Beautiful Virgin Islands

Tuesday, Jun 03, 2025

The financial sector is adopting AI to reduce bias and make smarter, more equitable loan decisions. But the sector needs to be aware of the pitfalls for it to work.

The financial sector is adopting AI to reduce bias and make smarter, more equitable loan decisions. But the sector needs to be aware of the pitfalls for it to work.

The financial sector has a long history of making inequitable loan decisions.

Redlining, a discriminatory practice that started in the 1930s, is when a bank denies a customer a loan because of their ZIP code. These institutions physically drew a red line around low-income neighborhoods, segregating these residents from any opportunity to borrow money.

Redlining disproportionately affects Black Americans and immigrant communities. This denies them opportunities like homeownership, starting a small business, and earning a postsecondary education.

While it became illegal in 1974 for lenders to reject loans based on race, gender, or age under the Equal Credit Opportunity Act, studies have found laws did little to lessen lending disparities.

The rise of machine learning and big data means decisions can be controlled for human bias. But just adopting the tech isn't enough to overhaul discriminatory loan decisions.

A 2019 analysis of US Home Mortgage Disclosure Act data by The Markup, a nonprofit dedicated to data-driven journalism, found lenders nationwide were nearly twice as likely to deny Black applicants as they were to reject similarly qualified white applicants despite adopting machine-learning and big-data tech. Latinos, Asians, and Native Americans were also denied mortgages at higher rates than white Americans with the same financial background.

Governments around the world have indicated there will be a crackdown on "digital redlining," where algorithms discriminate against marginalized groups.

Rohit Chopra, the head of the US's Consumer Financial Protection Bureau, said there should be harsher penalties for these biases: "Lending algorithms can reinforce bias," he told The Philadelphia Inquirer. "There's discrimination baked into the computer code."

Meanwhile, politicians in the European Union plan to introduce the Artificial Intelligence Act for stricter rules around the use of AI in filtering everything from job and university applicants to loan candidates.


Bringing bias to light


It's easy to blame technology for discriminatory lending practices, Sian Townson, a director at Oliver Wyman's digital practice, told Insider. But it doesn't deserve the responsibility.

"Recent discussions have made it sound like AI invented bias in lending," she said. "But all the computational modeling has done is quantify the bias and make us more aware of it."

While identifiers like race, sex, religion, and marital status are forbidden to be considered in credit-score calculations, algorithms can put groups of people at a disadvantage.

For instance, some applicants may have shorter credit histories because of their religious beliefs. For example, in Islam, paying interest is seen as a sin. This can be a mark against Muslims, even though other factors may indicate they would be good borrowers.

While other data points, like mobile payments, are not a traditional form of credit history, Townson said, they can show a pattern of regular payments. "The aim of AI was never to repeat history. It was to make useful predictions about the future," she added.


Testing and correcting for bias


Software developers like the US's FairPlay — which recently raised $10 million in Series A funding — have products that detect and help reduce algorithmic bias for people of color, women, and other historically disadvantaged groups.

FairPlay's customers include the financial institution Figure Technologies in San Francisco, the online-personal-loan provider Happy Money, and Octane Lending.

One of its application-programming-interface products, Second Look, reevaluates declined loan applicants for discrimination. It pulls data from the US census and the Consumer Financial Protection Bureau to help recognize borrowers in protected classes, given financial institutions are forbidden to collect information directly about race, age, and gender.

Rajesh Iyer, the global head of AI and machine learning for financial services at Capgemini USA, said lenders could minimize discrimination by putting their AI solutions through about 23 bias tests. This can be done internally or by a third-party company.

One bias test analyzes for "disproportionate impact." This detects whether a group of consumers is being more adversely affected by AI than other groups — and, more importantly, why.

Fannie Mae and Freddie Mac, which back the majority of mortgages in the US, recently found people of color were more likely to list their source of income from the "gig economy." This disproportionately stopped them from getting mortgages because gig incomes are seen as unstable, even if someone has a strong rent-payment history.

In looking to make its lending decisions fairer, Fannie Mae announced it would start factoring rental histories into credit-evaluation decisions. By inputting new data, humans essentially teach the AI to eliminate bias.


Human feedback to keep AI learning


AI can learn only from the data it receives. This makes a feedback loop with human input important for AI lending platforms, as it enables institutions to make more equitable loan decisions.

While it's good practice for humans to weigh in when decisions are too close to call for machines, it's essential for people to review a proportion of clear-cut decisions, too, Iyer told Insider.

"This ensures that the solutions adjust themselves, as it gets inputs from the human reviews through incremental or reinforced learning," Iyer said.

Newsletter

Related Articles

Beautiful Virgin Islands
0:00
0:00
Close
Dutch government falls as far-right leader Wilders quits coalition
Harvard Urges US to Unfreeze Funds for Public Health Research
Businessman Mauled by Lion at Luxury Namibian Lodge
Researchers Consider New Destinations Beyond the U.S.
53-Year-Old Doctor Claims Biological Age of 23
Trump Struggles to Secure Trade Deals With China and Europe
Russia to Return 6,000 Corpses Under Ukraine Prisoner Swap Deal
Microsoft Lays Off Hundreds More Amid Restructuring
Harvey Weinstein’s Publicist Embraces Notoriety
Macron and Meloni Seek Unity Despite Tensions
Trump Administration Accused of Obstructing Deportation Cases
Newark Mayor Sues Over Arrest at Immigration Facility
Center-Left Candidate Projected to Win South Korean Presidency
Trump’s Tariffs Predicted to Stall Global Economic Growth
South Korea’s President-Elect Expected to Take Softer Line on Trump and North Korea
Trump’s China Strategy Remains a Geopolitical Puzzle
Ukraine Executes Long-Range Drone Strikes on Russian Airbases
Conservative Karol Nawrocki wins Poland’s presidential election
Study Identifies Potential Radicalization Risk Among Over One Million Muslims in Germany
Good news: Annalena Baerbock Elected President of the UN General Assembly
Apple Appeals EU Law Over User Data Sharing Requirements
South Africa: "First Black Bank" Collapses after Being Looted by Owners
Poland will now withdraw from the EU migration pact after pro-Trump nationalist wins Election
"That's Disgusting, Don’t Say It Again": The Trump Joke That Made the President Boil
Trump Cancels NASA Nominee Over Democratic Donations
Paris Saint-Germain's Greatest Triumph Is Football’s Lowest Point
OnlyFans for Sale: From Lockdown Lifeline to Eight-Billion-Dollar Empire
Mayor’s Security Officer Implicated | Shocking New Details Emerge in NYC Kidnapping Case
Hegseth Warns of Potential Chinese Military Action Against Taiwan
OPEC+ Agrees to Increase Oil Output for Third Consecutive Month
Jamie Dimon Warns U.S. Bond Market Faces Pressure from Rising Debt
Turkey Detains Istanbul Officials Amid Anti-Corruption Crackdown
Taylor Swift Gains Ownership of Her First Six Albums
Bangkok Ranked World's Top City for Remote Work in 2025
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
White House Press Secretary Criticizes Harvard Funding, Advocates for Vocational Training
France to Implement Nationwide Smoking Ban in Outdoor Spaces Frequented by Children
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
U.S. Justice Department Reduces American Bar Association's Role in Judicial Nominations
U.S. Department of Energy Unveils 'Doudna' Supercomputer to Advance AI Research
U.S. SEC Dismisses Lawsuit Against Binance Amid Regulatory Shift
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
×