FDIC: Request for Comments on Real Estate Valuations – Quality Control Standards for Automated Valuation Models

WASHINGTON, June 2 -- The Federal Deposit Insurance Corporation issued the following financial institution letter (No. FIL-26-2023) on June 1, 2023:

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The Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Federal Housing Finance Agency, and the Consumer Financial Protection Bureau (the agencies) jointly issued a Notice of Proposed Rulemaking (NPR) seeking comment on a proposed rule to implement the quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer's principal dwelling.

Statement of Applicability: The contents of, and material referenced in, this FIL apply to all FDIC-supervised financial institutions.

Key Details:

* Section 1473(q) of the Dodd-Frank Act added a new section 1125 to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 directing the agencies to promulgate regulations to implement AVM quality control standards. Covered AVMs must adhere to quality control standards designed to: (1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor the agencies determine to be appropriate.

* The proposal would require institutions that engage in certain credit decisions or covered securitization determinations to adopt policies, practices, procedures, and control systems to ensure that AVMs used in these transactions to determine the value of mortgage collateral adhere to quality control standards designed to meet the previously specified four statutory factors. In addition, the agencies would add a fifth factor to ensure AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws.

* A nondiscrimination quality control factor under section 1125(a)(5) would create an independent requirement for institutions to establish policies, practices, procedures, and control systems to mitigate against discrimination risk in their use of AVMs, thereby increasing confidence in the estimates and supporting well-functioning AVMs.

* The proposed rule would implement a statutory scope provision by applying the standards when an AVM is used to make a determination of collateral value, as opposed to other uses such as monitoring value over time or validating an already completed valuation. Therefore, the proposed rule would apply to AVMs used in connection with making a "credit decision." Secondary market issuers would be subject to the proposed rule whenever a secondary market issuer uses an AVM in connection with making a covered securitization determination or an appraisal waiver. AVMs used to monitor collateral value would not be subject to the quality control factors.

* Comments on the proposed rule will be accepted for 60 days after publication in the Federal Register.

Related Resources:

* Part 323 of the FDIC Rules and Regulations (https://www.ecfr.gov/current/title-12/chapter-III/subchapter-B/part-323)

* Interagency Appraisal and Evaluation Guidelines (https://www.fdic.gov/news/financial-institution-letters/2010/fil10082.html)

Related Topic:

* Appraisals and Other Valuation Products

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Original text here: https://www.fdic.gov/news/financial-institution-letters/2023/fil23026.html