Traders work on the floor of the New York Stock Exchange (NYSE) in New York, USA, Friday, June 28, 2024. Wall Street traders pushed stocks to record highs as signs of subdued inflation boosted their bets that the Federal Reserve could start cutting interest rates this year. Photo by Michael Nagle/Bloomberg via Getty Images
After a series of meetings with industry players, a working group of the House Financial Services Committee concluded that housing and finance are the two sectors of the economy where government regulation of artificial intelligence (AI) is most needed.
In its new report, the working group said the Commission “should play a leading role in overseeing the adoption of AI in the financial services and housing industries.”
The report was produced by the 12-member House Financial Services Committee AI Working Group, which was formed in January and includes both Democrats and Republicans, and was led by its chair, Rep. Patrick McHenry (R-North Carolina), and its ranking committee member, Rep. Maxine Waters (D-Calif.).
It paints a picture of AI permeating numerous financial subsectors and becoming embedded in the transactional fabric of the economy.
The report paints a picture of AI being used for widespread oversight in capital markets, raising questions about the extent to which traditional forces still play a role in securities markets where algorithms drive up to 70% of daily trading, according to market researchers and former Federal Reserve bankers.
Brokers and investors told the committee that AI reduces the level of price volatility, including through trade timing.
The report also details how AI is pervasive across business practices, including loan underwriting, fraud detection, debt collection and even customer service in general.
The working group's analysis looks at questions about privacy and how much information companies can obtain about their customers through their use of AI.
In one example, a company notified the Commission about its use of “computer vision technology to verify know-your-customer (KYC) information” as a fraud prevention measure.
In the housing sector, companies are using AI for mortgage and insurance underwriting, tenant screening, and data analysis.
The commission said such use challenges fair housing practices, consumer protections and anti-discrimination laws.
“AI can lead to bias and discrimination, and a lack of explainability can make such results difficult to detect,” the report said.
Regulators involved in the discussions noted that companies would be required to “comply with all laws, including anti-discrimination and other consumer protection laws, in a technology-neutral manner.”
AI and algorithms have come under widespread scrutiny recently in various sectors of the economy in the context of corporate pricing strategies, with authorities and researchers pointing out that they could lead to price manipulation and effectively turn competitive industries into cartels.
The Department of Justice recently became involved in a lawsuit involving the New Jersey hospitality industry, filing a statement of interest in the “Algorithmic Price Fixing of Hotel Rooms Case.”
“Firms across the economy are increasingly using algorithms to determine prices. When a few algorithm providers are able to influence key segments of the market, competitors can take advantage of the algorithm providers to facilitate collusion,” the Department of Justice said in a March statement.
“Even if competitors do not communicate with each other directly, they cannot lawfully cooperate to set prices, whether through staff or algorithms,” the agency warned.
Academic studies have confirmed the cartelizing effect of algorithmic pricing.
“Wide adoption of the same algorithms could lead to price corrections, resulting in higher prices,” University of Pennsylvania researchers concluded in a 2023 study of software used in the multifamily rental market.
The researchers found that algorithmically adjusted markets “have higher rents and lower occupancy rates” and that the patterns they observed are “consistent with either algorithmic price adjustments or widespread mispricing.”
Algorithmic price manipulation has attracted the attention of investigative journalists and lawmakers in recent years.
In 2022, ProPublica investigators found that 70% of rents for apartments and houses managed by 10 property management companies in one Seattle neighborhood were all set using pricing software from a single company, RealPage, raising questions about the extent to which the “market” functions in an algorithmic pricing environment.
“Not only does RealPage provide its customers with access to anonymous, non-public information, but it has also established the RealPage Users Group, a forum that encourages landlords to collaborate on issues like revenue management,” Sens. Elizabeth Warren (D-Mass.), Tina Smith (D-Minn.), Edward Markey (D-Mass.) and Bernie Sanders (Independent-Vermont) wrote in a letter to the company in 2022.
The report, released Thursday, also looked at different pricing behaviors made possible by sophisticated algorithms known as surge pricing and dynamic pricing, where prices change from moment to moment.
One housing sector expert told the committee that dynamic pricing needed oversight, pointing to “the potential for cooperation among market participants in dynamic pricing algorithms.”
The official said federal agencies should consider using rent-setting technology.
There are growing calls internationally for regulating AI.
In Britain, where a new Labour government came to power promising major reforms after 14 years of Conservative rule, technology advocates say they want to see more work done on AI.
“My concern about the way the current government is approaching AI is that they're not being inclusive, they're not consulting with leading academics and researchers but also others in civil society,” technology critic Stephanie Hare told the BBC on Wednesday.
Updated 2:06 p.m.
