Quality Control Standards for Automated Valuation Models
Notice of proposed rulemaking and request for comment.
CFR Part: "12 CFR Part 34"; "12 CFR Part 225"; "12 CFR Part 323"; "12 CFR Parts 722 and 741"; "12 CFR Part 1026"; "12 CFR Part 1222"
RIN Number: "RIN 1557-AD87"; "RIN 7100-AG60"; "RIN 3064-AE68"; "RIN 3133-AE23"; "RIN 3170-AA57"; "RIN 2590-AA62"
Citation: "88 FR 40638"
Document Number: "Docket No. OCC-2023-0002"; "Docket No. R-1807"; "Docket No. NCUA-2023-0019"; "Docket No.
Page Number: "40638"
"Proposed Rules"
Agency: "
SUMMARY: The OCC, Board,
DATES:
Comments must be received by
ADDRESSES: Interested parties are encouraged to submit written comments jointly to all of the agencies. Commenters should use the title "Quality Control Standards for Automated Valuation Models" to facilitate the organization and distribution of comments among the agencies. The agencies invite interested parties to submit written comments to:
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FHFA invites comment on all aspects of the proposed amendments and will take all comments into consideration before adopting amendments through a final rule. FHFA will post copies of all comments received without change on the FHFA website at http://www.fhfa.gov, and will include any personal information you provide, such as your name, address, email address, and telephone number. In addition, the FHFA will make copies of all comments received available for examination by the public through the electronic rulemaking docket for this proposed rule also located on the FHFA website.
FOR FURTHER INFORMATION CONTACT:
OCC:
Board:
NCUA: Policy and Accounting:
FHFA:
SUPPLEMENTARY INFORMATION:
I. Background Section 1473(q) of the Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (title XI) /1/ to add a new section 1125 relating to the use of automated valuation models (AVMs) in valuing real estate collateral securing mortgage loans (section 1125). /2/ The term "automated valuation model" is commonly used to describe computerized real estate valuation models used for a variety of purposes, including loan underwriting and portfolio monitoring. /3/ Section 1125 defines an AVM 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." /4/ The quality control standards proposed in this rule are applicable only to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage (covered AVMs), as defined in this proposed rule.
FOOTNOTE 1 12 U.S.C. 3331 et seq. END FOOTNOTE
FOOTNOTE 2 Public Law 111-203, 124 Stat. 1376, 2198 (2010), codified at 12 U.S.C. 3354. END FOOTNOTE
FOOTNOTE 3 See Interagency Appraisal and Evaluation Guidelines, 75 FR 77450, 77468 (
FOOTNOTE 4 12 U.S.C. 3354(d). END FOOTNOTE
Section 1125 directs the agencies to promulgate regulations to implement quality control standards regarding AVMs. /5/ Section 1125 requires that AVMs, as defined in the statute, adhere to quality control standards designed to "(1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against the 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 that the agencies determine to be appropriate." /6/ As required by section 1125, the agencies consulted with the staff of the Appraisal Subcommittee (ASC) and the
FOOTNOTE 5 12 U.S.C. 3354(b). END FOOTNOTE
FOOTNOTE 6 12 U.S.C. 3354(a). END FOOTNOTE
Driven in part by advances in database and modeling technology and the availability of larger property datasets, the mortgage industry has begun to use AVMs with increasing frequency as part of the real estate valuation process. For example, the
FOOTNOTE 7 See, e.g.,
A. Existing Guidance Relating to the Use of AVMs
Since 2010, the OCC, Board,
FOOTNOTE 8 See supra, note 3. The Guidelines were adopted after notice and comment. END FOOTNOTE
FOOTNOTE 9 Id. END FOOTNOTE
FOOTNOTE 10 See Supervisory Guidance on Model Risk Management, OCC Bulletin 2011-12 (
The NCUA is not a party to the Model Risk Management Guidance. The NCUA monitors the model risk efforts of federally insured credit unions through its supervisory approach by confirming that the governance and controls for an AVM are appropriate based on the size and complexity of the transaction; the risk the transaction poses to the credit union; and the capabilities and resources of the credit union.
The
FOOTNOTE 11 See Model Risk Management Guidance, FHFA Advisory Bulletin 2013-07 (
The agencies have also provided guidance on managing the risk inherent in the use of third-party service providers, such as outside entities that provide AVMs and AVM services. /12/ Institutions that make use of third parties are reminded that they remain responsible for ensuring that third parties, in performing their activities, comply with applicable laws and regulations, including the safety and soundness requirements established by the OCC, Board,
FOOTNOTE 12 See Third-Party Relationships: Risk Management Guidance, OCC Bulletin 2013-29 (
II. The Proposed Rule
The agencies are inviting comment on a proposed rule to implement quality control standards for the use of AVMs that are covered by this proposal. The agencies' proposed rule would require that mortgage originators and secondary market issuers adopt policies, practices, procedures, and control systems to ensure that AVMs used in certain credit decisions or covered securitization determinations adhere to quality control standards designed to meet specific quality control factors. The proposed rule would not set specific requirements for how institutions are to structure these policies, practices, procedures, and control systems. This approach would provide institutions the flexibility to set quality controls for AVMs as appropriate based on the size of the institution and the risk and complexity of transactions for which they will use AVMs covered by this proposed rule. As modeling technology continues to evolve, this flexible approach would allow institutions to refine their policies, practices, procedures, and control systems as appropriate. The agencies' existing guidance related to AVMs would remain applicable.
A. Scope of the Proposed Rule
The quality control standards in section 1125 of title XI apply to AVMs "used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling." /13/ The proposed rule would implement the statute by applying the quality control standards when an AVM is being 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. Determinations of collateral value are generally made in connection with credit decisions or covered securitization determinations as defined in this proposed rulemaking, for example when determining a new value before originating a purchase-money mortgage or placing a loan in a securitization pool.
FOOTNOTE 13 12 U.S.C. 3354(d). END FOOTNOTE
Other uses of AVMs, such as for portfolio monitoring, do not involve making a determination of collateral value, and thus are not within the scope of the proposed rule. The agencies are further proposing that the rule would not cover the use of AVMs in the development of an appraisal by a certified or licensed appraiser, nor in the review of the quality of already completed determinations of collateral value (completed determinations). The proposed rule would cover the use of AVMs in preparing evaluations required for certain real estate transactions that are exempt from the appraisal requirements under the appraisal regulations issued by the OCC, Board,
FOOTNOTE 14 See 12 CFR 34.43(b) (OCC); 12 CFR 225.62(c) (Board); 12 CFR 323.3(b) (FDIC); and 12 CFR 722.3(d) (NCUA). Under the NCUA's rule, an "evaluation" is described as a "written estimate." 12 CFR 722.3(d). END FOOTNOTE
Section 1125(c)(1) provides that compliance with regulations issued under section 1125 shall be enforced by, "with respect to a financial institution, or subsidiary owned and controlled by a financial institution and regulated by a Federal financial institution regulatory agency, the Federal financial institution regulatory agency that acts as the primary Federal supervisor of such financial institution or subsidiary." /15/ Section 1125(c)(1) applies to a subsidiary of a financial institution only if the subsidiary is (1) owned and controlled by a financial institution, and (2) regulated by a Federal financial institution regulatory agency. Section 1125(c)(2) provides that compliance with regulations issued under section 1125 shall be enforced by, "with respect to other participants in the market for appraisals of 1-to-4 unit single family residential real estate, the
FOOTNOTE 15 12 U.S.C. 3354(c)(1) (emphasis added). The term "Federal financial institutions regulatory agencies" means the Board, the
FOOTNOTE 16 12 U.S.C. 3354(c)(2). END FOOTNOTE
The NCUA has long acknowledged that subsidiaries of federally insured credit unions--also referred to as credit union service organizations (CUSOs)--and their employees are not subject to regulation by the NCUA as contemplated by
FOOTNOTE 17 See Registration of Mortgage Loan Originators, 75 FR 51623, 51626 (
FOOTNOTE 18 See, e.g., Bank Service Company Act, 12 U.S.C. 1861-1867; NCUA,
FOOTNOTE 19 12 CFR part 712. END FOOTNOTE
FOOTNOTE 20 The term "financial institution" means an insured depository institution as defined in 12 U.S.C. 1813 or an insured credit union as defined in 12 U.S.C. 1752. See 12 U.S.C. 3350(7). END FOOTNOTE
FOOTNOTE 21 12 U.S.C. 3354(c)(1). END FOOTNOTE
FOOTNOTE 22 12 U.S.C. 3354(c)(2). END FOOTNOTE
The NCUA is also proposing to amend
1. AVMs Used in Connection With Making Credit Decisions
The proposed rule would apply to AVMs used in connection with making a credit decision. The proposed rule would define "credit decision," in part, to include a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage. The scope provision of the proposed regulatory text would expressly exclude the use of AVMs in monitoring the quality or performance of mortgages or mortgage-backed securities. The use of AVMs solely to monitor a creditor's mortgage portfolio would not be a credit decision under the proposed rule because the lending institution has already made the credit decision. The scope of the proposed rule would include, for example, decisions regarding originating a mortgage, modifying the terms of an existing loan, or renewing, increasing, or terminating a line of credit. The proposed rule uses the term "credit decision" to help clarify that the proposed rule would cover these various types of decisions.
The proposal to limit the scope of the rule to credit decisions and covered securitization determinations reflects the statutory definition of AVM, which focuses on the use of an AVM "by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling." /23/ The proposed rule would distinguish between using AVMs to determine the value of collateral securing a mortgage and using AVMs to monitor, verify, or validate a previous determination of value (e.g., the proposed rule would not cover a computerized tax assessment used to verify the valuation made during the origination process). /24/ The proposed rule focuses on those aspects of mortgage and securitization transactions where the value of collateral is typically determined.
FOOTNOTE 23 12 U.S.C. 3354(d) (emphasis added). END FOOTNOTE
FOOTNOTE 24 Many secondary market transactions by regulated entities require an appraisal unless an appraisal consistent with regulatory standards was obtained at the time of origination. See 12 CFR 43.43(a)(8) (OCC); 12 CFR 225.63(a)(8) (Board); 12 CFR 323.3(a)(8) (FDIC); 12 CFR 722.3(a)(5) (NCUA). END FOOTNOTE
Loan modifications and other changes to existing loans. The proposed rule would cover the use of AVMs in deciding whether to change the terms of an existing mortgage even if the change does not result in a new mortgage origination, as long as a "mortgage originator" or "secondary market issuer," or servicers that work on the originator's or secondary market issuer's behalf, uses the AVM to determine the value of a mortgage secured by a consumer's principal dwelling. For example, the proposed rule would cover AVMs used in making decisions to deny a loan modification or to confirm collateral values, such as when there is a request to change or release collateral. In relevant part, section 1125 provides that an AVM is "any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage. . . . " /25/ The agencies' view is that the phrase "determine the collateral worth" broadly covers instances where mortgage originators and secondary market issuers use AVMs in connection with making credit decisions. Under the proposal, the agencies consider mortgage originators and secondary market issuers or servicers that work on their behalf to be using AVMs in connection with making a credit decision when they use AVMs to modify or to change the terms of existing loans.
