ACT 3: The Financial Infrastructure Decentralization Act (FIDA)#

The Algorithm Diversity Mandate: Preventing 2008-Style Correlated Collapse at Millisecond Speed

The Systemic Risk:

By 2027, 87% of banks will be using one of three foundation model families (GPT, Claude, Gemini) for credit risk workflows. The Financial Stability Board’s October 2025 report explicitly warns this algorithmic homogenization creates a 2008 VaR model replay—but at millisecond speed instead of weeks.

When homogenized AI models simultaneously tighten credit (T+100ms), trading algorithms dump the same assets (T+50ms), and supply chain AIs cancel orders (T+200ms), the cascade completes before a human regulator can convene an emergency meeting.

This is not consumer protection legislation. This is systemic risk mitigation for the age of machine-speed panics.

Legislative Framework: Mandating Model Diversity to Prevent Synchronized Collapse#

GOAL: Ensure no single AI model or vendor controls >30% of credit decisions at systemically important financial institutions (SIFIs), preventing correlated failure modes.

PRIMARY MECHANISM: Mandatory algorithmic diversity requirements for banks with >$50B in assets, enforced through Federal Reserve stress testing and capital requirements.

IMPLEMENTATION STRUCTURE:

Tier 1: Algorithmic Pluralism Requirements

Banks designated as SIFIs must maintain:

• Minimum 2 independent credit scoring models from different vendors OR 1 vendor + 1 in-house developed model
• Maximum 30% reliance on any single foundation model family for credit decisioning
• Quarterly diversity audits demonstrating heterogeneity in model architectures, training data, and decision logic
• No single vendor lock-in: Must be able to switch primary vendor within 12 months (vs. current 24-36 month switching costs)

Tier 2: Right to Human Review

Any algorithmic denial of critical financial services triggers mandatory human review rights:

• Credit denials >$10,000: Borrower can request human underwriter review within 10 business days
• Account closures: 30-day notice required with specific, explainable justification (not “risk model flagged”)
• ESG compliance denials: Must cite specific regulatory violation, not automated “low ESG score”
• Burden shift: Bank must prove decision was reasonable, not borrower proving discrimination

Tier 3: Vendor Accountability & Liability

Currently, when AI denies a loan incorrectly:

• Bank claims “We followed the model’s recommendation”
• Vendor claims “We provide a tool, not a decision”
• No one accepts responsibility

New Liability Structure:

• Strict Liability for Vendors: If model produces discriminatory outcomes (40+ point credit score gaps for protected classes), vendor is liable for damages
• No Contractual Waivers: Cannot contract away liability for civil rights violations
• Mandatory Insurance: Model vendors must carry $100M+ errors & omissions insurance for deployment at SIFIs
• Explainability Requirement: Must provide human-comprehensible explanation for any denial (not “the neural network weighted features X, Y, Z”)

LEGAL PRECEDENT:

Builds on existing frameworks:

• Community Reinvestment Act (1977): Extended to algorithmic lending
• Fair Credit Reporting Act: Applied to AI credit models
• Algorithmic Accountability Act (2022 proposal): Mandates impact assessments for high-risk AI systems
• EU AI Act (2024): High-risk AI systems require transparency, human oversight, conformity assessments

NEW AUTHORITY: Classifies foundation models used in systemic credit decisions as “Critical Financial Infrastructure” under Dodd-Frank Act Section 804, subjecting them to Federal Reserve supervision and stress testing.

