State regulators float AI framework for banks, examiners

State regulators are setting the stage for how they will oversee artificial intelligence in lending. The Conference of State Bank Supervisors (CSBS) recently issued a new framework that gives examiners a roadmap for auditing how banks and financial institutions use AI. For retailers and operators, this means the lenders you partner with are about to face much stricter scrutiny regarding their automated approval algorithms. The guidance focuses on three specific risk tiers: operations, compliance, and safety and soundness. What this means for your business is a likely shift in how your lending partners manage their 'black box' credit models. Regators want to ensure that AI doesn't lead to discriminatory lending practices or hidden biases that could violate fair lending laws. If your primary lender uses AI to provide instant approvals for your customers, they will soon have to prove to state examiners that they fully understand why the AI is making specific 'yes' or 'no' decisions. You may see lenders become more conservative or require more documentation as they adjust their systems to meet these new transparency requirements. This is not a new law yet, but it serves as the instruction manual for the people who audit your lenders' books.

Source: Banking Dive

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