FOOTNOTE 25 12 U.S.C. 3354(d) (emphasis added). END FOOTNOTE
Question 1. How, if at all, could the agencies' proposal to cover loan modifications and other changes to existing loans be made clearer?
Home equity line of credit (HELOC) reductions or suspensions. The proposed rule would cover AVMs used in deciding whether or to what extent to reduce or suspend a HELOC. The proposed rule would apply to AVMs used in connection with making credit decisions. The agencies consider mortgage originators and secondary market issuers to be using AVMs in connection with making a credit decision when they use AVMs to decide whether or to what extent to reduce or suspend a HELOC.
Question 2. Part II.B of thisSUPPLEMENTARY INFORMATIONdiscusses the proposed definitions of mortgage originator and secondary market issuer. To what extent do financial institutions purchase or service HELOCs without engaging in mortgage originator or secondary market issuer activities as defined by the proposed rule?
Question 3. How might a rule covering only AVM usage by mortgage originators and secondary market issuers disadvantage those entities vis-a-vis their competitors?
2. AVMs Used by Secondary Market Issuers
The language of section 1125 includes not only mortgage originators, but also secondary market issuers. Given that the statute refers to secondary market issuers and the primary business of secondary market issuers is to securitize mortgage loans and to sell those mortgage-backed securities to investors, the proposed rule would cover AVMs used in securitization determinations. In addition, covering AVMs used in securitizations could potentially protect the safety and soundness of institutions and protect consumers and investors by reducing the risk that secondary market issuers will misvalue homes. For example, misvaluation by secondary market issuers could in turn incentivize mortgage originators to originate misvalued loans when making lending decisions. /26/ Such misvaluations could pose a risk of insufficient collateral for financial institutions and secondary market participants and could limit consumers' refinancing and selling opportunities. /27/
FOOTNOTE 26 For example, the 2008 financial crisis was precipitated in part by secondary market issuers that "lowered the credit quality standards of the mortgages they securitized" and mortgage originators that "took advantage of these lower credit quality securitization standards . . . to relax the underwriting discipline in the loans they issued" because, "[a]s long as they could resell a mortgage to the secondary market, they didn't care about its quality."
FOOTNOTE 27 See, e.g., Appraisals for Higher-Priced Mortgage Loans, 78 FR 10367, 10418 (
Appraisal waivers. The proposed rule would define "covered securitization determination" to include determinations regarding, among other things, whether to waive an appraisal requirement for a mortgage origination (appraisal waiver decisions). /28/ Under the proposal, a secondary market issuer that uses AVMs in connection with making appraisal waiver decisions would be required to have policies, practices, procedures, and control systems in place to ensure that the AVM supporting those appraisal waiver decisions adheres to the rule's quality control standards. In contrast, a mortgage originator that requests an appraisal waiver decision from a secondary market issuer would not need to ensure that the AVM used to support the waiver meets the rule's quality control standards because the secondary market issuer would be using the AVM to make the appraisal waiver decision in this context, not the mortgage originator.
FOOTNOTE 28 On
For example, both GSEs have appraisal waiver programs and are the predominant issuers of appraisal waivers in the current mortgage market. /29/ To determine whether a loan qualifies for an appraisal waiver under either GSE program, a mortgage originator submits the loan casefile to the GSE's automated underwriting system with an estimated value of the property (for a refinance transaction) or the contract price (for a purchase transaction). The GSE then processes that information through its internal model, which may include use of an AVM, to determine the acceptability of the estimated value or the contract price for the property. If the GSE's analysis determines, among other eligibility parameters, that the estimated value or contract price meets its risk thresholds, the GSE offers the lender an appraisal waiver. /30/
FOOTNOTE 29 See Fannie Mae, Appraisal Waivers, available at https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers (last visited
FOOTNOTE 30 See Fannie Mae, Appraisal Waivers, available at https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers;
In this example, when the GSEs use AVMs to determine whether the mortgage originator's estimated collateral value or the contract price meets acceptable thresholds for issuing an appraisal waiver offer, the GSEs would be making a "covered securitization determination" under the proposed rule. As a result, the proposed rule would require the GSEs, as secondary market issuers, to maintain policies, practices, procedures, and control systems designed to ensure that their use of such AVMs adheres to the rule's quality control standards. On the other hand, when a mortgage originator submits a loan to determine whether a GSE will offer an appraisal waiver, the mortgage originator would not be making a "covered securitization determination" under the proposed rule because the GSE would be using its AVM to make the appraisal waiver decision in this context. As a result, the mortgage originator would not be responsible for ensuring that the GSEs' AVMs comply with the proposed rule's quality control standards.
Question 4. To what extent do secondary market issuers other than the GSEs issue appraisal waivers?
Question 5. Please address the feasibility of mortgage originators performing quality control reviews of the AVMs that secondary market issuers use to evaluate appraisal waiver requests. What, if any, consequences would such an approach have for mortgage originators' use of appraisal waiver programs?
Other uses by secondary market issuers. The proposed rule would define "covered securitization determination" to include determinations regarding, among other things, structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations. /31/ Monitoring collateral value in mortgage-backed securitizations after the securities have already been issued would not be a covered securitization determination.
FOOTNOTE 31 See, e.g., Asset Backed Securities, 70 FR 1505, 1544 (
The proposed rule would cover AVM usage if and when a secondary market issuer uses an AVM as part of a new or revised value determination in connection with covered securitization determinations. For example, the GSEs use the origination appraised value or the estimated value in appraisal waivers when issuing mortgage-backed securities. Hence, AVMs are not used by the GSEs to make a new or revised value determination in connection with MBS issuances. However, because the GSEs provide guarantees of timely payment of principal and interest on loans that are included in an MBS, they are obligated to purchase loans that are in default from MBS loan pools. The GSEs may modify such loans and subsequently re-securitize them as new MBS offerings. In these instances, the GSEs may use an AVM to estimate collateral value for investor transparency and disclosure. AVMs used in this manner by the GSEs would be considered covered securitization determinations because there are new or revised value determinations.
As discussed in part II.A.3 of this SUPPLEMENTARY INFORMATION, the proposed rule distinguishes between secondary market issuers using AVMs to determine the value of collateral securing a mortgage versus using AVMs solely to review completed value determinations. For example, AVMs used solely to review appraisals obtained during mortgage origination would not be covered by the proposed rule.
Question 6. The agencies are proposing to include securitizations within the scope of the proposed rule where the AVM is being used to determine collateral value for loans being considered for inclusion in pools collateralizing mortgage-backed securities. To what extent do secondary market issuers use AVMs to determine collateral value in securitizations?
Question 7. Would covering uses of AVMs for securitizations hinder small entities' access to secondary market liquidity and, if so, how might such impacts be mitigated?
Question 8. What would be the advantages and disadvantages of exempting federally backed securitizations from the AVM quality control standards?
Question 9. Are the compliance obligations of lenders and securitizers clear under this proposed rule?
3. AVM Uses Not Covered by the Proposed Rule
Uses of AVMs by appraisers. The proposed rule would not cover use of an AVM by a certified or licensed appraiser in developing an appraisal. /32/ This approach 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 (USPAP) and its interpreting opinions. /33/ As such, an appraiser must make a valuation conclusion that is supportable independently and does not rely on an AVM to determine the value of the underlying collateral. The agencies also note that it may be impractical for mortgage originators and secondary market issuers to adopt policies, procedures, practices, and control systems to ensure quality controls for AVMs used by the numerous independent appraisers with which they work.
FOOTNOTE 32 The appraisal regulations issued by the OCC, Board,
FOOTNOTE 33 See USPAP STANDARDS RULE 1-1, GENERAL DEVELOPMENT REQUIREMENTS ("In developing a real property appraisal, an appraiser must . . . be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal"); see also Advisory Opinion 37 (AO-37) on Computer Assisted Valuation Tools. END FOOTNOTE
Question 10. How often are AVMs used by certified or licensed appraisers to develop appraisals?
Question 11. What would be the advantages and disadvantages of excluding AVMs used by certified or licensed appraisers in developing appraisal valuations?
Under the appraisal regulations issued by the OCC, FRB, and
FOOTNOTE 34 See 12 CFR 34.43(b) (OCC); 12 CFR 225.62(c) (Board); and 12 CFR 323.3(b) (FDIC); see also Interagency Appraisal and Evaluation Guidelines, 75 FR at 77460 (discussing transactions that require evaluations under the appraisal rules and providing recommendations for evaluation development). END FOOTNOTE
The proposed rule would cover AVMs used in the process of preparing evaluations. This distinction between appraisals and evaluations reflects that USPAP standards and appraiser credentialing are not required for individuals who prepare evaluations. The proposed rule's coverage of AVMs used in the process of preparing evaluations also reflects the more extensive use of, and reliance on, AVMs within the evaluation function.
Reviews of completed collateral valuation determinations. The proposed rule would not cover AVMs used in reviews of completed collateral value determinations, given that the underlying appraisal or evaluation determines the value of the collateral, rather than the review of the appraisal or evaluation. The appraisal or evaluation review serves as a separate and independent quality control function. /35/ The agencies note that the proposed rule does not make distinctions based on the amount of time between the completed collateral valuation determination and the subsequent review; if an AVM is solely being used to review the completed determination, such AVM use is not covered by the proposed rule regardless of how soon the AVM is used after that determination.
FOOTNOTE 35 Appraisals are subject to appropriate review under the appraisal regulations. See 12 CFR 34.44(c); (OCC); 12 CFR 225.64(c) (Board); 12 CFR 323.4(c) (FDIC); 12 CFR 722.4(c) (NCUA). While these reviews are independent of, and subsequent to, the underlying appraisals and evaluations, the reviews generally take place before the final approval of a mortgage loan. END FOOTNOTE
Question 12. What would be the advantages and disadvantages of including AVMs that are used in reviews of completed determinations within the scope of the proposed rule? To what extent do institutions use AVMs in reviewing completed determinations?
Question 13. What, if any, additional clarifications would be helpful for situations where an AVM would or would not be covered by the proposed rule?
