On June 20, 2024, the Consumer Financial Protection Bureau (CFPB) and a consortium of federal regulators introduced a long-awaited rule governing the use of automated valuation models (AVMs) in mortgage origination and secondary market transactions. This landmark regulation, mandated by Section 1473 of the Dodd-Frank Act, aims to establish rigorous quality control standards for AVMs to ensure accurate and unbiased property valuations.
Background and Regulatory Framework
The Dodd-Frank Act, enacted over 13 years ago, mandated the development of rules to govern the use of AVMs in mortgage lending. The new rule, slated to take effect approximately 12 months after publication in the Federal Register, aligns with Section 1473(q) of Dodd-Frank and amends the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) to formalize quality control standards for AVM usage.
Scope and Application of the Rule
Automated valuation models are defined under the rule as computerized models utilized by mortgage originators and secondary market issuers to assess the value of residential properties securing mortgages. These models are crucial in making credit decisions, determining mortgage values for securitization, and adjusting loan terms such as refinancing or home equity lines of credit.
Key Requirements and Standards
The rule mandates that institutions using AVMs must:
a) Implement policies, procedures, and control systems to uphold AVM quality control standards.
b) Ensure AVMs produce reliable valuation estimates with a high level of confidence.
c) Safeguard against data manipulation and conflicts of interest.
d) Conduct random sample testing and reviews to validate AVM accuracy.
e) Comply with federal nondiscrimination laws to mitigate potential biases in property valuations.
Enhanced Regulatory Measures
In addition to the Dodd-Frank mandates, the rule incorporates an explicit requirement for AVM quality control standards to adhere to applicable nondiscrimination laws. This provision addresses concerns about biases in property valuations, aligning with broader federal efforts, including the Biden administration’s PAVE initiative focused on reducing appraisal bias.
Exclusions and Compliance
Certified or licensed appraisers using AVMs in appraisal development are exempt from the rule, as their valuations must independently comply with professional appraisal standards. Likewise, reviews of completed appraisals using AVMs are outside the rule’s scope, emphasizing the distinction between initial valuations and post-issuance monitoring.
Implementation and Preparation
For regulated entities, including mortgage originators and secondary market issuers, preparing for compliance involves:
a) Developing tailored policies and procedures to ensure AVMs meet quality control standards.
b) Collaborating with AVM developers and vendors to align practices with regulatory requirements.
c) Anticipating the emergence of third-party AVM testing entities to support compliance efforts.
d) Initiating vendor management oversight to ensure ongoing adherence to regulatory standards.
Conclusion
The adoption of the new AVM rule by the CFPB and federal agencies represents a significant step toward enhancing transparency and reliability in property valuations within the mortgage industry. By establishing robust quality control measures, the rule aims to protect consumers, mitigate valuation biases, and promote confidence in mortgage lending practices. Stakeholders should begin preparations now to meet compliance obligations ahead of the rule’s anticipated effective date, ensuring a seamless transition to the new regulatory framework.
Stay informed about further developments and insights into how these regulatory changes will impact the mortgage industry and appraisal practices as implementation progresses.
