On Thursday, two U.S. regulators — office of the comptroller of the currency (OCC) and Federal Deposit Insurance Corporation (FDIC) — Announced approval of a final rule to implement quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers.
The AVM evaluates residential real estate used as collateral for mortgage loans and is currently developing interagency rules. The final rule still requires regulatory approval, e.g. federal housing finance agency (Federal Housing Finance Agency) Consumer Financial Protection Bureau (CFPB) and federal reserve system.
The regulator said the rules were designed to ensure a high degree of confidence in the estimates produced by AVMs, protect the services from data manipulation and seek to avoid conflicts of interest.
The final rule also requires mortgage lenders and secondary market investors to conduct random sampling testing and review of their AVMs. These models must comply with applicable non-discrimination laws.
With the new rules, the agencies aim to address two challenges evident during the post-pandemic refinancing boom: rising costs due to a shortage of appraisers and concerns about bias in home valuations.
The notice of proposed rulemaking published in the Federal Register in June 2023 received approximately 50 comments from stakeholders including financial institutions, real estate and mortgage industry associations.
Last year, trade groups expressed concerns about the new rules. this Mortgage Bankers Association (MBA) and Consumer Bankers Association (CBA) said any regulation should consider the practicality of model risk management and its potential unintended consequences.
Pete Mills, senior vice president of housing policy and strategic industry engagement at MBA, writes to house line Thursday, “Improving the appraisal process, alleviating the appraiser shortage and reducing the risk of appraisal bias is important to the MBA and its members, and the AVM holds great promise as an effective tool to address this issue.”
Mills added: “We will review the guidance in more detail in the coming days and hope that the benefits to housing affordability outweigh the increased cost of compliance and that it works for AVM users of all sizes and business models. It works.
In voting in favor of the rule, FDIC Chairman Martin J. Gruenberg said AVMs are “increasingly used” in the mortgage sector and “have the potential to help reduce costs and shorten the turnaround time for real estate valuations.”
Gruberg said the final rule will help prevent discrimination in the evaluation of residential real estate used as collateral in mortgage transactions by “specifying nondiscriminatory quality control factors.”
“This new requirement will further mitigate potential discrimination risks when lenders use AVMs and increase the credibility and integrity of AVM valuations,” Grunberg said in a prepared statement.
The OCC said the rulemaking “supports Acting Comptroller of the Currency Michael J. Hsu’s priorities of reducing inequality and improving fairness in the banking industry.”