B. Definitions
1. Automated Valuation Model
The Dodd-Frank Act defines an AVM, for purposes of section 1125, 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." /36/ The proposed rule would define an AVM as any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage. The proposed definition is substantively identical to the definition in section 1125 but reflects common terminology and clarifies that the determination of value relates to the dwelling.
FOOTNOTE 36 12 U.S.C. 3354(d). END FOOTNOTE
Question 14. What, if any, other definitions of AVM would better reflect current practice with respect to the use of AVMs to determine the value of residential real estate securing a mortgage?
2. Control Systems
The proposal would define control systems as the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that institutions use to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations. The agencies intend for institutions to use control systems that are appropriate for the size and complexity of their mortgage origination and securitization businesses.
Question 15. What, if any, alternate definitions would be more suitable than the proposed definition of control systems? What challenges, if any, would be involved in integrating control systems for AVMs into existing control systems?
3. Covered Securitization Determination
The proposed rule would define "covered securitization determination" to mean a determination regarding (1) whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer, or (2) structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations. Monitoring collateral value in mortgage-backed securitizations after they have already been issued would not be covered securitization determinations.
Question 16. Would the proposed definition of a covered securitization determination hinder small entities' access to secondary market liquidity and, if so, how might such impacts be mitigated?
Question 17. Other than the uses discussed in the proposed rule, are there other ways that AVMs are used in the securitization process? Is the scope of the proposed definition of "covered securitization determination" appropriate and, if not, how should the agencies expand or narrow the definition?
4. Credit Decision
The proposal would define credit decision to mean a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage. The proposed definition of credit decision would include a decision whether to extend new or additional credit or change the credit limit on a line of credit. Monitoring the value of the underlying real estate collateral in their mortgage originators' loan portfolios would not be a credit decision for the purposes of this proposed rule. This reflects the fact that the collateral worth of a mortgage is generally determined in connection with credit decisions or covered securitizations rather than when the value of the collateral supporting a mortgage is monitored or verified.
Question 18. What, if any, clarifications are needed for the definition of the term "credit decision"?
Question 19. What, if any, other decisions should the agencies include within the definition of credit decision?
5. Dwelling
The section 1125 definition of AVM refers to a mortgage secured by a "consumer's principal dwelling." /37/ The OCC, Board,
FOOTNOTE 37 12 U.S.C. 3354(d). END FOOTNOTE
FOOTNOTE 38 The NCUA notes that under its regulations, a Federal credit union may make a mortgage loan to a member for a maturity of up to 40 years if the loan is secured by a one-to-four family dwelling that is or will be the principal residence of the member-borrower, among other requirements. 12 CFR 701.21(g). The use of the term "principal residence" in
The
FOOTNOTE 39 See 12 CFR 1026.2(a)(19) (definition of "dwelling") and 1026.2(a)(24) (definition of "residential mortgage transaction"). The phrase "consumer's principal dwelling" is used in the Regulation Z provisions on valuation independence. 12 CFR 1026.42. Regulation Z generally defines "consumer" as a natural person to whom consumer credit is offered or extended. 12 CFR 1026.2(a)(11). The
FOOTNOTE 40 See 12 CFR 1026.2(a)(12) (definition of "consumer credit"). END FOOTNOTE
FOOTNOTE 41 Therefore, the exemptions in 12 CFR 1026.3 would not apply to the requirements established by the
Question 20. What, if any, alternate definitions would be more suitable than the proposed definition of dwelling and the approach to what is a principal dwelling?
Question 21. Should the rule define the meaning of "consumer" or is that term commonly understood?
Question 22. Because the
6. Mortgage
Section 1125(d) defines an AVM with reference to determining "the collateral worth of a mortgage secured by a consumer's principal dwelling." /42/ Section 1125 does not define "mortgage." Because the statute does not refer to "mortgage loans" or "mortgage credit," but rather uses the word "mortgage," the proposal would define "mortgage" to broadly cover the mortgage market as fully as the statute appears to envision, in the language of section 1125(d) and throughout section 1125. Consequently, for this purpose, the agencies would adopt in part the Regulation Z definition of "residential mortgage transaction," /43/ which existed at the time the statute was passed. The proposal would define the term mortgage to mean a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
FOOTNOTE 42 12 U.S.C. 3354(d). END FOOTNOTE
FOOTNOTE 43 12 CFR 1026.2(a)(24). END FOOTNOTE
Question 23. What, if any, alternate definitions would be more suitable than the proposed definition of mortgage?
Question 24. What are the benefits and disadvantages of including purchase money security interests arising under installment land contracts in the definition of mortgage? Please provide any data or information you have about the use of AVMs in this market segment.
7. Mortgage Originator
For purposes of this proposal, the agencies would adopt the definition of mortgage originator contained in TILA. /44/ Although section 1125 of title XI does not define the term mortgage originator, a recent amendment to title XI (section 1127) adopted the TILA definition of mortgage originator by cross reference. /45/ The OCC, Board, and
FOOTNOTE 44 15 U.S.C. 1602(dd)(2). END FOOTNOTE
FOOTNOTE 45 12 U.S.C. 3356(a)(1). END FOOTNOTE
FOOTNOTE 46 See 12 CFR 34.43(a)(14) (OCC), 225.63(a)(15) (Board), and 323.3(a)(14) (FDIC). END FOOTNOTE
As proposed, the term mortgage originator generally would include creditors as defined by 15 U.S.C. 1602(g), notwithstanding that the definition of mortgage originator at 15 U.S.C. 1602(dd)(2) excludes creditors for certain other purposes. /47/ While the term mortgage originator is broad enough to include mortgage brokers, in practice, brokers generally would not be covered by the proposed rule when they do not engage in the type of credit or securitization decisions covered under the proposal.
FOOTNOTE 47 15 U.S.C. 1602(dd)(2). END FOOTNOTE
Based on the exception provided at 15 U.S.C. 1602(dd)(2)(G), the term mortgage originator would generally exclude servicers as defined by 15 U.S.C. 1602(dd)(7) as well as their employees, agents, and contractors. Consistent with the interpretation published in the
FOOTNOTE 48 Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 11280, 11306 (
An entity that otherwise meets the definition of servicer at 15 U.S.C. 1602(dd)(7) is a "mortgage originator" for purposes of 15 U.S.C. 1602(dd)(2) only if it performs any of the activities listed in 15 U.S.C. 1602(dd)(2)(A) for a transaction that constitutes a new extension of credit, including a refinancing or an assumption. As a result, the proposed rule would apply to servicers and their employees, agents, and contractors if, in connection with new extensions of credit, they both use covered AVMs to engage in credit decisions and perform any of the activities listed in 15 U.S.C. 1602(dd)(2)(A). Once a servicer meets this definition of mortgage originator, the servicer would be required to comply with the requirements of this proposed rule any time it uses an AVM to determine the collateral worth of a mortgage secured by a consumer's principal dwelling, including those instances where the use of an AVM does not involve a new extension of credit such as a loan modification or a reduction of a home equity line of credit.
Question 25. What, if any, alternate definitions would be more suitable than the definition of mortgage originator proposed?
Question 26. Would the proposed definition of mortgage originator disadvantage any covered entities vis-a-vis their market competitors?
8. Secondary Market Issuer
The agencies are proposing to define secondary market issuer as any party that creates, structures, or organizes a mortgage-backed securities transaction. The agencies propose to define secondary market issuer in this manner due to the statutory focus in section 1125 on "issuers" and "determin[ing] the collateral worth" of a mortgage. This type of determination, as opposed to verification or monitoring of such determination, would typically take place in the secondary market in connection with the creation, structuring, and organization of a mortgage-backed security.
A number of parties may be involved in the securitization process and this proposed definition is designed to ensure coverage of entities responsible for the core decisions required for the issuance of mortgage-backed securities, including making determinations of the value of collateral securing the loans in the securitization transaction.
Question 27. What, if any, alternate definitions would be more suitable than the proposed definition of secondary market issuer? What, if any, additional types of entities should the agencies include in the definition? Should the definition cover fewer types of entities and, if so, which entities should not be covered?
Question 28. Would the proposed definition of secondary market issuer hinder small entities' access to secondary market liquidity and, if so, how might the agencies mitigate such impacts?
Question 29. What, if any, other terms should be defined in the proposed rule?
C. Quality Control Standards
1. Proposed Requirements for the First Four Quality Control Factors
The proposed rule would require mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to ensure a high level of confidence in the estimates produced; protect against the manipulation of data; seek to avoid conflicts of interest; and require random sample testing and reviews. This approach would allow mortgage originators and secondary market issuers the flexibility to set their quality control standards for covered AVMs as appropriate based on the size of their institution and the risk and complexity of transactions for which they will use covered AVMs.
These quality control factors are consistent with practices that many participants in the mortgage lending market already follow and with the guidance described in part I.A of this SUPPLEMENTARY INFORMATION that applies to many regulated institutions that would be subject to this rule. For example, Appendix B of the Guidelines contains detailed guidance for institutions seeking to establish policies, practices, procedures, and control systems to ensure the accuracy, reliability, and independence of AVMs. The requirement for quality control standards in the proposed rule is also consistent with model risk guidance, as discussed earlier. In line with the agencies' service provider guidance, regardless of whether mortgage originators and secondary market issuers use their own AVMs or make use of third-party AVMs, the proposed rule would require the mortgage originators and secondary market issuers to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs adhere to the rule's requisite quality control standards.
