warned of challenges around data privacy, potential bias in algorithmic decision-making and the need to ensure AI systems comply with existing laws.
“As consumers and businesses increasingly turn to the use of AI, it is important that lawmakers and regulators keep up,” McHenry said in a news release. “This report represents a bipartisan effort to understand the benefits and potential risks of artificial intelligence in the financial services and housing industries. It also highlights the need for appropriate oversight and consumer protections to address the growing number of use cases for artificial intelligence.”
The report comes as financial institutions are increasingly experimenting with advanced AI capabilities, including generative AI systems like ChatGPT. While many institutions have used traditional machine learning models for years, new AI technologies are opening up new uses.
Expanding access to credit
The AI Working Group held six roundtables to explore how the financial industry is using AI. Regulators told the group that AI could lead to bias and discrimination that could be harder to detect. They stressed that companies that use AI still must follow anti-discrimination laws. The Consumer Financial Protection Bureau said it’s a violation of the law if lenders can’t explain why AI is denying a loan.
According to the roundtable participants, banks and investment firms are adopting AI cautiously, especially in their external-facing operations. Many banks and investment firms have used machine learning for years to process data. Now, they are testing newer AI to assist in research, monitor market issues and improve trading. But there are risks: Too many companies using similar AI models could lead to herd behavior in the market.
In the home and insurance industries, AI is changing how companies do business by helping approve loans and insurance, vet renters, improve customer service, analyze data, and more.
For example, AI underwriting models have shown promise in approving more borrowers from underserved communities in mortgage lending: One company reported a 177% increase in loan approvals for Black applicants using AI-based underwriting.
But the working group also heard concerns that AI could perpetuate or exacerbate past biases in lending if not carefully designed and monitored. Consumer advocacy groups stressed the need for human oversight and the right of consumers to challenge AI-driven decisions.
Issues and Recommendations
On the regulatory front, authorities stressed at the roundtable that the use of AI does not exempt financial institutions from the obligation to comply with existing laws. The report noted: “Several regulators commented that regulated entities are expected to comply with all laws, including anti-discrimination and other consumer protection laws, in a technology-neutral manner.”
In a separate report required by President Joe Biden’s executive order on AI, the Treasury Department highlighted the cybersecurity risks posed by AI in the financial sector. The department warned of a widening technology gap between larger institutions with the resources to develop AI capabilities in-house and smaller businesses that may need to rely more heavily on third-party vendors.
The House committee report outlined several recommendations for policymakers, including ensuring financial regulators have the right tools and expertise to oversee new AI products and services, overhauling data privacy laws, and promoting U.S. leadership in setting global standards for responsible AI development in finance.
The working group also highlighted the need for clearer definitions and a common terminology regarding AI in finance, noting that there is confusion among experts about the exact meaning of terms like “machine learning” and “generative AI.”
The report did not call for immediate legislation but suggested Congress may need to address regulatory gaps as AI becomes more sophisticated and more widely adopted across the financial system.
“The Commission must ensure that regulators apply and enforce existing laws, including anti-discrimination laws, and assess regulatory gaps as market participants adopt AI,” the report said.
As AI capabilities continue to advance rapidly, the House committee’s work suggests financial regulators and lawmakers will need to remain vigilant and adaptable.
“The Committee should ensure U.S. global leadership on the development and use of AI,” the report concluded, emphasizing the importance of maintaining U.S. competitiveness while addressing potential risks.
The transformative potential of AI in finance is clear, but so are the challenges to ensuring its benefits are realized fairly and securely. The Commission’s findings lay the groundwork for ongoing discussion about how best to foster innovation while protecting consumers and maintaining the integrity of the financial system.
On Tuesday (July 23), the House Financial Services Committee will hold a hearing titled “Exploring AI Innovation: Insights into AI Applications in Financial Services and Housing” to further discuss the findings of the recent report.
