Increasing use of automated value models (AVMs) for real estate key in agencies’ proposed rule on their use

The increasing frequency of use of automated valuation models (AVMs) by mortgage lenders in determining the value of property was a key factor for issuing a proposal late Thursday by federal financial institution regulators on the use of the models, according to the proposal’s text.

According to the agencies (the Consumer Financial Protection Bureau [CFPB], Federal Deposit Insurance Corp. [FDIC], Federal Reserve, National Credit Union Administration [NCUA], and the Office of the Comptroller of the Currency [OCC]), along with the Federal Housing Finance Agency (FHFA), the use of AVMs has been spurred by (in part) by advances in database and modeling technology and the availability of larger property datasets.

The proposal points to such government-sponsored enterprises (GSEs) as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which may use proprietary AVMs in their collateral valuation processes, as examples of growing use of the technology. “While advances in AVM technology and data availability have the potential to contribute to lower costs and shorter turnaround times in the performance of property valuations, it is important that institutions using such tools take appropriate steps to ensure the credibility and integrity of the valuations produced by AVMs,” the proposal stated.

The proposal, issued for a 60-day comment period which commences once it is published in the Federal Register, puts into effect quality control standards mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). That provision in the 13-year-old law requires the standards for use of the AVMs by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer’s principal dwelling.

According to the agencies, they would require banks, credit unions, and other institutions that make certain credit decisions or securitization determinations to “adopt policies, practices, procedures, and control systems” over the models.

The agencies indicated that those actions are necessary to ensure that the AVMs adhere to quality control standards designed to ensure: a high level of confidence in the estimates produced by AVMs; protection against the manipulation of data; avoidance of conflicts of interest; random sample testing and reviews; and compliance with applicable nondiscrimination laws.

The quality control standards outlined in the proposal, the agencies noted, are only applicable to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage (covered AVMs), as defined in the proposed rule. It would cover neither the use of AVMs in the development of an appraisal by a certified or licensed appraiser, nor in the review of the quality of already completed determinations of collateral value (completed determinations).

The proposal would, however, cover the use of AVMs in preparing evaluations required for certain real estate transactions that are exempt from the appraisal requirements under the appraisal regulations issued by the OCC, Fed Board, FDIC, and NCUA, such as transactions that have a value below the exemption thresholds in the appraisal regulations.

The proposal also specifically notes that it does not cover credit union subsidiaries, known as credit union service organizations (CUSOs) that engage in mortgage lending. The proposal indicates that the NCUA regulations already indirectly affect CUSOs (in that federally insured credit unions may invest only in CUSOs that conform to certain specified requirements).

“The NCUA would not take action to enforce the requirements of this rule” with respect to CUSOs if the rule is made final, the proposal states. Rather, it states that the Federal Trade Commission (FTC), the CFPB, and state attorneys general would have enforcement authority over CUSOs, whether owned by a state or federally chartered credit union, in connection with a final AVM rule.

Proposed rule: Quality Control Standards for Automated Valuation Models