On June 21, 2023, the Office of the Comptroller of the Currency (OCC), Treasury, Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Consumer Financial Protection Bureau (CFPB), and Federal Housing Finance Agency (FHFA) (collectively, the “Agencies”) published a proposed rule and request for comment on quality control standards for automated valuation models (AVMs).

The proposed rule and request for comment stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) which required the CFPB to jointly promulgate rules governing AVMs with the Board, OCC, FDIC, the NCUA, and the FHFA. Together, these agencies were tasked to: “(1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate” (12 U.S.C. 3354).

The proposed rule would implement quality control standards for the use of AVMs and require that mortgage loan originators and secondary market issuers that are regulated by these Agencies adopt policies, practices, procedures and control systems to meet the first four quality control objectives set out in Dodd-Frank.   The quality control standards would only apply when an AVM is being used to make a determination of collateral value, as opposed to other uses such as monitoring value over time or validating an already completed evaluation.  Determinations of collateral value are generally made in connection with credit decisions or covered securitization determinations, such as a purchase-money mortgage or placing a loan in a securitized pool.   The proposed rule would not apply to the use of AVMs in the (i) monitoring of the quality or performance of mortgages or mortgage-backed securities; (ii) reviews of the quality of already completed determinations of the value of collateral; or (iii) the development of an appraisal by a certified or licensed appraiser.

Dodd-Frank also permitted the Agencies to add their own fifth quality control objective.  Based on this authority, the Agencies proposed to include a fifth factor that would require the regulated institutions to also adopt policies, practices, procedures and control systems to ensure that the AVMs comply with applicable non-discrimination laws.  The proposed rule notes that while existing non-discrimination laws apply to an institution’s use of AVM’s they do not currently require an institution to develop standards that specifically address non-discrimination. The Agencies believe that by adding this fifth quality control standard it would further mitigate any discrimination risk in the use of AVMs.

The Agencies are soliciting feedback on many aspects of their proposed rule.  Some of the questions include the following:

• How might a rule covering only AVM usage by mortgage originators and secondary market issuers disadvantage those entities vis-à-vis their competitors?
• What would be the advantages and disadvantages of exempting federally backed securitizations from the AVM quality control standards?
• What would be the advantages and disadvantages of excluding AVMs used by certified or licensed appraisers in developing appraisal valuations?

Comments to the proposed rule are due by August 21, 2023.

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