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How Generative AI is Impacting Auto Lending Compliance

Auto lenders, like leaders in other business sectors, are grappling with the current wave of excitement over generative AI. Many professionals have already seen a coworker or vendor pitch a generative AI use case. It seems as though half the room is significantly impressed, while the other half is waiting for a negative consequence or reaction knowing it was computer generated. The safe bet is that this technology will bring significant changes to auto lending.

Compliance Risks
From my perspective, this AI “Gold Rush” will have an equivalent impact on the compliance landscape. First, like any new technology, generative AI has its own risks. These include: copyright and IP infringement, discrimination, fraud, and privacy violations. When companies deploy generative models, compliance teams must monitor these emerging risks.

But, there is a second less obvious compliance change coming – regulators shifting priorities. Even if your company is conservative about using generative AI, you must recognize that regulators are redeploying their finite resources to address the technology. And this redeployment intensely focuses on issues of bias, discrimination and unfairness.

CFPB Focus
The recent CFPB Fair Lending Report published in late June is an example of this shift. Every year, the CFPB publishes this statutorily required report on its enforcement of federal fair lending laws. The current report’s discussion of future CFPB activities states the CFPB is, “focused on increased use of advanced and emerging technologies in financial services.”

The report adds that the CFPB, “is increasing its expertise in data science and analytics in order to identify fair lending violations at each stage of the credit lifecycle and hold creditors and service providers accountable for fully complying with fair lending and other federal consumer financial laws, regardless of the technology they choose to use.”

So, the CFPB will devote more money, resources and attention to examining AI systems for discrimination.

The CFPB’s view of AI is cautious, if not skeptical. Other Agencies also have put AI in the crosshairs. In the recent Joint Statement, the Federal Trade Commission, the Equal Opportunity Commission, and the Department of Justice have committed to vigorously pursuing enforcement actions against unlawful bias or discrimination by AI systems.

What does all of this mean for the industry?
What does this regulatory focus on AI mean for auto lenders?  It means more scrutiny of your lending operations for unfairness and discrimination, whether you use AI or not.  In particular, take note of the CFPB’s statement that it intends to look for risks across the lending cycle. The regulators aren’t just looking at how you approve loans. They’re watching your advertising and application process, collections, and the sale and administration of ancillary products in your deal jackets.

On the positive side, and what is often left out of recent headlines, is the extraordinary power of AI to reduce harm, including fair lending and discrimination risks. The right AI technology helps counter perceived risks of AI with tools and compliance dashboards.

Using AI for successful outcomes
The software today leverages advanced AI technology to simplify and automate the process of collecting and analyzing data, with the goal of helping to fund loans as quickly and efficiently as possible while lowering cost to fund, lowering the cost of processing GAP refunds for early payoffs, improving compliance, and lowering the cost of regulatory Matters Requiring Attention (MRAs) and consent decrees related to unfair, deceptive, or abusive acts and practices (UDAAPs).

Like financial providers across all industries, auto lenders are not AI/ML experts, and it’s not their core competency, so they understand the importance of finding quality outside experts in AI/ML today who can help. Trusted partners are being tapped to help catch these loan defects, where improper deals can be flagged if not ready for funding. AI software allows funders to focus on complete deals, enabling their teams to quickly address any identified issues with dealers. It also enables automation of dealer defects, instantly notifying dealers of document defects to reduce contracts-in-transit, and fund deals faster while reducing compliance and regulatory risk.

Tom Oscherwitz
Tom Oscherwitz
Tom Oscherwitz is VP of Legal and Regulatory Advisor at Informed.IQ, an AI software company with a specialty in auto lending. He has over 25 years of experience as a senior government regulator (CFPB, U.S. Senate) and as a fintech legal executive working at the intersection of consumer data, analytics, and regulatory policy. Contact him at [email protected].
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