With a roll-out led by Vice President Harris, the federal financial services regulators have released the long-awaited proposed automated valuation model (AVM) rule, referencing both home appraisal bias in mortgage lending and algorithmic bias, but providing no guidance at all about how to address those issues. On June 1, the Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively, the agencies) published the proposed rule with request for public comment that would implement quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The standards would require mortgage originators and secondary market insurers that use AVMs to determine the value of mortgage collateral adhere to quality control standards designed to: 1) ensure a high level of confidence in the estimates, 2) protect against the manipulation of data, 3) seek to avoid conflicts of interest, 4) require random sample testing and reviews, and 5) comply with applicable nondiscrimination laws. In the press release announcing the proposed rule, the CFPB acknowledged, “[t]he proposed rule’s safeguards are not a panacea, but represent a recognition of the risks posed by algorithmic appraisals.”
While the agencies acknowledge that AVMs have the potential to lower costs and quicken turnaround times in property valuations, they are focused on eradicating the potential for bias. According to the CFPB, “unlike an appraisal or broker price opinion, where an individual person looks at the property and assesses the comparability of other sales, automated valuations rely on mathematical formulas and number crunching machines to produce an estimate of value. While machines crunching numbers might seem capable of taking human bias out of the equation, they can’t.” Instead, according to the CFPB, “automated models can embed the very human bias they are meant to correct.”
The proposed rule would require that mortgage originators and secondary market issuers adopt policies and controls to ensure that AVMs used in certain credit decisions or covered securitization determinations adhere to quality control standards. However, to provide flexibility, the proposed rules allow for regulated institutions to adopt their own AVM policies and control systems to satisfy the statutory factors, rather than prescribing those polices and systems. In fact, the proposed rule contains no guidance at all regarding how to address bias or discrimination in AVMs; rather, it simply requires institutions to devise their own policies and procedures to address it. So, for any institution looking forward to concrete guidance on this topic, the proposed AVM rule does not provide it.
Under the proposal, the agencies suggest an effective date of 12 months after issuance of the final rule.
The issue of bias within the appraisal and property evaluation process has been a hot topic for the agencies for a few years now. In 2021, the Department of Housing and Urban Development announced the creation of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). As discussed here, in February 2023, the agencies sent a joint letter to The Appraisal Foundation, the private organization that sets appraisal standards, urging it to revise the fourth draft of its 2023 Edition of the Uniform Standards of Professional Appraisal Practice to include a detailed statement of federal prohibitions against discrimination. In March 2023, the Justice Department and the CFPB announced that they filed a statement of interest in a case pending in the U.S. District Court for the District of Maryland to explain the application of the Fair Housing Act and the Equal Credit Opportunity Act to lenders relying on discriminatory home appraisals.
The proposed rule contains 37 questions for comment. Interested parties may submit comments on the proposed rule until 60 days after publication of the proposed rule in the Federal Register.