Appraisals and ValuationsCFPBMortgageTechnology

Trade groups warn of “unintended consequences” from proposed AVM rules

MBA and CBA said AVMs can alleviate appraiser shortage, reduce costs and safeguard against bias, but robust regulation is critical

The Mortgage Bankers Association (MBA) and the Consumer Bankers Association (CBA) sent a letter to regulators on Monday warning of the “unintended consequences” of new quality control standards for automated valuation models (AVMs). 

On June 1, six federal agencies requested comments from the public on a rule designed to ensure the credibility and integrity of models used in real estate valuations. The proposed rule will implement quality control standards that govern AVMs used by originators and secondary market issuers in valuing the real estate collateral securing mortgage loans.

The agencies intend to tackle two challenges evident during the Covid-years refi boom: higher costs due to appraiser shortages and concerns regarding bias in home valuations. 

In their letter, MBA and CBA said that AVMs and technologies like them can alleviate appraiser shortages, reduce transaction costs, and safeguard against individual appraisal bias. Ultimately, a robust regulatory framework continues to be a critical imperative to achieve these outcomes.

However, any regulation should consider the practicalities of model risk management and its potential unintended consequences. 

For example, the associations said the proposed rule includes Fannie Mae and Freddie Mac to the new standards, which creates a level playing field in the market. But the trade groups are worried about the impact of quality control standards on the GSEs’ alternative valuation methods, such as desktop appraisal, since these tools are essential in times of high demand.  

“MBA and CBA suggest that the agencies consult with the GSEs to ensure that application of the quality control standards would not create adverse effects on the availability of alternative valuation methods,” the letter states. 

In addition, regulators should be aware of any unbalanced market effects of AVMs regulations, conflicting interpretations of the legal framework, and the lack of established methodologies in examining systemic bias in the U.S., the trade groups state.  

The agencies involved include the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the National Credit Union Administration; the Federal Deposit Insurance Corporation; the U.S. Department of the Treasury; and the Federal Reserve System.

Per the proposed rules, each institution using AVMs will adopt and maintain its practices, procedures, and control systems, reducing the burden on smaller institutions. But the trade groups request the agencies to include a small lender/servicer exemption from the standards, as these companies are likely to rely on larger outside service providers subject to a thorough review by regulators or larger clients.  

Regarding third-party providers, the associations suggest that the CFPB expand its Compliance Bulletin 2016-02, Service Providers to outline expectations and potential recourse “for quality control and fair lending oversight” of third-parties providing AVMs services. In addition, MBA and CBA said that creditors should not be liable for violating nondiscrimination law when relying on third-party AVMs, disagreeing with the agencies’ interpretation of the Fair Housing Act. 

The MBA and the CBA requested an adequate implementation timeline of at least 12 months. 

The White House supports a new rule for AVMs, which follows goals set out by the president in addressing issues of racial bias that have exacerbated homeownership and wealth gaps. When announcing the proposed rule, Vice President Kamala Harris weighed in.

“Today, I’m proud to announce we are developing a rule that will require that financial institutions ensure that their appraisal algorithms are not biased, for example, that they do not produce lower valuations for homes owned by people of color,” Harris said. “We are also releasing the guidance to make it easier for consumers to appeal what they suspect to be unbiased valuation.”

Another trade group weighed in on the newly proposed rule. 

The National Association of Mortgage Brokers (NAMB) said it supports new federal regulatory proposals governing the use of AVMs. 

“The reality is the systems and structures are themselves, in some cases, problematic,” said NAMB President Ernest Jones in a statement. “Even when appraisers follow the intended approach, it may result in an outcome that disenfranchises people. They could be doing everything in a way they feel is consistent with the approaches they’ve learned and for which they’re certified, but there are some underlying issues that need to be addressed.”

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