Federal regulators approve final rule for AVM usage

On Thursday, two U.S. regulators — the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) — announced their approval of a final rule imposing quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers.

AVMs, which value residential real estate used as collateral to secure mortgages, are under an interagency rulemaking process. The final rule still requires approval from regulators such as the Federal Housing Finance Agency (FHFA), the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve System.

Regulators said that the rule aims to ensure a high level of confidence in the estimates produced by AVMs, protect these services against data manipulation and seek to avoid conflicts of interest.

The final rule also requires that mortgage lenders and secondary market investors apply random sample testing and reviews to their AVMs. The models must comply with applicable nondiscrimination laws. 

With the new rule, the agencies intend to tackle two challenges evident during the post-pandemic refinance boom — higher costs due to appraiser shortages and concerns about bias in home valuations. 

A notice for the proposed rulemaking, published in the Federal Register in June 2023, received about 50 comments from stakeholders such as financial institutions and real estate and mortgage trade associations.  

Last year, trade groups expressed concerns with the new regulation. The Mortgage Bankers Association (MBA) and the Consumer Bankers Association (CBA) said that any regulation should consider the practicalities of model risk management and its potential unintended consequences. 

Pete Mills, MBA’s senior vice president of residential policy and strategic industry engagement, wrote to HousingWire on Thursday that “improving the valuation process, alleviating appraiser shortages, and reducing the risk of appraisal bias is important to MBA and its members, and AVMs hold great promise as an effective tool to address this issue.”

“We will review the guidance in greater detail in the coming days and are hopeful that the benefits for homeownership affordability outweigh the heightened compliance costs and that it will be practicable for AVM users of all sizes and business models,” Mills added.

In its vote in favor of the rule, FDIC Chairman Martin J. Gruenberg said that AVMs “are being used more and more” in the mortgage space and have the “potential to contribute to lower costs and shorter turnaround times in the performance of property valuations.” 

According to Gruenberg, the final rule helps prevent discrimination in evaluating residential real estate used as collateral in a mortgage transaction by “specifying a nondiscrimination quality control factor.” 

“This new requirement would further mitigate potential discrimination risk in lenders’ use of AVMs, improving the credibility and integrity of the valuations produced by AVMs,” Gruenberg said in a prepared statement.  

The OCC said the rulemaking “supports Acting Comptroller of the Currency Michael J. Hsu’s priority to reduce inequality and elevate fairness in banking.”