The Fed’s banking regulator warns that AI might result in unlawful lending practices like minority exclusion

Michael Barr, Vice Chairman for Oversight of the Federal Reserve Board of Governors, testifies during a House Financial Services Committee hearing on oversight of regulators May 16, 2023 on Capitol Hill in Washington, DC.

Almond Ngan | AFP | Getty Images

The Federal Reserve’s top banking regulator on Tuesday expressed caution about the impact artificial intelligence can have on efforts to ensure underserved communities have fair access to housing.

Michael S. Barr, the Fed’s vice chairman, said AI technology has the potential “to bring recognition to people who otherwise don’t have access to it.”

However, he cautioned that it can also be used for nefarious purposes, particularly to exclude certain communities from housing opportunities through a process traditionally known as “redlining.”

“While these technologies have tremendous potential, they also carry the risk of violating fair lending laws and perpetuating the very inequalities they can eliminate,” Barr said in prepared remarks for the National Fair Housing Alliance.

As an example, he said that AI could be manipulated to perform “digital redlining,” which could result in majority-minority communities being denied access to credit and housing. In contrast, “reverse redlining” occurs when “more expensive or otherwise inferior products” are shifted to minority areas in lending.

Barr said the work of the Fed and other regulators on the Community Reinvestment Act will focus on ensuring underserved communities have equal access to credit.