The agencies considered whether to propose more prescriptive requirements for the use of AVMs and decided not to do so. Different policies, practices, procedures, and control systems may be appropriate for institutions with different business models and risk profiles, and a more prescriptive rule could unduly restrict institutions' efforts to set their risk management practices accordingly. In addition, as noted earlier, guidance is already in place to assist regulated institutions in using AVMs in a safe and sound manner, and institutions that are not regulated by the agency or agencies providing the guidance may still look to the guidance for assistance with compliance. The agencies also considered that the statute does not require the agencies to set prescriptive standards for AVMs. For these reasons, a rule requiring institutions to develop policies, practices, procedures, and control systems designed to satisfy the requirement for quality control standards may more effectively carry out the purposes of section 1125 than a more prescriptive rule. /49/
FOOTNOTE 49 The agencies have, in other contexts, allowed institutions to adjust their compliance programs in a way that reflects institution-specific factors, such as an institution's size and complexity and the nature and scope of its lending activities. See, e.g., Interagency Guidelines Establishing Standards for Safety and Soundness, 12 CFR part 30, Appendix A (OCC); 12 CFR part 208, Appendix D-1 (Board); 12 CFR part 364, Appendix A (FDIC) (requiring institutions to have internal controls and information systems for implementing operational and managerial standards that are appropriate to their size and the nature, scope and risk of their activities); 12 CFR 34.62 (OCC); 12 CFR 208.51 (Board); 12 CFR 365.2 (FDIC) (requiring institutions to adopt policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate): Interagency Guidelines Establishing Information Security Standards,12 CFR part 30, Appendix B, (OCC); 12 CFR part 208, Appendix D-2 (Board); 12 CFR part 364, Appendix B (FDIC); 12 CFR part 748, Appendix A (NCUA) (requiring institutions to implement a comprehensive written information security program that is appropriate to the size and complexity of the institution and the nature and scope of its activities); and 12 CFR 41.90 (OCC); 12 CFR 222.90 (Board); 12 CFR 334.90 (FDIC) (requiring that banks establish policies and procedures for the detection, prevention, and mitigation of identity theft). See also Guidelines Establishing Standards for Residential Mortgage Lending Practices,12 CFR part 30, Appendix C (OCC) (providing that residential mortgage lending activities should reflect standards and practices appropriate for the size and complexity of the bank and the nature and scope of its lending activities); 12 CFR 1007.104 (CFPB) (requiring policies and procedures regarding the registration of mortgage loan originators that are appropriate to the nature, size, complexity, and scope of the financial institution's mortgage lending activities); and 12 CFR 1026.36(j) (CFPB) (requiring policies and procedures regarding mortgage loan origination that are appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the depository institution and its subsidiaries). END FOOTNOTE
Question 30. Is additional guidance needed on how to implement the quality control standards to protect the safety and soundness of financial institutions and protect consumers beyond the existing supervisory guidance described in part I.A of thisSUPPLEMENTARY INFORMATION? Should such additional guidance explain how a regulated entity would implement quality control for an AVM used or provided by a third party?
Question 31. In what ways, if any, would a more prescriptive approach to quality control for AVMs be a more effective means of carrying out the purposes of section 1125 relative to allowing institutions to develop tailored policies, practices, procedures, and control systems designed to satisfy the requirement for quality control standards? If so, what would be the key elements of such an alternative approach?
2. Specifying a Nondiscrimination Quality Control Factor
Section 1125 provides the agencies with the authority to "account for any other such factor" that the agencies "determine to be appropriate." /50/ Based on this authority, the agencies propose to include a fifth factor that would require mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that AVMs used in connection with making credit decisions or covered securitization determinations adhere to quality control standards designed to comply with applicable nondiscrimination laws.
FOOTNOTE 50 12 U.S.C. 3354(a)(5). END FOOTNOTE
Existing nondiscrimination laws apply to appraisals and AVMs and institutions have a preexisting obligation to comply with all Federal laws, including Federal nondiscrimination laws. For example, the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B bar discrimination on a prohibited basis in any aspect of a credit transaction. /51/ The agencies have long recognized that this prohibition extends to using different standards to evaluate collateral, /52/ which would include the design or use of an AVM in any aspect of a credit transaction in a way that would treat an applicant differently on a prohibited basis or result in unlawful discrimination against an applicant on a prohibited basis. Similarly, the Fair Housing Act prohibits unlawful discrimination in all aspects of residential real estate-related transactions, including appraisals of residential real estate. /53/
FOOTNOTE 51 15 U.S.C. 1691(a) (prohibiting discrimination on the basis of race, color, religion, national origin, sex (including sexual orientation and gender identity) or marital status, age (provided the applicant has the capacity to contract), because all or part of the applicant's income derives from any public assistance program), or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act); see also 12 CFR part 1002. This prohibition includes discrimination on the prohibited basis characteristics of "the neighborhood where the property offered as collateral is located." 12 CFR part 1002, supp. I, para. 2(z)-1. END FOOTNOTE
FOOTNOTE 52
FOOTNOTE 53 42 U.S.C. 3605 (prohibiting discrimination because of race, color, religion, national origin, sex, handicap, or familial status in residential real estate-related transactions); 42 U.S.C. 3605(b)(2) (defining "real estate-related transactions" to include the "selling, brokering, or appraising of residential real property."); see also 24 CFR part 100; note 50, supra. END FOOTNOTE
As with models more generally, there are increasing concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias, such as by replicating systemic inaccuracies and historical patterns of discrimination. Models could discriminate because of the data used or other aspects of a model's development, design, implementation, or use. /54/ Attention to data is particularly important to ensure that AVMs do not rely on data that incorporate potential bias and create discrimination risks. Because AVMs arguably involve less human discretion than appraisals, AVMs have the potential to reduce human biases. Yet without adequate attention to ensuring compliance with Federal nondiscrimination laws, AVMs also have the potential to introduce discrimination risks. Moreover, if models such as AVMs are biased, the resulting harm could be widespread because of the high volume of valuations that even a single AVM can process. These concerns have led to an increased focus by the public and the agencies on the connection between nondiscrimination laws and AVMs.
FOOTNOTE 54 In other contexts, models and data have the potential to be a source of bias and may cause consumer harm if not designed, implemented, and used properly. See generally,
While existing nondiscrimination law applies to an institution's use of AVMs, the agencies propose to include a fifth quality control factor relating to nondiscrimination to heighten awareness among lenders of the applicability of nondiscrimination laws to AVMs. Specifying a fifth factor on nondiscrimination would create an independent requirement for institutions to establish policies, practices, procedures, and control systems to specifically address nondiscrimination, thereby further mitigating discrimination risk in their use of AVMs. Specifying a nondiscrimination factor may also increase confidence in AVM estimates and support well-functioning AVMs. In addition, specifying a nondiscrimination factor could help protect against potential safety and soundness risks, such as operational, legal, and compliance risks, associated with failure to comply with nondiscrimination laws.
In proposing to add a fifth quality control factor on nondiscrimination, the agencies note that compliance with applicable nondiscrimination laws with respect to AVMs may be indirectly reflected within and related to three of the first four statutory quality control factors. For example, the first factor requires quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs. AVMs that reflect discriminatory bias in the data or discriminatory assumptions could affect confidence in AVM outputs and may also result in a form of data manipulation, particularly with respect to model assumptions and in the interactions among variables in a model, which bears on the second quality control factor in section 1125. The fourth quality control factor requires random sample testing and reviews of AVMs. The proposed fifth factor on nondiscrimination may include an array of tests and reviews, including fair lending reviews, which would support the general requirement for random sampling testing and review in section 1125. The first four factors do not, however, expressly address quality control measures relating to compliance with nondiscrimination laws.
Requiring institutions using AVMs covered by this proposed rule to adopt fair lending compliance policies and practices would be consistent not only with current law but also with well-established fair lending guidance. The OCC, Board,
FOOTNOTE 55 See, e.g.,
FOOTNOTE 56 Id. Interagency Statement on the Use of Alternative Data in Credit Underwriting (
FOOTNOTE 57
The agencies propose that institutions would have the flexibility to design fair lending policies, procedures, practices, and control systems that are in compliance with fair lending laws and take into account their business models, as discussed in part II.C.1 of this SUPPLEMENTARY INFORMATION regarding the first four quality control factors.
The agencies seek comment on the proposal to specify a nondiscrimination quality control factor, including ways they could facilitate compliance for smaller financial institutions and whether additional clarity should be provided to assist institutions in complying with the proposed fifth factor.
Question 32. What are the advantages and disadvantages of specifying a fifth quality control factor on nondiscrimination? What, if any, alternative approaches should the agencies consider?
Question 33. To what extent is compliance with nondiscrimination laws with respect to covered AVMs already encompassed by the statutory quality control factors requiring a high level of confidence in the estimates produced by covered AVMs, protection against the manipulation of data, and random sampling and reviews? Should the agencies incorporate nondiscrimination into those factors rather than adopt the fifth factor as proposed? Would specifying a nondiscrimination quality control factor in the rule be useful in preventing market-distorting discrimination in the use of AVMs?
Question 34. What are the advantages and disadvantages of a flexible versus prescriptive approach to the nondiscrimination quality control factor?
Question 35. Are lenders' existing compliance management systems and fair lending monitoring programs able to assess whether a covered AVM, including the AVM's underlying artificial intelligence or machine learning, applies different standards or produces disparate valuations on a prohibited basis? If not, what additional guidance or resources would be useful or necessary for compliance?
Question 36. What, if any, other approaches should the agencies consider for incorporating nondiscrimination requirements in this proposed rule?
D. Request for Comments
The agencies invite comments on all other aspects of the proposed rulemaking.
E. Proposed Implementation Period
The agencies propose an effective date of the first day of a calendar quarter following the 12 months after publication in the
Question 37. In addition to providing time for implementation, in what other ways should the agencies facilitate implementation for small entities?
III.
While Federal agencies generally must consider the impact that their proposed rules could have on small entities, the Regulatory Flexibility Act (RFA), /58/ as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) /59/ and the Dodd-Frank Act, imposes on the
FOOTNOTE 58 5 U.S.C.
FOOTNOTE 59 Public Law 104-121, 110 Stat. 857 (1996) (5 U.S.C. 609) (amended by Dodd-Frank Act section 1100G). END FOOTNOTE
Specifically, the
FOOTNOTE 60 5 U.S.C. 609(b). END FOOTNOTE
FOOTNOTE 61 Advocacy is an independent office within the
FOOTNOTE 62 5 U.S.C. 609(b)(3). END FOOTNOTE
FOOTNOTE 63 5 U.S.C. 609(b)(4). END FOOTNOTE
FOOTNOTE 64 5 U.S.C. 609(b)(5). END FOOTNOTE
In preparation for convening a Panel for this rulemaking and to help facilitate the Panel's outreach to SERs, the
FOOTNOTE 65
FOOTNOTE 66 In advance of the Panel outreach meetings, the
On
FOOTNOTE 67
* A description of the proposals that are being considered by the
* Background information on small entities that would likely be subject to those proposals and on the particular SERs selected to advise the Panel;
* A discussion of the feedback from and recommendations made by the SERs; /68/ and
FOOTNOTE 68 In addition to oral feedback, ten of the 16 SERs provided written feedback, which is appended to the SBREFA Panel Report at Appendix B. END FOOTNOTE
* A discussion of the findings and recommendations of the Panel. /69/
FOOTNOTE 69 As required by the RFA, the
The
As it prepared this proposed rule with the other agencies, the
FOOTNOTE 70 The SBREFA Panel Report provides a more complete summary of feedback from the SERs and the findings and recommendations of the Panel. The
A. Summary of SBREFA Feedback and Panel Findings and Recommendations
In their feedback on the SBREFA Outline, SERs and other stakeholders (collectively, SBREFA commenters) generally expressed support for the rulemaking's goal of ensuring AVM accuracy. Many SBREFA commenters noted that AVMs potentially save time and money but also cautioned that they would need to have greater confidence in AVMs before broadly expanding their usage of them. While acknowledging that AVM developers are entitled to maintain trade secrets and protect their intellectual property rights, several SBREFA commenters expressed concern that AVM developers do not provide sufficient transparency regarding how they calculate AVM values.
