On June 20, six federal financial services regulators issued the final automated valuation model (AVM) rule. The AVM rule, initially proposed in June 2023 and discussed here, aims to implement the quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The final AVM rule is largely identical to the proposed rule and is set to take effect on the first day of the calendar quarter following 12 months after its publication in the Federal Register.

The AVM rule, issued by the Consumer Financial Protection Bureau, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, National Credit Union Administration, and Federal Housing Finance Agency (collectively, the agencies), mandates that mortgage originators and secondary market issuers that use AVMs to determine the value of mortgage collateral adhere to quality control standards designed to:

• Ensure a High Level of Confidence in Estimates: Institutions must ensure that AVMs produce reliable and accurate property valuations.
• Protect Against Data Manipulation: Safeguards must be in place to prevent any tampering with the data used by AVMs.
• Avoid Conflicts of Interest: Institutions must implement measures to prevent conflicts of interest in the valuation process.
• Require Random Sample Testing and Reviews: Regular testing and reviews of AVMs are required to ensure ongoing accuracy and reliability.
• Comply with Applicable Nondiscrimination Laws: Institutions must ensure that AVMs comply with all relevant nondiscrimination laws, such as the Equal Credit Opportunity Act and Fair Housing Act.

While the first four quality control standards are statutorily required, the fifth standard (compliance with nondiscrimination laws) was added at the agencies’ discretion under the Dodd-Frank Act’s catch-all provision that the agencies could “account for any other … factor that the agencies … determine to be appropriate.”

The final AVM rule follows a period of public comment, during which the agencies received approximately 50 comments from various stakeholders. According to the agencies, while most commenters supported the need for quality control standards, some expressed concerns about how to implement the proposed quality control standards, particularly the fifth factor on nondiscrimination, and suggested that additional guidance from the agencies may be needed. The agencies claim they have addressed these concerns by emphasizing that existing nondiscrimination laws already apply to AVMs and that institutions have a preexisting obligation to comply with all federal laws. The final AVM rule purportedly provides institutions with the flexibility to adopt approaches that reflect their individual business models and risk profiles.

As was the case with the proposed rule, the regulators have not provided any guidance on how to ensure that AVMs comply with fair lending laws, and so the industry continues to be left to figure out how to do that on its own. We view AVMs as being significantly unlike underwriting models, where industry at least has significant experience and interactions with regulators over the years to provide an understanding of how to assess those models for fair lending compliance. For AVMs, because of their different functions and the different data inputs used for them, there is a real question about how to assess them for disparate impact, taking into account the obvious business justifications involved in predicting property values in the market. It is disappointing that the regulators chose not to provide guidance here.

The agencies have also clarified that while the rule applies to mortgage originators and secondary market issuers, financial institutions can work with AVM developers and vendors to meet their compliance obligations.