5 takes on the use of AI in mortgage lending

September 14, 2022 10:00 AM

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Mortgage lenders are being urged to use new technology such as artificial intelligence, machine learning, predictive analytics and complex algorithms to offer credit to more consumers. However, there are concerns that this new way of evaluating creditworthiness will fail to eliminate the biases that certain applicants already face.

Read our roundup to learn more about how AI is being used in lending and how regulators are stepping in to monitor this evolving situation.

CHRIS RANK/Photographer: Chris Rank/Bloombe

Regulators should support adoption of fair-lending algorithms

Advances in modeling techniques using artificial intelligence and machine learning have made it possible to remove bias from lending algorithms, and thereby improving fair-lending practices, while not affecting their accuracy in predicting borrower default.

But, lenders are reluctant to implement this new technology out of concerns that they may be held accountable, and possibly sued, for previously using older algorithms that if updated were considered less fair and potentially didn't comply sufficiently with the Equal Credit Opportunity Act .

Unless financial regulators confirm that lenders will not be punished for using less discriminatory alternatives, companies will continue to use their current systems, rather than adopt new fair-lending algorithms that can make lending more inclusive.

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Regulators should support adoption of fair-lending algorithms

CFPB Sues TransUnion For Repeat Offenses

Samuel Corum/Bloomberg

Will regulators’ warnings chill lenders’ use of AI?

The increasing use of AI in determining lending decisions continues to concern the CFPB, which recently issued a further reminder to lenders of their legal requirement to provide a clear reason to consumers who are denied credit, even if it is the result of complex modeling techniques.

"The law gives every applicant the right to a specific explanation if their application for credit was denied," said CFPB Director Rohit Chopra. "That right is not diminished simply because a company uses a complex algorithm that it doesn't understand."

However, some analysts view the regulations as a way to move decisioning algorithms forward. "They're meant to enable the use of this technology, like the seat belts and airbags and antilock brakes that will enable us to go much faster on this new highway," said Deloitte partner Alexey Surkov. "Without those technologies, we'd be going 15 miles an hour, like we did a hundred years ago."

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Will regulators' warnings chill lenders' use of AI?

CFPB reiterates skepticism of AI in fair-lending report

While technology such as AI, ML and complex algorithms can transform fair lending and expand access to credit, it needs to overcome historical biases and structural discrimination that have excluded minorities and people of color, said a CFPB fair-lending report.

"The mission of fair lending is to break these discriminatory patterns and practices and to promote access to credit to create fairer markets for all," said Patrice Ficklin, the CFPB's fair-lending director.

As new technology continues to emerge, the CFPB plans to "focus on digital redlining and algorithmic bias" to fight against discriminatory and unfair practices.

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CFPB reiterates skepticism of AI in fair-lending report

Why this credit union says AI can reduce lending bias

The CFPB may be concerned about AI exacerbating discrimination and bias in lending, but GreenState Credit Union believes the technology can help them reach new, previously underserved customers and is teaming up with fintech Zest AI to expand its lending base

"Our primary reason for the partnership with Zest is to go deeper with lending to women and people of color" in the communities we serve, said Amy Henderson, chief consumer services officer at GreenState.

The collaboration will allow the credit union to evaluate and potentially approve more customers in underserved communities by utilizing an ML-based algorithm in its underwriting instead of relying just on FICO scores.

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Why this credit union says AI can reduce lending bias

CFPB warnings of bias in AI could spook lenders

Lenders with aspirations to utilize AI, ML and complex algorithms to expand credit to more consumers may be re-thinking their strategy, given CFPB director Rohit Chopra's well-documented concerns about the use of these tools in lending.

"The CFPB will be digging hard on documentation of AI models," said Christopher Willis, a partner at Ballard Spahr. "There is an effort to warn the industry, and particularly the fintech side, not to get too creative with the data they ingest and use in making credit decisions."

But, those who are undeterred must follow the rules. "Any use of newer algorithm technologies like ML needs to be thoroughly documented in terms of its business purpose, accuracy and transparency, and it needs to be subjected to a rigorous fair-lending analysis," said Willis.

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CFPB warnings of bias in AI could spook lenders