In order to protect against discrimination in the appraisal process in the age of AI, six federal regulatory agencies have issued a final rule, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, designed to help ensure the credibility and integrity of models used in valuations for certain mortgages secured by a consumer’s principal dwelling.
In particular, “Quality Control Standards for Automated Valuation Models” will implement quality control (QC) standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers in valuations. The final rule is similar to the proposal issued in June 2023.
The agencies issuing the rule include the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Federal Reserve Board (FRB), National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).
Under the final rule, the agencies will require institutions that engage in certain transactions secured by a consumer’s principal dwelling to adopt policies, practices, procedures, and control systems designed to:
- Ensure a high level of confidence in estimates;
- Protect against data manipulation;
- Seek to avoid conflicts of interest;
- Require random sample testing and reviews; and
- Comply with nondiscrimination laws.
Driven in part by advances in database and modeling technology and the availability of larger property datasets, AVMs are being used with increasing frequency as part of the real estate valuation process. While advances in AVM technology and data availability have the potential to reduce costs and turnaround times of the property valuation process, it is important that institutions using AVMs take appropriate steps to ensure the credibility and integrity of the valuations produced. It is also important that the AVMs institutions use adhere to quality control standards designed to comply with applicable nondiscrimination laws.
Firms transacting mortgages will be required to adhere to policies, procedures, and measures designed to comply with legal statutes, avoid conflicts of interest, and protect the integrity of the AVM process.
The final rule will become effective on the first day of the calendar quarter following 12 months after publication in the Federal Register.
