Federal Agencies Issue Final Automated Valuation Model Quality Control Rule
Written by: Rob Ellis, Senior Compliance Consultant
Federal banking regulators recently published and began adopting a final rule that requires supervised mortgage originators to ensure that automated valuation models (“AVM”) they use follow quality control standards, including a requirement that they comply with nondiscrimination laws. The final rule will be effective on the first day of the calendar quarter following the 12 months after publication in the Federal Register.
Link - Final Rule
The final rule requires mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to meet specific quality control factors whenever they use covered AVMs in connection with making certain credit decisions or securitization determinations regarding mortgages. The final rule does not set specific requirements for how institutions are to structure these policies, practices, procedures, and control systems. This approach provides institutions the flexibility to tailor their quality controls for covered AVMs as appropriate based on the size of their institution and the risk and complexity of transactions for which they will use covered AVMs. As modeling technology continues to evolve, this flexible approach would allow institutions to refine their policies, practices, procedures, and control systems as appropriate.
The rule applies regardless of whether the loan is primarily for consumer purposes or business purposes, and whether the credit is closed end or open end.
In addition to discrimination, the quality standards also address several other issues.
“The final rule requires supervised mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards,”
Those standards must:
Ensure a high level of confidence in the estimates produced.
Protect against the manipulation of data.
Seek to avoid conflicts of interest.
Require random sample testing and reviews, and
Comply with applicable nondiscrimination laws.
The first four factors are set forth in Dodd-Frank, and the agencies added the fifth factor based on authority in Dodd-Frank to “account for any other such factor that the agencies . . . determine to be appropriate.”
The agencies set forth their reasons for including the fifth factor in the preamble to final rule, and make the following statement:
“As with models more generally, there are increasing concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias, such as by replicating systemic inaccuracies and historical patterns of discrimination. Models could discriminate because of the data used or other aspects of a model’s development, design, implementation, or use. Attention to data is particularly important to ensure that AVMs do not rely on data that incorporate potential bias and create discrimination risks. Because AVMs arguably involve less human discretion than appraisals, AVMs have the potential to reduce human biases. Yet without adequate attention to ensuring compliance with Federal nondiscrimination laws, AVMs also have the potential to introduce discrimination risks. Moreover, if models such as AVMs are biased, the resulting harm could be widespread because of the high volume of valuations that even a single AVM can process. These concerns have led to an increased focus by the public and the agencies on the connection between nondiscrimination laws and AVMs.”
“It can be tempting to think that computer models can take bias out of the equation, but they can’t,”
The CFPB in announcing the rule stated:
“The new rule approved today is also another example of the CFPB’s work to use existing laws on the books to police potential pitfalls when it comes to artificial intelligence. We’ve terminated the program that handed out special legal immunities and favors to individual AI companies that they could exploit to gain an unfair advantage. We’ve issued guidance and reports to make clear that there is no “fancy technology” exemption in our nation’s consumer financial protection and fair lending laws. We’re also building more capacity at the CFPB to address new and emerging technologies.”
The following is a link to an FDIC memorandum to its Board of Directors from FDIC staff recommending the Board adopt the final rule.
Link - FDIC MEMO
The memo is an excellent resource and contains info discussing details of the final rule of the following sections.
Definitions
Scope of the Final Rule
AVMs Used In Connection With Making Credit Decisions
AVMs Used by Secondary Market Issuers
AVM Uses Not Covered By The Final Rule
Statutory Quality Control Standards
Fifth Nondiscrimination Quality Control Factor
If you would like to discuss assistance in implementing this Final Rule, please contact our Director, Bill Dolan, at WDolan@scapartnering.com or by phone at (617) 694-2617 and schedule a time to speak with us today.