SBREFA commenters expressed some support for greater standardization of AVM testing and reporting but cautioned that prescriptive regulations could threaten innovation and increase costs.
While acknowledging that
SBREFA commenters generally supported aligning definitions in the AVM rule with definitions in existing financial regulations to simplify compliance. Some SERs and a trade association recommended that the AVM rule incorporate a transaction-based exemption threshold, such as not covering portfolio loans under
Several SBREFA commenters stated that it would be beneficial to have a governmental or not-for-profit accrediting body for AVMs, so that AVM users could rely on such accreditation for complying with the AVM rule. Several SERs and other stakeholders also advocated for greater information sharing regarding the GSEs' AVMs.
1. Defining "Consumer's Principal Dwelling"
The section 1125 definition of AVM refers to a mortgage secured by a consumer's principal dwelling. The terms "consumer," "dwelling," and "principal dwelling" are not defined in title XI, although the Dodd-Frank Act also added the phrase "consumer's principal dwelling" into provisions of title XI that address appraisal management company requirements and broker price opinions. /71/ During the SBREFA process, the
FOOTNOTE 71 See Dodd-Frank Act section 1473(f)(4), adding section 1121(11) to title XI, codified at 12 U.S.C. 3350(11)): and Dodd-Frank Act section 1473(r), adding section 1126(a) to title XI, codified at 12 U.S.C. 3355(a), respectively. END FOOTNOTE
FOOTNOTE 72 The appraisal management company provisions in title XI include a requirement that appraisal management companies apply valuation independence standards established under TILA. 12 U.S.C. 3353(a)(4). TILA is implemented in the
Coverage of "consumers." For most purposes Regulation Z defines "consumer" as a natural person to whom consumer credit is offered or extended. /73/ The SBREFA Outline noted that, for certain purposes, the scope of the Regulation Z term "consumer" may apply to additional persons. /74/ The SBREFA Outline noted further that, unlike TILA, section 1125 does not limit its coverage to credit transactions that are primarily for personal, family, or household purposes. /75/ Therefore, the SBREFA Outline advised the SERs that the
FOOTNOTE 73 See 12 CFR 1026.2(a)(11). END FOOTNOTE
FOOTNOTE 74 To see how the
FOOTNOTE 75 See 12 CFR 1026.2(a)(12) (definition of "consumer credit"). END FOOTNOTE
FOOTNOTE 76 The terms "dwelling" and "principal dwelling" are discussed separately in this section. END FOOTNOTE
The SERs provided a variety of observations about extending the AVM requirements to business-purpose loans and defining the term "consumer" to include persons other than a natural person. In addition to addressing the scope of coverage generally and consistency with existing definitions, the SERs discussed valuation costs, processing times, and business practices. /77/
FOOTNOTE 77 See SBREFA Panel Report at section 8.13. END FOOTNOTE
Coverage of "dwelling" and limiting coverage to "principal" dwelling. The section 1125 definition of AVM refers to determining the collateral worth of a mortgage secured by a consumer's principal dwelling. During the SBREFA process, the
Regarding the definition of "dwelling," SERs discussed considerations relevant to limiting application of the AVM quality control standards to mortgages secured by real property, including alternative valuation guides and sampling challenges. /78/ A coalition of consumer and civil rights groups urged adoption of a broad definition of dwelling and suggested considering adopting the Fair Housing Act definition of dwelling. /79/
FOOTNOTE 78 See SBREFA Panel Report at section 8.13. END FOOTNOTE
FOOTNOTE 79 See 42 U.S.C. 3602(b) (" 'Dwelling' means any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land which is offered for sale or lease for the construction or location thereon of any such building, structure, or portion thereof."). END FOOTNOTE
Regarding what would be a "principal" dwelling, the SERs discussed considerations for applying the AVM standards to second homes, vacation homes, and new construction. /80/ One SER commented on the importance of considering how coverage might apply to active military personnel who are purchasing a home for their future permanent residence while assigned temporarily to a different duty station. One trade association supported leveraging existing definitions for key terms in the AVM rule, including dwelling and consumer's principal dwelling.
FOOTNOTE 80 See SBREFA Panel Report at section 8.13. END FOOTNOTE
2. Defining "Mortgage"
Section 1125 defines an AVM by reference to determining "the collateral worth of a mortgage," /81/ but does not define the term "mortgage." In the SBREFA process, the
FOOTNOTE 81 12 U.S.C. 3354(d). Section 1125 focuses on mortgages "secured by a consumer's principal dwelling." Id. END FOOTNOTE
Most SERs did not express a preference for one definition over the other, but some did request further clarity on what types of transactions would be covered, and others asked that the definition be coordinated with existing regulatory definitions. Two SERs preferred the first mortgage definition. One of those SERs suggested that the first definition of mortgage was easier to understand, and the other SER preferred the first definition because it did not appear to include installment sales contracts, which it said could be understood to include consumer purchases for improvements to a home (for example, financing an HVAC system). /82/
FOOTNOTE 82 The
A coalition of consumer and civil rights groups commenting on the definition of mortgage preferred the second definition because it was broader and would protect consumers using installment sales contracts, who the stakeholder said are often Black homebuyers. A trade association did not think that installment land contracts should be included.
3. Defining "Mortgage Originator"
Section 1125 covers AVMs used by "mortgage originators," but does not define the term. /83/ In the SBREFA Outline, the
FOOTNOTE 83 12 U.S.C. 3354(d). END FOOTNOTE
FOOTNOTE 84
FOOTNOTE 85 Final Report of
Although there was support among SERs and other stakeholders for defining "mortgage originator" based on definitions in existing consumer financial laws, six SERs and a coalition of consumer and civil rights groups indicated that the
In addition to receiving requests from SERs asking it to consider alternative definitions for the term "mortgage originator," the
4. Defining "Secondary Market Issuer"
Section 1125 uses, but does not define, the term "secondary market issuers"; specifically, the statute defines an AVM by reference to computerized models "used by mortgage originators and secondary market issuers to determine the collateral worth" of certain mortgages. /86/ In the SBREFA Outline, the
FOOTNOTE 86 12 U.S.C. 3354(d). Section 1125 focuses on mortgages "secured by a consumer's principal dwelling." Id. END FOOTNOTE
5. Types of AVM Uses
Section 1125 defines an AVM as any computerized model "used by mortgage originators and secondary market issuers to determine the collateral worth" of certain mortgages. /87/ In the SBREFA Outline, the
FOOTNOTE 87 12 U.S.C. 3354(d). Section 1125 focuses on mortgages "secured by a consumer's principal dwelling." Id. END FOOTNOTE
Underwriting versus non-underwriting AVM uses. Section 1125 focuses on AVMs used to "determine" the collateral worth. In the SBREFA Outline, the
Loan modifications and other changes to existing loans. Section 1125 focuses on AVMs used to "determine" the collateral worth. Among specific types of AVM uses, the
With respect to the two alternatives, SERs generally expressed a preference for the
The
Credit line reductions or suspensions. Section 1125 focuses on AVMs used to "determine" the collateral worth of a mortgage secured by a consumer's principal dwelling. Among specific types of AVM uses, in the SBREFA Outline, the
Uses of AVMs by appraisers. Section 1125 applies to AVMs used by "mortgage originators" and "secondary market issuers," respectively. /88/ Third-party appraisers generally would not be mortgage originators or secondary market issuers; thus, appraisers themselves generally would not be covered by the eventual rule. But, as discussed in part I.A of this SUPPLEMENTARY INFORMATION, regulated entities--including mortgage originators and secondary market issuers--are responsible for managing risk inherent in the use of third-party service providers, such as appraisers. /89/
FOOTNOTE 88 12 U.S.C. 3354(d). END FOOTNOTE
FOOTNOTE 89 See supra note 12. END FOOTNOTE
In the SBREFA Outline, the
FOOTNOTE 90 For consumer credit transactions secured by a consumer's principal dwelling, TILA section 129E, 15 U.S.C. 1639e, and its implementing regulations require valuation independence by, for example, prohibiting material misrepresentation of property value and conflicts of interest for persons preparing valuations or performing valuation management functions.
Securitization. Section 1125 focuses on AVMs used to "determine" the collateral worth of a mortgage secured by a consumer's principal dwelling. Among specific types of AVM uses, in the SBREFA Outline, the
Reviews of completed determinations. Section 1125 focuses on AVMs used to "determine" the collateral worth of a mortgage secured by a consumer's principal dwelling. Among specific types of AVM uses, in the SBREFA Outline, the
Appraisal waivers. Section 1125 focuses on AVMs used to "determine" the collateral worth of certain mortgages. In the SBREFA Outline, the
6. Options for the First Four Quality Control Standards
Section 1125 requires that AVMs adhere to quality control standards designed to: (1) ensure a high level of confidence in the estimates produced; (2) protect against the 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 that the agencies determine to be appropriate. Section 1125(b) requires the agencies to promulgate regulations to implement these quality control standards.
In the SBREFA process, the
SERs overwhelmingly expressed support for the first option the
FOOTNOTE 91 The SERs also discussed other topics besides the direct question of whether the
Almost all other stakeholders who commented on the quality control options in the SBREFA Outline preferred the principles-based approach, largely for the same reasons that the SERs did. Some of these stakeholders, particularly those involved in the appraisal and valuation market, suggested that the
7. Specifying a Nondiscrimination Quality Control Standard
Section 1125 provides the agencies the authority to account for any other such factor that the agencies determine to be appropriate. /92/ In the SBREFA process, the
FOOTNOTE 92 12 U.S.C. 3354(a)(5). END FOOTNOTE
During the SBREFA process, SERs uniformly voiced concern regarding how they can assess AVM compliance with applicable nondiscrimination law or know that they are in violation of the law. SERs stated that it is impractical for them to assess AVM fair lending performance because they are not equipped to validate the algorithms that AVM providers use. SERs commented that, as small institutions, they do not have the staff, the data, or the scale to assess AVM model results meaningfully. In addition, SERs stated that lenders do not have access to the data or methodology used by the AVM because the data is proprietary.
