Final automated valuation model rule published by 6 regulators

A final rule governing the use of automated valuation models in mortgage lending has now been published by a group of six federal regulators, the last step in the process of putting it into effect.

The regulations were first proposed for public comment in June 2023 and finalized last month. The six agencies involved are Office of the Comptroller of the Currency, Federal Housing Finance Agency, Federal Reserve, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau and the National Credit Union Administration.

Mortgage market participants will be required to "adopt policies, practices, procedures, and control systems designed to: ensure a high level of confidence in estimates; protect against data manipulation; seek to avoid conflicts of interest; require random sample testing and reviews; and comply with nondiscrimination laws," a joint press release said.

AVM usage has increased due to advances in database and modeling technology, the regulators said. They are also seen as helping to relieve a long-term shortage of appraisers.

Last week, the Department of Housing and Urban Development entered into a settlement with the Appraisal Foundation resolving a complaint "alleging discriminatory barriers preventing qualified Black people and other persons of color from entering the appraisal profession on the basis of race in violation of the Fair Housing Act."

A cause of the shortage, as well as driving this complaint, is the experience requirement, where a friend or family member who is already a licensed appraiser has to be willing to supervise as the applicant gains on-the-job experience.

In its board memo on the proposed final rule, Federal Reserve Board staff said four of the five quality control points raised in the rule were required by statute. The final point, nondiscrimination, addresses concerns for the potential of bias in modeling.

"Existing nondiscrimination laws already apply to an institution's use of AVMs; the nondiscrimination factor would heighten awareness among lenders to this requirement and impose an independent requirement for institutions to establish policies, practices, procedures, and systems to ensure compliance with nondiscrimination laws," the staff memo said.

A change in the final rule clears up inconsistencies with the Truth in Lending Act, the memo noted.

The Mortgage Bankers Association and its affiliate, the Mortgage Industry Standards Maintenance Organization will be issuing in the near future a Call for Participation to create a development work group that focuses on AVM standardization.

In a joint comment letter with the Community Bankers Association made last August, they supported allowing individual lenders to adopt and maintain their own policies, saying it "better acknowledges differing business models and levels of AVM usage.

"In addition, prescriptive rules could become outdated if they cannot evolve with technological developments, hindering advancements in the industry," the letter said. "They also may present an undue burden on smaller institutions."

The final rule goes into effect on the first day of the calendar quarter following 12 months after it is published in the Federal Register.