On June 24, 2024, the Consumer Financial Protection Bureau (CFPB) announced that it had approved a new rule about the use of algorithms and artificial intelligence (AI) for home appraisals and valuations. The new rule was promulgated by the CFPB, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency, pursuant to Dodd-Frank’s direction that the CFPB and other financial supervisory agencies create regulations to implement quality control standards for “automated valuation models” (AVMs). Dodd-Frank defines AVMs as “any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.” See 12 U.S.C. § 3354(d).
In relevant part, the rule amends Regulation Z (among others) by adding subpart (i) to 12 C.F.R. § 1026.42, which would require that mortgage originators and secondary market issuers that use AVMs for certain credit decisions adopt quality control processes that “(i) ensure a high level of confidence in the [valuation] estimates produced; (ii) protect against the manipulation of data; (iii) avoid conflicts of interest; (iv) require random sample testing and reviews; and (v) comply with applicable nondiscrimination laws.” The text does not specify the applicable nondiscrimination laws, nor does it explain the specific testing and reviews required.
With respect to the nondiscrimination element, the summary references the CFPB’s “ECOA Baseline Review” included in its Examination Procedures which explains how CFPB examiners will evaluate whether an institution’s models used in credit decisions include the proper antidiscrimination controls. The rule summary specifically states that “institutions will have the flexibility to adopt approaches to implement the fifth factor [nondiscrimination compliance] in ways that reflect the risks and complexities of institutions’ business models.” The summary also specifies that lenders who rely on third parties for valuations are responsible for ensuring that such third parties comply with applicable laws and regulations.
According to the text of the rule, the requirement does not apply to the use of AVMs in “(i) Monitoring the quality of performance of mortgages or mortgage-backed securities; (ii) Reviews of the quality of already completed determinations of the value of collateral; or (iii) The development of an appraisal by a certified or licensed appraiser as defined in [12 C.F.R.] § 1026.35(c)(1)(i).” The rule does not further explain this exemption. However, the summary of the rule states that the exemption “reflects the fact that while appraisers may use AVMs in preparing appraisals, they must achieve credible results in preparing an appraisal under the [Uniform Standards of Professional Appraisal Practice] and its interpreting opinions.”
In the CFPB’s blog post about the new rule, written by Director Rohit Chopra and Deputy Director Zixta Martinez, the CFPB claims that the new rule is part of its effort to “ensure that the appraisal system is fair, nondiscriminatory, and free of conflicts of interest.” The post also notes, without further explanation, that the CFPB is “examining the growing power that appraisal management companies can wield over individual appraisal professionals.”
Companies employing AVMs for loan origination and secondary market transactions, including through the use of third parties, should be aware of this update and prepared for its implementation. The rule will be effective 12-months from publication in the Federal Register which had not occurred as of this post.
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