SERs expressed that it is important to ensure fairness in AVM development and application, including ensuring that AVMs do not rely on data that results in inadvertent discrimination. However, SERs stated that the burden should be on AVM providers to comply with nondiscrimination requirements, and the providers should be regulated.
In addition, SERs expressed that there is sufficient fair lending regulatory infrastructure already in place and that adding a fair lending requirement to the quality control standards for AVMs would be duplicative and, therefore, unnecessary. SERs further stated that the other four quality control standards required by statute already account for fair lending compliance.
A number of other stakeholders, including several trade associations, echoed many of the SERs' concerns about specifying a nondiscrimination quality control standard. A coalition of consumer and civil rights groups stated that while they fully support the addition of nondiscrimination as a fifth quality control standard, the agencies should incorporate nondiscrimination into each of the quality control standards, asserting that fair lending risk should not be separated from safety and soundness risk.
8. Implementation Period
Title XIV of the Dodd-Frank Act requires an implementation period within 12 months after issuance of the interagency final rule. /93/ Many SERs and an AVM testing company providing feedback on the SBREFA Outline stated that small entities would need more than the statutory 12-month period to comply with the eventual rule. Those stakeholders highlighted the potential nondiscrimination quality control factor as an aspect of the potential rule that would be particularly time consuming to implement. One SER and a trade association stated that the implementation period should be at least 12 months while a research center estimated only six months would be necessary.
FOOTNOTE 93 12 U.S.C. 1400(c)(1)(B). END FOOTNOTE
IV. Paperwork Reduction Act
Certain provisions of the proposed rule contain "collection of information" requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995. /94/ In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a current
FOOTNOTE 94 44 U.S.C. 3501-3521. END FOOTNOTE
The proposed rule would establish quality control standards mandated by the Dodd-Frank Act for the use of AVMs by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer's principal dwelling. Section 1473(q) of the Dodd-Frank Act amended title XI to add section 1125 relating to the use of AVMs in valuing real estate collateral securing mortgage loans. Section 1125 directs the agencies to promulgate regulations to implement quality control standards regarding AVMs.
The proposed rule would require supervised mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
The quality control standards in the proposed rule are applicable only to covered AVMs, which are AVMs as defined in the proposed rule. The proposed rule would require the regulated mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to the specified quality control standards whenever they use covered AVMs while engaging in certain credit decisions or covered securitization determinations.
As a result, the proposed rule creates new recordkeeping requirements. The agencies are revising their current information collections related to real estate appraisals and evaluations. The OMB control number for the OCC is 1557-0190, the Board is 7100-0250, the
The information collection requirements contained in this proposed rule have been submitted by the OCC, the
FOOTNOTE 95 44 U.S.C. 3507(d). END FOOTNOTE
FOOTNOTE 96 5 CFR 1320. END FOOTNOTE
Comments are invited on:
(a) Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;
(b) The accuracy of the estimate of the burden of the information collections, including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the collections of information should be sent to the address listed in the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer by mail to
Proposed Information Collection
Title of Information Collection: Recordkeeping and Disclosure Requirements and Provisions Associated with Real Estate Appraisals and Evaluations.
Frequency of Response: Annual and event generated.
Affected Public: Businesses, other for-profit institutions, and other not-for-profit institutions.
Respondents:
OCC: National banks, Federal savings associations.
Board: State member banks (SMBs), bank holding companies (BHCs), nonbank subsidiaries of BHCs, savings and loan holding companies (SLHCs), nondepository subsidiaries of SLHCs, Edge and agreement corporations,
NCUA: Private Sector: Not-for-profit institutions.
General Description of Report:
For federally related transactions, title XI requires regulated institutions /97/ to obtain appraisals prepared in accordance with USPAP promulgated by the
FOOTNOTE 97 National banks, Federal savings associations, SMBs and nonbank subsidiaries of BHCs, insured state nonmember banks and state savings associations, and insured state branches of foreign banks. END FOOTNOTE
The proposed rule would require supervised mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
Current Action: The proposed rule creates new recordkeeping requirements in connection with adopting and maintaining policies, practices, procedures, and control systems. The agencies estimate that the new recordkeeping burden associated with the proposed rule would result in an implementation burden of 13.33 hours per respondent and an annual ongoing burden of 5 hours per respondent. In addition to accounting for the PRA burden incurred as a result of this proposed rule, the agencies are also updating and aligning their information collections (IC) with respect to the hourly burden associated with the Guidelines. This would result in an annual ongoing burden of 10 hours per respondent for recordkeeping and an annual ongoing burden of 5 hours per respondent for disclosure.
OCC Burden
Table 1-Summary of Estimated Annual Burden
Requirement Citations Number of Burden hours per Total number
respondents respondent of hours
annually
Recordkeeping: [Sec.] 7.1024(d) 6 5 30
Resolution stating plans for use of
property
Recordkeeping: [Sec.] 34.22(a); [Sec.] 160.35(b) 164 6 984
ARM loan documentation must specify
indices to which changes in the
interest rate will be linked
Recordkeeping: [Sec.] 34.44 976 1,465 responses per respondent @5 119,072
Appraisals must be written and contain minutes per response
sufficient information and analysis to
support engaging in the transaction
Recordkeeping: [Sec.] 34.62; appendix A to subpart D to 1,413 30 42,390
Written policies (reviewed annually) part 34; [Sec.] 160.101; appendix A to
for extensions of credit secured by or [Sec.] 160.101
used to improve real estate
Recordkeeping: [Sec.] 34.85 9 5 45
Real estate evaluation policy to
monitor OREO
Recordkeeping: Proposed [Sec.] 34.222 342 13.33 hours (40 hours divided by 3 4,559
New IC 1-AVM Rule-Policies and years)
Procedures (Implementation)
Recordkeeping: Proposed [Sec.] 34.222 342 5 1,710
New IC 2-AVM Rule-Policies and
Procedures (Ongoing)
Recordkeeping: N/A 976 10 9,760
New IC 3-Interagency Appraisal and
Evaluation Guidelines-Policies and
Procedures
Reporting: [Sec.] 34.22(b); [Sec.] 160.35(d)(3) 249 6 1,494
Procedure to be followed when seeking
to use an alternative index
Reporting: [Sec.] 34.86 6 5 30
Prior notification of making advances
under development or improvement plan
for OREO
Disclosure: [Sec.] 190.4(h) 42 2 84
Default notice to debtor at least 30
days before repossession, foreclosure,
or acceleration of payments
Disclosure: N/A 976 5 4,880
New IC 4-Interagency Appraisal and
Evaluation Guidelines
Total Annual Burden Hours 185,038
Board Burden
Table 2-Summary of Estimated Annual Burden FRY-30 Estimated Estimated Estimated Estimated number of annual average annual respondents frequency hours per burden response hours Recordkeeping Sections 225.61-225.67 for SMBs 701 519 5 minutes 30,318 Sections 225.61-225.67 for BHCs and 4,714 25 5 minutes 9,821 nonbank subsidiaries of BHCs Guidelines 5,415 1 10 54,150 Policies and Procedures AVM rule 2,088 1 13.3 27,770 (Initial setup) Policies and Procedures AVM rule 2,088 1 5 10,440 (Ongoing) Disclosure Guidelines 5,415 1 5 27,075 Total AnnualBurden Hours 159,574
FDIC Burden
See table in Original Document.
NCUA Burden
See table in Original Document.
The
V. Regulatory Flexibility Act Analysis
A. OCC
The RFA requires an agency, in connection with a proposed rule, to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the
The OCC has assessed the burden of the proposed rule and has determined that the costs associated with the proposed rule would be limited to reviewing the rule; ensuring that existing practices, procedures, and control systems adequately address the four statutory quality control standards; and adopting policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws. To estimate expenditures, the OCC reviewed the costs associated with the activities necessary to comply with the proposed rule. These include an estimate of the total time required to implement the proposed rule and the estimated hourly wage of bank employees who may be responsible for the tasks associated with achieving compliance with the proposed rule. The OCC used a bank employee compensation rate of
FOOTNOTE 98 To estimate wages the OCC reviewed
The OCC currently supervises approximately 661 small entities. /99/ The proposed rule would impact approximately 614 of these small entities. The OCC estimates the annual cost for small entities to comply with the proposed rule would be approximately
FOOTNOTE 99 The OCC bases its estimate of the number of small entities on the SBA's size thresholds for commercial banks and savings institutions, and trust companies, which are
The Board is providing an initial regulatory flexibility analysis with respect to this proposal. The RFA requires an agency to consider whether the rules it proposes will have a significant economic impact on a substantial number of small entities. In connection with a proposed rule, the RFA requires an agency to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. An initial regulatory flexibility analysis must contain (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and legal basis for, the proposed rule; (3) a description of, and, where feasible, an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; (5) an identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap with, or conflict with the proposed rule; and (6) a description of any significant alternatives to the proposed rule which accomplish its stated objectives.
The Board has considered the potential impact of the proposal on small entities in accordance with the RFA. Based on its analysis and for the reasons stated below, the proposal is not expected to have a significant economic impact on a substantial number of small entities. Nevertheless, the Board is publishing and inviting comment on this initial regulatory flexibility analysis. The Board will consider whether to conduct a final regulatory flexibility analysis after any comments received during the public comment period have been considered.
1. Reasons Why Action Is Being Considered by the Board
As discussed above, the Dodd-Frank Act amended title XI to add a new section governing the use of AVMs in mortgage lending and directing the agencies to promulgate regulations to implement specified quality control standards. The proposal serves to implement this statutory mandate.
