Artificial intelligence (AI) is set to revolutionize finance and housing, bringing both game-changing benefits and thorny new risks that demand vigilant oversight, a bipartisan House panel has concluded.
The House Financial Services Committee’s AI Working Group, established in January by Chairman Patrick McHenry, R-N.C., and Ranking Member Maxine Waters, D-Calif., examined AI’s impact on finance through a series of roundtables with regulators, market participants and consumer advocates.
In a report released Thursday (July 18), the group highlighted AI’s potential to expand access to credit, enhance fraud detection and improve customer service. However, it 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 look to leverage AI, it is critical that lawmakers and regulators keep pace,” 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 proper oversight and consumer protections that address the growing number of use cases for artificial intelligence.”
The report comes as financial firms increasingly experiment with advanced AI capabilities, including generative AI systems like ChatGPT. While many institutions have used traditional machine learning models for years, newer AI technologies are opening up novel applications.
The AI Working Group held six roundtables to explore how the finance industry is using AI. Regulators told the group that AI could lead to bias and discrimination that might be harder to spot. They stressed that firms using AI must still follow anti-discrimination laws. The Consumer Financial Protection Bureau said if a lender can’t explain why AI denied a loan, it’s breaking the law.
According to participants in the roundtables, banks and investment firms are cautiously adopting AI, especially for public-facing tasks. Many have used machine learning for years to crunch data. Now, they’re testing newer AI to help with research, watch for market issues and improve trading. But there are risks. Too many firms using similar AI models could cause herd-like market behavior.
In housing and insurance, AI is changing how companies work. It’s helping to approve loans and insurance, screen renters, serve customers better and analyze data.
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.
However, the working group also heard concerns that AI could perpetuate or even exacerbate historical biases in lending if it is not carefully designed and monitored. Consumer advocates stressed the need for human oversight and the right for consumers to appeal AI-driven decisions.
On the regulatory front, agencies emphasized in the roundtables that the use of AI does not absolve financial institutions from complying with existing laws. The report noted: “Several regulators commented that regulated entities are expected to follow all laws, including anti-discrimination and other consumer protection laws, in a tech-neutral manner.”
The Treasury Department, in a separate report mandated by President Joe Biden’s AI executive order, highlighted cybersecurity risks posed by AI in finance. It warned of a growing technological gap between large institutions with resources to develop in-house AI capabilities and smaller firms that may need to rely more heavily on third-party vendors.
The House panel’s report outlined several recommendations for policymakers, including ensuring financial regulators have appropriate tools and expertise to oversee new AI products and services, reviewing data privacy laws and promoting U.S. leadership in setting global standards for responsible AI development in finance.
The working group also stressed the need for clearer definitions and a common lexicon around AI in finance, noting confusion even among experts about precise meanings of terms like “machine learning” and “generative AI.”
While the report did not call for immediate legislation, it suggested Congress may need to address regulatory gaps as AI becomes more sophisticated and widely adopted throughout the financial system.
“The Committee must ensure 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 panel’s work suggests financial regulators and lawmakers will need to remain vigilant and adaptable.
“The Committee should ensure U.S. Global Leadership on AI Development and Use,” the report concluded, highlighting the importance of maintaining American competitiveness while addressing potential risks.
The transformative potential of AI in finance is clear, but so are the challenges of ensuring its benefits are realized equitably and safely. The committee’s findings set the stage for ongoing debate about how best to foster innovation while protecting consumers and maintaining the financial system’s integrity.
On Tuesday (July 23), the House Financial Services Committee will convene a hearing titled “AI Innovation Explored: Insights into AI Applications in Financial Services and Housing” to discuss the recent report’s findings in more detail.
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