Rule sets quality control standards for automated valuation models used by mortgage originators, others

Quality control standards will be required for use of automated valuation models (AVMs) by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer’s principal dwelling under new rules approved Thursday by two federal banking regulators.

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) Board both approved the final rules, which were proposed more than a year ago.

The Consumer Financial Protection Bureau (CFPB), Federal Reserve, and the National Credit Union Administration (NCUA) have also proposed the rule, but have not yet adopted a final regulation.

Under the proposal, banks, credit unions, and other institutions that make certain credit decisions or securitization determinations would be required to “adopt policies, practices, procedures, and control systems” over the models.

The standards were mandated by the 2010 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), passed in the wake of the 2008 financial crisis.

When proposed, the agencies contended that the standards were necessary to ensure that AVMs adhere to quality control standards designed to ensure several points. Those include: 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 standards 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 proposal. 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).

However, the standards would 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 regulators, such as transactions that have a value below the exemption thresholds in the appraisal regulations.

(The proposal specifically noted that it did not cover credit union subsidiaries, known as credit union service organizations (CUSOs) that engage in mortgage lending. The proposal indicated that credit union regulator’s regulations already indirectly affected CUSOs (in that federally insured credit unions may invest only in CUSOs that conform to certain specified requirements)).

OCC Approves Final Rule on Automated Valuation Models