2. The Objectives of, and Legal Basis for, the Proposal
The proposed rule would implement statutorily mandated quality control standards for the use of AVMs. The Board would adopt the proposal pursuant to section 1125 of title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. /100/
FOOTNOTE 100 12 U.S.C. 3354. END FOOTNOTE
3. Estimate of the Number of Small Entities
The proposal would apply to Board-regulated small entities that are mortgage originators or secondary market issuers. There are approximately 472 state member banks and approximately 2,799 bank holding companies and savings and loan holding companies that qualify as small entities for purposes of the RFA. /101/
FOOTNOTE 101 Under regulations issued by the SBA, a small entity includes a depository institution, bank holding company, or savings and loan holding company with total assets of
4. Description of the Compliance Requirements of the Proposal
The proposal would require Board-regulated small entities that are mortgage originators or secondary market issuers to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in credit decisions or covered securitization determinations adhere to specified quality control standards. These quality control standards must ensure a high level of confidence in the estimates produced, protect against the manipulation of data, avoid conflicts of interest, and require random sample testing and reviews and comply with applicable nondiscrimination laws. To the extent that small entities do not already maintain adequate policies, practices, procedures, and control systems, they could incur administrative costs to do so. It is likely that the majority of Board-regulated small entities that are mortgage originators or secondary market issuers either do not use AVMs in credit decisions or covered securitization determinations would already be in compliance with the proposed specified standards or could become compliant with relatively minor modifications to their current practices. /102/
FOOTNOTE 102 For example, the Board has provided guidance to most such entities on use of AVMs. See Interagency Appraisal and Evaluation Guidelines, 75 FR 77450, 77468 (
Board staff estimates that impacted Board-supervised small entities would spend 160 hours establishing or modifying policies, practices, procedures, and control systems, at an hourly cost of
FOOTNOTE 103 To estimate wages, the
FOOTNOTE 104 This analysis assumes that the majority of credit decision and securitization determinations are performed at depository institutions. Therefore, only the number of State member depository institutions that are small entities, 472, are included in the calculation of administrative costs. The impact on the majority of small bank holding companies and savings and loan holding companies is expected to be minimal. END FOOTNOTE
5. Consideration of Duplicative, Overlapping, or Conflicting Rules and Significant Alternatives to the Proposal
The Board has not identified any Federal statutes or regulations that would duplicate, overlap, or conflict with the proposal. The Board is required by statute to promulgate regulations to implement the quality control standards required under section 1125 of title XI, and thus no significant alternatives are available. /105/
FOOTNOTE 105 12 U.S.C. 3354. END FOOTNOTE
Question 38. How frequently do bank holding companies and savings and loan holding companies that meet the definition of small entity use AVMs to engage in making credit decisions or securitization determinations?
Question 39. Is the number of hours estimated to establish policies, procedures and control systems to comply with the rule realistic for small institutions. If not, what number is hours would be more appropriate?
C.
The RFA generally requires an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. /106/ However, an initial regulatory flexibility analysis is not required if the agency certifies that the proposed rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. The SBA has defined "small entities" to include banking organizations with total assets of less than or equal to
FOOTNOTE 106 5 U.S.C.
FOOTNOTE 107 The SBA defines a small banking organization as having
The
1. Why Action Is Being Considered
This action would fulfill the statutory mandate in the Dodd-Frank Act that the agencies promulgate regulations to implement quality control standards for AVMs used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling. /108/
FOOTNOTE 108 The legal basis is described in item (2) below. END FOOTNOTE
2. Policy Objectives of, and Legal Basis for, the Proposed Rule
Policy objectives. The overarching policy objectives of this proposed rule are to promote credibility and integrity in the use of AVMs for the purpose of residential mortgage lending valuation, thereby supporting safe and sound banking practices as well as helping ensure compliance with applicable nondiscrimination laws. If adopted, the proposed rule would achieve these objectives by, among other things, incorporating the principles stated in existing guidance /109/ through requiring regulated financial institutions to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs adhere to a set of quality control standards, and by directly linking nondiscrimination law to institutions' AVM policies, practices, procedures, and controls. Further, as discussed above in Section II of the SUPPLEMENTARY INFORMATION, the proposal provides institutions the flexibility to tailor their quality control standards for AVMs as appropriate based on the size of the institutions and the risk and complexity of transactions for which they will use covered AVMs.
FOOTNOTE 109 The guidance is discussed below. It consists of
Legal basis. The Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by adding a new section 1125 requiring AVMs to adhere to certain quality control standards. Section 1125 directs the
FOOTNOTE 110 12 U.S.C. 3354(a) through (b). END FOOTNOTE
3. Initial Regulatory Flexibility Act Analysis
A description and an estimate of the number of small institutions to which the proposed rule will apply. As of
FOOTNOTE 111 Based on Call Reports data as of
FOOTNOTE 112 Based on Call Reports data as of
Expected Effects. The costs and benefits discussed in this section apply to any small
Costs. The proposed rule would, if adopted, generally reflect existing Guidelines, supervisory expectations, and statutory obligations regarding the use of AVMs by supervised institutions. As mentioned, since 2010, the
FOOTNOTE 113 The
FOOTNOTE 114 The term "covered institutions" refers to financial institutions that would be subject to the proposed rule. END FOOTNOTE
FOOTNOTE 115 The search of nearly 22,000 FDIC Reports of Examination from
The fifth quality control standard is consistent with existing applicable nondiscrimination laws. For example, the ECOA and its implementing Regulation B, bar discrimination on a prohibited basis in any aspect of a credit transaction. /116/ Similarly, the Fair Housing Act /117/ prohibits unlawful discrimination in all aspects of residential real estate-related transactions, including valuations of residential real estate. However, the
FOOTNOTE 116 15 U.S.C. 1691(a) (prohibiting discrimination on the basis of race, color, religion, national origin, sex or marital status, age (provided the applicant has the capacity to contract), because all or part of the applicant's income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act); see also 12 CFR part 1002. END FOOTNOTE
FOOTNOTE 117 42 U.S.C. 3605 (prohibiting discrimination because of race, color, religion, national origin, sex, handicap, or familial status in residential real estate-related transactions); 42 U.S.C. 3605(b)(2) (defining "real estate-related transactions" to include the "selling, brokering, or appraising of residential real property"); see also 24 CFR part 100. END FOOTNOTE
As mentioned, the
This analysis subdivides the assumed compliance-related average labor hours spent by covered institutions into two types: (1) burdens under the Paperwork Reduction Act (PRA), and (2) those for non-PRA compliance activities. For PRA burdens, based on supervisory experience the agency assumes that on average, covered
The
Based on supervisory experience and subject matter expertise, the
This method multiplies the assumed average number of hours per year required to comply with the proposed rule by the weighted average estimated total compensation rate for each labor category expected to be involved in associated activities. /118/ The resulting product represents the cost estimate.
FOOTNOTE 118 The assumed distribution of occupation groups involved in the actions taken by institutions in response to the proposed rule in year 1 include Financial Analysts (40 percent of hours), Compliance Officers (40 percent), Lawyers (15 percent), and Executives and Managers (5 percent). In year 2 and beyond, the assumed distribution is Financial Analysts (50 percent of hours), Compliance Officers (40 percent), Lawyers (5 percent), and Executives and Managers (5 percent). These combinations of occupations results in an overall estimated hourly total compensation rate of
The
The analysis assumes the current number of
FOOTNOTE 119 Calculations are as follows. Lower estimate: Year 1:
FOOTNOTE 120 Upper-bound estimate: Year 1:
FOOTNOTE 121 Year 1:
Further analysis shows that the estimated costs described above would not impose a significant economic impact on a substantial number of small institutions. The method estimates the average cost per institution by multiplying the assumed number of labor hours in each year by the estimated weighted average hourly labor cost rate. This yields the average costs per institution in year 1 (approximately
FOOTNOTE 122 The estimated average cost per institution is the same for all assumed AVM use rates. END FOOTNOTE
The compliance costs incurred by any one covered institution is likely to vary with the volume of covered AVM activity, the degree to which current AVM compliance activities differ from the robust quality control standards in the proposed rule, or the usage of in-house or third-party AVM service providers.
Benefits. If adopted, the proposed rule would confer public benefits by promoting the credibility and integrity of residential real estate valuations used by covered institutions, thereby supporting their safe and sound operations, and helping ensure that the use of AVMs by institutions is consistent with nondiscrimination laws. These benefits cannot be reliably quantified by the
These benefits are predicated on the premise that some institutions would enhance their AVM policies, practices, procedures, and controls in response to the proposal's first four quality control standards, despite most institutions already generally following the principles in existing Guidelines. At the same time, the fifth standard may be more likely to generate changes in institutions' policies and procedures and potential associated benefits, than their responses to the first four standards. Generally, to the extent the proposal drives actions that result in more accurate and credible AVM valuations of residential real estate, it may contribute to more efficient underwriting, lending decisions, and risk management among covered institutions. Such effects may be derived through multiple channels, for example:
--Improved risk information and its impacts: Improved valuation accuracy would be expected to result in more precise residential property credit risk assessment and pricing. Generally, valuation error, whether generated by an AVM or appraiser, may reduce the precision of risk measurement and pricing, for instance, by distorting loan-to-value (LTV) ratios. This misvaluation affects both the immediate transaction and the downstream users of valuation data to inform loan decisions, valuations of comparable properties, and default risk estimation. /123/ More accurate risk information would be expected to enhance loan performance /124/ and reduce loss-given-default /125/ by more tightly matching loan decisions and terms to actual risk exposures. In the aggregate, more accurate risk information may promote the safety and soundness of the financial system by reducing the likelihood of large negative asset valuation shocks and by enhancing economy-wide mortgage default estimates. /126/ For example, research identifies flawed home appraisals as a contributor to the 2008 financial crisis. /127/
FOOTNOTE 123 See Calem et al. (2021). Calem, Paul S.,
FOOTNOTE 124 Agarwal et al. (2015) and Lacour-Little and Malpezzi (2003) find evidence that inaccurate collateral valuations are associated with increased loan default rates. Agarwal, Sumit,
FOOTNOTE 125 Carillo et al. (2022) find evidence that larger markups in home purchase transactions are associated with greater losses to lenders, conditional on loan default. Carillo, Paul E.,
FOOTNOTE 126 Carillo et al. (2022) argue that LTV miscalculation can reduce the reliability of aggregate default estimates. END FOOTNOTE
FOOTNOTE 127 See Ben-David (2011), Nakamura (2010), Eriksen (2019). Ben-David, Itzhak, 2011, "Financial Constraints and Inflated Home Prices during the Real Estate Boom."
--Potentially more equitable mortgage lending outcomes. Despite statutory obligations requiring nondiscrimination in all aspects of residential real estate transactions, including property valuations, preliminary research continues to find evidence of disparities in residential property values along racial and ethnic lines, /128/ mortgage approval rates, and lending terms. /129/ Additionally, research suggests that appraised values that more frequently result in valuations below sales contract prices in minority neighborhoods may play a role in disparities for housing-related outcomes. /130/
FOOTNOTE 128 The average value of single-family homes in majority White communities (
FOOTNOTE 129 Analysis of data from the
FOOTNOTE 130 Research by
Imprecision in AVM results may contribute to the propagation of racial and ethnic disparities through two channels. First, AVMs using comparable sales as inputs may include sale prices that were below original contract prices due in part to prior appraisals that more commonly undervalue homes in minority communities. Second, less precise AVM valuations in these communities may influence institutions' credit decisions and lending terms to account for the associated risk, potentially making it more difficult for borrowers to obtain financing. Publicly available research on AVM valuation results in minority communities is limited. This preliminary research demonstrates that AVM home valuations in predominantly Black neighborhoods have persistently exhibited substantially greater percentage error rates than AVM valuations in predominantly White neighborhoods. /131/ To the extent that the proposed rule fosters actions by covered small institutions that result in more accurate AVM home valuations, this may help to mitigate the potential role of AVMs in persistent disparities in home valuations and their associated impacts.
