The Consumer Financial Protection Bureau (CFPB) has staked out a clear position on using artificial intelligence (AI) in financial services: There are no exceptions to existing consumer protection laws for new technologies.
In am Aug. 12 comment letter to Treasury Secretary Janet Yellen, the CFPB outlined its approach to regulating AI and other emerging technologies in the financial sector. The agency emphasized that innovation must not come at the expense of consumer protection or fair competition.
“Although institutions sometimes behave as if there are exceptions to the federal consumer financial protection laws for new technologies, that is not the case,” the CFPB stated in its letter. “Regulators have a legal mandate to ensure that existing rules are enforced with respect to all technologies, including those marketed as new or novel.”
The agency’s position comes as financial institutions increasingly adopt AI and machine learning technologies for everything from customer service to fraud detection and credit underwriting. While these technologies promise increased efficiency and potentially better outcomes for consumers, they also raise concerns about fairness, transparency and compliance with existing regulations.
CFPB General Counsel Seth Frotman and Chief Technologist Erie Meyer, who co-signed the letter, said that the agency is closely monitoring the adoption of these technologies.
“If firms cannot manage using a new technology in a lawful way, then they should not use the technology,” they wrote.
The CFPB highlighted several areas of concern, including automated customer service, fraud screening and lending and underwriting decisions. The agency warned that AI-powered customer service tools may provide incorrect information, fail to provide meaningful dispute resolution, and raise privacy and security risks.
Regarding fraud screening, the CFPB cautioned that such activities conducted as part of a transaction for a consumer financial product or service must comply with relevant laws, including the Consumer Financial Protection Act and, in some cases, the Equal Credit Opportunity Act.
For lending and underwriting decisions, the agency emphasized that the Equal Credit Opportunity Act applies regardless of the complexity of the technology used, “including when it comes to combatting unlawful discrimination or explaining how certain credit decisions are made.”
The CFPB’s approach marks a departure from previous efforts to encourage innovation through regulatory “sandboxes” and No Action Letters. The agency found that these programs “fell short of their intended purpose of encouraging pro-consumer innovation in financial markets” and sometimes resulted in waiving important consumer protections.
Instead, the CFPB is turning its focus to creating a level playing field for all market participants.
“Innovation is fostered when regulators ensure that all market participants adhere to the same set of rules and compete on a level playing field,” the letter stated.
To achieve this goal, the agency outlined several initiatives, including providing clear guidance on applying existing laws to new technologies, ensuring regulations don’t stifle competition or favor incumbents, combating anticompetitive practices and proposing rules to make it easier for consumers to switch financial service providers.
The CFPB’s stance aligns with a growing trend among regulators worldwide to scrutinize the use of AI in financial services. In Europe, the AI Act imposes strict rules on the use of AI systems in various sectors, including finance.
As part of its oversight efforts, the CFPB is taking steps to evaluate how companies are testing the algorithms they use to make lending decisions to ensure compliance with the law, including the prohibition against discrimination based on protected characteristics. The agency is also closely tracking how tech firms are expanding into banking-like services in virtual worlds and monitoring the potential misuse of generative AI tools for fraud.
Additionally, the CFPB has proposed to subject large technology companies that offer services like digital wallets and payment apps to its supervisory process, aligning oversight of their offering of consumer financial products or services with that of banks and other financial institutions.
As AI continues to reshape the financial services landscape, the CFPB’s position signals that regulators are determined to keep pace with technological change. The agency concluded its letter by emphasizing that “artificial intelligence” is just one aspect of the rapid adoption of new technologies in the consumer financial marketplace, accompanied by new risks and challenges that the CFPB is keenly focused on.
With this clear statement of intent, financial institutions and FinTech companies alike must carefully navigate the regulatory landscape as they seek to harness the power of AI and other emerging technologies. The CFPB’s approach means that innovation in financial services will be expected to occur within the bounds of existing consumer protection laws, with no special exemptions for new technologies.
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