IMPLEMENTATION TIMELINE:

• Year 1 (2025): Legislative passage, Federal Reserve rule-making, SIFI identification
• Year 2 (2026): SIFIs submit diversity transition plans, begin vendor diversification
• Year 3 (2027): Diversity requirements in effect, first stress tests incorporating algorithmic homogenization risk
• Year 4 (2028): Human review infrastructure operational, vendor liability cases establishing precedent
• Year 5 (2029): Full compliance, demonstrable model heterogeneity across banking sector

KEY PROVISIONS:

Section 1: Algorithmic Diversity Requirements

• Scope: Banks with >$50B assets (approximately 35 institutions, controlling 70% of US deposits)
• Compliance Metric: No >30% of credit decisions can rely on models sharing same:
  • Foundation model architecture (e.g., all using GPT-4 as base)
  • Training data corpus (>40% overlap)
  • Vendor (same company providing primary model)
• Enforcement: Non-compliance triggers increased capital requirements (additional 2% tier 1 capital ratio)
• Stress Testing: Annual “Black Swan” scenario testing correlated AI failure (what happens if primary vendor has 24-hour outage)

Section 2: Mandatory Human Review Rights

• Trigger Thresholds:
  • Any credit denial >$10,000
  • Account closure for any reason
  • Insurance denial >$5,000 annual premium
  • “High-risk” classification affecting credit terms
• Review Timeline: Bank must complete human review within 10 business days
• Burden of Proof: Bank must demonstrate decision was reasonable given human-understandable factors
• Penalty: If reversal rate >10%, bank faces enhanced scrutiny and potential penalties

Section 3: Vendor Strict Liability

• Disparate Impact Safe Harbor Removed: Vendors cannot claim “we didn’t intend discrimination” if model produces:
  • 40+ point credit score gaps for protected classes with similar risk profiles
  • Universal rejection effects (all vendors denying same individual due to model homogenization)
  • Geographic redlining patterns (systematic denial by zip code correlating with race/income)
• Damages: Statutory damages of $10,000 per discriminatory denial + actual damages
• Insurance Requirement: Vendors must maintain insurance covering potential class-action liability
• Right to Audit: Regulators can demand full model audits, including training data, weights, architecture

Section 4: Community Reinvestment Modernization

• CRA Applied to Algorithms: Banks must demonstrate AI models do not systematically exclude CRA-designated communities
• Local Investment Requirement: 5% of assets in community development financial institutions (CDFIs) or local credit unions
• Alternative Data Mandate: Must consider non-traditional credit data (rental history, utility payments, gig economy income) for “thin file” applicants

QUANTIFIED IMPACT PROJECTIONS:

• Systemic Stability: Reduces correlated collapse risk by 60-80% (Fed modeling of heterogeneous decision systems)
• Financial Inclusion: Estimated 2-5 million additional Americans gain access to credit through human review rights and alternative data
• Algorithmic Accountability: Vendor liability creates market incentive for fairness—insurance costs drive model improvements
• Competition: Breaking vendor lock-in reduces switching costs from $50-200M to $10-30M, enabling competitive procurement
• Consumer Protection: 10-business-day human review prevents “algorithmic exile” where all vendors deny simultaneously

BIPARTISAN FRAMING:

• Conservative Appeal: Anti-monopoly, reducing big tech control over finance, protecting community banks, consumer rights
• Progressive Appeal: Civil rights enforcement, reducing algorithmic discrimination, financial inclusion, accountability for tech giants
• Libertarian: Individual rights, human agency over automated systems, reducing unaccountable corporate power

WHY 2025 PASSAGE IS CRITICAL:

By 2027, banks will have completed 18-24 month AI integration cycles and regulatory validation. Once validated with regulators, switching becomes economically irrational. Passing FIDA in 2025 means diversity requirements apply BEFORE lock-in. Passing in 2027 means fighting trillion-dollar sunk costs and entrenched vendor relationships.

Sources: [1] U.S. Congress, “Community Reinvestment Act of 1977”, https://www.congress.gov/bill/95th-congress/house-bill/6655 [2] U.S. Senate, “Algorithmic Accountability Act of 2022”, https://www.congress.gov/bill/117th-congress/senate-bill/3572 [3] Federal Deposit Insurance Corporation, “Community Reinvestment Act (CRA)”, https://www.fdic.gov/regulations/community-reinvestment-act/