Agencies Release Proposal Governing Automated Valuation Models
First, let me start by saying Hello! If you haven't met me yet my name is Aminah Moore, and I have transferred from NAFCU's Regulatory Affairs Department to Compliance, and boy am I loving it!
A couple of weeks ago, the National Credit Union Administration (NCUA), Consumer Financial Protection Bureau (CFPB), Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), and Federal Housing Finance Agency (FHFA) issued a proposed rule to implement the quality control standards that the Dodd-Frank Act required for the use of automated valuation models (AVMs). As a refresher, the Dodd-Frank Act added section 1125 to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which requires that AVMs meet certain quality control standards, to be defined by the regulators of financial institutions. So, you can imagine that this is a highly anticipated proposal as it has been on several rulemaking agendas for many years.
This proposed rule will apply to all credit unions that originate mortgages; it will apply when the AVM is used to determine the collateral worth of a mortgage secured by a principal residence. Meaning whenever a credit decision is being made regarding a mortgage. It is important to note that the requirements of this proposal would apply regardless of whether a credit union uses their own AVM or a third party's.
Credit unions (including those that are federally insured but state-chartered) will be required to adopt policies, practices, procedures and control systems to ensure that AVMs used in the applicable scenarios meet specific quality control factors. A credit union will have the flexibility to set quality controls for AVMs according to its needs and refine as appropriate. The only requirement is that the credit union's AVM quality control standards meet these specific factors:
- ensure a high level of confidence in the estimates produced;
- protect against the manipulation of data;
- seek to avoid conflicts of interest;
- require random sample testing and reviews; and
- comply with nondiscrimination laws.
Last year the CFPB issued an outline of proposals and alternatives aimed at combatting bias and inaccuracy in AVMs. This proposed rule adopts the factors listed in that outline and adds one more on nondiscrimination as there has been a lot of buzz around appraisal discrimination and bias.
Federally-insured credit unions will be covered by this rule through NCUA’s regulations. If the rule is finalized as proposed, it will amend Part 722 of the NCUA regulations, which contains NCUA’s appraisal rules. Unlike the other federal banking agencies, the NCUA is maintaining its position that CUSOs are not subject to regulation by the NCUA, therefore the FTC, CFPB, and State attorneys general will have enforcement authority of CUSOs in connection with the AVM rule.
It might be good to note that secondary market participants are also subject to the requirements of this proposal. For credit unions this means that if a credit union requests an appraisal waiver decision from a secondary market issuer, the credit union would not be required to ensure that the AVM used to support the waiver meets the proposal's quality control standards because the secondary market issuer is the one using the AVM and is subject to the requirements of the proposal.
The proposal also does not apply to the use of AVMs by a certified or licensed appraiser in developing an appraisal as they do not solely rely on the AVM to determine the value of collateral, and applying these standards to those situations would be overly burdensome on the originator.
NAFCU's regulatory alert dives into the proposal and allows members to provide comments to be included in NAFCU's response.
If you'd like to submit comments on behalf of your credit union you may submit written comments, identified by RIN 3133-AE23, by any of the following methods (Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments for Docket Number NCUA-2023-0019.
Mail: Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
If there are any additional questions, please do not hesitate to contact NAFCU’s Regulatory Compliance team at firstname.lastname@example.org.
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