Washington D.C. — Today, the Bank Policy Institute (BPI) and Covington & Burling LLP published a white paper that identifies outdated regulatory frameworks hindering the adoption of responsible artificial intelligence (AI) practices within the financial services industry. The paper provides a background on the current regulatory framework that applies to AI underwriting and proposes the regulatory agencies take joint efforts to coordinate and modernize existing rules. The use of AI in financial services has enormous potential to improve underwriting and expand access to credit, most notably among underserved communities frequently excluded from the FICO-based credit system.
“A traditional FICO-based credit score is a helpful but limited metric. The score effectively bars from bank credit those with limited credit histories, such as young consumers and immigrants, and does not always provide a complete and accurate picture of a consumer’s ability to repay,” stated BPI President and CEO Greg Baer. “The recommendations outlined in the white paper would enable institutions to implement credit-scoring models that are dynamic, inclusive and further the goal of broadening access to the financial system.”
“We are pleased to be partnering with BPI to help regulators focus on the constructive role artificial intelligence can play in assessing consumers’ creditworthiness. Just as computers improved underwriting a generation ago, AI offers a leap forward towards credit decisions that are fairer and more inclusive,” added Covington Partner Eric Mogilnicki and Of Counsel David Stein “This white paper is designed to advance the conversation about how regulators can facilitate this innovation while preserving core commitments to transparency and fair lending.”
As part of the recommendations, the white paper establishes a set of critical objectives that the regulatory agencies should strive to achieve:
- The distinct features of AI should be recognized, and regulatory treatment of AI models should apply equally to both banks and nonbanks;
- Regulatory agencies should produce a single set of expectations that are applied consistently by all federal financial regulatory agencies;
- Changes to the framework should distinguish regulatory principles from regulatory practices, and regulators should reevaluate, update and improve these practices over time to accommodate for the dynamic and evolving nature of non-traditional AI models; and
- When a modernized regulatory framework takes shape, transparency should remain a priority. This framework, whether issued jointly or in consultation and coordination among agencies, should be made available so that all stakeholders can understand how AI may be used in credit underwriting.
In preparation for the release of the white paper, BPI solicited feedback from numerous stakeholders through a discussion draft published in late 2019. BPI also hosted an event on Capitol Hill attended by leading policymakers, academics and lawmakers, including House Financial Services Committee Trask Force on Artificial Intelligence Chair, Representative Bill Foster (D-IL) and Ranking Member, French Hill (R-AR).
About the Bank Policy Institute. The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.
About Covington & Burling LLP. In an increasingly regulated world, Covington & Burling LLP provides corporate, litigation, and regulatory expertise to help clients navigate their most complex business problems, deals, and disputes. Founded in 1919, the firm has more than 1,000 lawyers in offices in Beijing, Brussels, Dubai, Frankfurt, Johannesburg, London, Los Angeles, New York, Palo Alto, San Francisco, Seoul, Shanghai, and Washington.