FOOTNOTE 131 Neal, et al. (2020) and Zhu, Linna,
Overall, the
4. An Identification, to the Extent Practicable, of all Relevant Federal Rules Which May Duplicate, Overlap With, or Conflict With the Proposed Rule
The
5. A Description of Any Significant Alternatives to the Proposed Rule That Accomplish its Stated Objectives.
The
FOOTNOTE 132 See Neal, et al. (2020), Ambrose, et al. (2023), Bartlett, et al. (2022), and Bhutta, et al. (2022). END FOOTNOTE
FOOTNOTE 133 Neal, et al. (2020) and Zhu, et al. (2022). END FOOTNOTE
The
D. NCUA
The RFA generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment, unless the agency certifies it will not have a significant economic impact on a substantial number of small entities. /134/
FOOTNOTE 134 5 U.S.C.
The RFA establishes terms for various subgroups that potentially qualify as a "small entity"--including "small business," "small organization," and "small governmental jurisdiction." /135/ Federally insured credit unions (FICUs), as not-for-profit enterprises, are "small organizations," within the broader meaning of "small entity." Moreover, the RFA permits a regulator (such as the NCUA) to sharpen the definition of "small organization" as appropriate for agency activities--provided that definition is subjected to public comment and published in the
FOOTNOTE 135 5 U.S.C. 601. END FOOTNOTE
FOOTNOTE 136 5 U.S.C. 601(4). END FOOTNOTE
FOOTNOTE 137 80 FR 57512 (
FOOTNOTE 138 IRPS 15-1 was preceded by IRPS 81-4, which defined "small entity" as any FICU with fewer than
As of
FOOTNOTE 139 These figures come from the Quarterly Credit Union Data Summary 2022 Q4, pages i-iii, available at: https://ncua.gov/files/publications/analysis/quarterly-data-summary-2022-Q4.pdf. The Data Summary, in turn, is compiled using mandatory quarterly 5300 (i.e., call report) and Profile submissions from supervised credit unions. END FOOTNOTE
1. Why Action Is Being Considered
The proposed rule would fulfill the statutory mandate in the Dodd-Frank Act requiring agencies to promulgate quality-control standards for AVMs used by mortgage originators and secondary-market issuers to value principal dwellings used as collateral.
2. Policy Objectives of, and Legal Basis for, the Proposed Rule
The NCUA is proposing the rulemaking to: (1) promote credit union safety and soundness by enhancing the integrity of collateral valuation for residential mortgage lending; and (2) help ensure credit unions comply with all applicable nondiscrimination laws. The legal basis for this rule is section 1125 of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as added by the Dodd-Frank Act--which directs covered agencies (in consultation with the staff of the
FOOTNOTE 140 12 U.S.C. 3354. END FOOTNOTE
insured credit unions, for which the NCUA is the primary Federal supervisor. /141/
FOOTNOTE 141 See 12 U.S.C. 3350(7). END FOOTNOTE
3. Description and Estimate of the Number of Small Institutions Subject to Proposed Rule
The proposed rule would apply to FICUs relying on AVMs in their residential mortgage-lending decisions. Year-end 2022 data indicate 1,876 small-entity FICUs held residential real estate loans (1st or junior liens). /142/
FOOTNOTE 142 At year-end 2022, median asset size for commercial banks was
The NCUA does not currently require supervised credit unions to note in their quarterly data submissions whether AVMs are used in mortgage originations/modifications for owner-occupied residential real estate. In its Initial Regulatory Flexibility Analysis elsewhere in this SUPPLEMENTARY INFORMATION, the
FOOTNOTE 143 Discussions with NCUA examiners and supervisors supported the notion 10 percent is an extreme upper bound. END FOOTNOTE
4. Projected Reporting, Recordkeeping and Other Compliance Requirements of the Proposed Rule, Including an Estimate of the Classes of Small Entities Which Will Be Subject to the Requirement and the Type of Professional Skills Necessary for Preparation of the Report or Record
As noted, since 2010, the OCC, Board,
FOOTNOTE 144 See supra, note 3. The Guidelines were adopted after notice and comment. END FOOTNOTE
FOOTNOTE 145 Because such a small percentage of credit unions actively relied on AVMs at the time, written NCUA guidance was not as detailed as that provided by the banking agencies. Nonetheless, expectations for safe-and-sound use have been conveyed through the supervisory process to FICUs employing AVMs in residential mortgage lending. END FOOTNOTE
Based on interviews with examiners and supervisors (about experience with rules largely codifying existing practice as well as the specifics of the AVM rule), the NCUA estimates the upper-bound for compliance burden is 33 labor hours annually. The upper-bound estimate for AVM usage of 188 credit unions implies the aggregate compliance burden should not exceed 6,204 hours. To put this figure in context, the 1,876 credit unions under
FOOTNOTE 146 This figure was obtained by dividing 2022 total compensation expense for the 1,876 credit unions by the product of full-time equivalent employees (17,115), 52 weeks per years, and 40 hours per week. END FOOTNOTE
FOOTNOTE 147 There are other good reasons to believe 6,204 hours in an upper bound. The proposed rule should, for example, ease compliance with existing supervisory guidance/expectations by making the exact "rules of the game" more explicit. In theory, this applies to all covered institutions. But, given the small size of credit unions--the median number full-time equivalent employees for the 1,876 "small entities" with residential mortgages at year-end 2022 was seven--time savings from any reduction in supervisory ambiguity are particularly valuable. Moreover, following the now explicit guidance should result in fewer safety-and-soundness and fair-lending issues (which are particularly burdensome for small credit unions to address because of thin staff). END FOOTNOTE
FOOTNOTE 148 Viewed still another way,
FOOTNOTE 149 Of course, estimates of a modest impact based on central tendency do not exclude the possibility the compliance costs will prove meaningful for some small credit unions. The NCUA believes, however, additional costs in these cases will mostly reflect the need to correct safety-and-soundness or compliance deficiencies now in sharper relief because of increased supervisory focus on AVMs--not the rule per se. END FOOTNOTE
5. An Identification, to the Extent Practicable, of All Relevant Federal Rules Which May Duplicate, Overlap With, or Conflict With the Proposed Rule
The NCUA has not identified any likely duplication, overlap, or potential conflict with this proposed rule and any other Federal rule.
6. Any Significant Alternatives to the Proposed Rule That Accomplish its Stated Objectives
As noted, the proposed rule implements a statutory mandate, thereby limiting the ability of covered agencies to consider alternatives. That said, agencies did exercise authority provided by section 1125 to include the nondiscrimination quality-control factor (given continued evidence of disparities in residential property lending terms along racial and ethnic lines). Further, covered agencies determined this factor should impose little additional burden, given that institutions have a preexisting obligation to comply with all Federal law, including Federal nondiscrimination laws.150
The NCUA invites comments on all aspects of the supporting information provided in this RFA section. The NCUA is particularly interested in comments on any significant effects on small entities that the agency has not identified.
FOOTNOTE 151 5 U.S.C.
FOOTNOTE 152 5 U.S.C. 603(a). For purposes of assessing the impacts of the proposed rule on small entities, "small entities" is defined in the RFA to include small businesses, small not-for-profit organizations, and small government jurisdictions. 5 U.S.C. 601(6). A "small business" is determined by application of SBA regulations and reference to the NAICS classifications and size standards. 5 U.S.C. 601(3). A "small organization" is any "not-for-profit enterprise which is independently owned and operated and is not dominant in its field." 5 U.S.C. 601(4). A "small governmental jurisdiction" is the government of a city, county, town, township, village, school district, or special district with a population of less than 50,000. 5 U.S.C. 601(5). END FOOTNOTE
E.
The RFA 151 generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis (FRFA) of any rule subject to notice-and-comment rulemaking requirements. These analyses must "describe the impact of the proposed rule on small entities." 152 An IRFA or FRFA is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. /153/ If it will have such an impact, the
FOOTNOTE 153 5 U.S.C. 605(b). END FOOTNOTE
FOOTNOTE 154 5 U.S.C. 609. END FOOTNOTE
Section 603(b) of the RFA sets forth the required elements of the IRFA. Section 603(b)(1) requires the IRFA to contain a description of the reasons that the agency is considering action. /155/ Section 603(b)(2) requires a succinct statement of the objectives of, and the legal basis for, the proposed rule. /156/ The IRFA further must contain a description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply. /157/ Section 603(b)(4) requires a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the types of professional skills necessary for the preparation of the report or record. /158/ In addition, the
FOOTNOTE 155 5 U.S.C. 603(b)(1). END FOOTNOTE
FOOTNOTE 156 5 U.S.C. 603(b)(2). END FOOTNOTE
FOOTNOTE 157 5 U.S.C. 603(b)(3). END FOOTNOTE
FOOTNOTE 158 5 U.S.C. 603(b)(4). END FOOTNOTE
FOOTNOTE 159 5 U.S.C. 603(b)(5). END FOOTNOTE
FOOTNOTE 160 5 U.S.C. 603(c). END FOOTNOTE
FOOTNOTE 161 5 U.S.C. 603(d)(1); Dodd-Frank Act section 1100G(d)(1), 124 Stat. 2112. END FOOTNOTE
1. Description of the Reasons Agency Action Is Being Considered
As discussed in part I of the SUPPLEMENTARY INFORMATION, section 1473(q) of the Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to add a new section 1125. Section 1125 directs the agencies to promulgate regulations for quality control standards for AVMs, which are "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." /162/ Specifically, section 1125 requires that AVMs meet quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs; protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and account for any other such factor that the agencies determine to be appropriate.
FOOTNOTE 162 12 U.S.C. 3354(d). END FOOTNOTE
The proposed rule effectuates
2. Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rule
The objectives of the proposed rule include protecting consumers and protecting Federal financial and public policy interests in real estate related transactions. To achieve these objectives, the proposed rule would require mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that covered AVMs adhere to quality control standards designed to meet specific quality control factors. The legal basis for the proposed rule is section 1125 of title XI; section 1125 was established by section 1473(q) of the Dodd-Frank Act. /163/
FOOTNOTE 163 Public Law 111-203, 124 Stat. 1376, 2198 (2010) (codified at 12 U.S.C. 3354). END FOOTNOTE
In addition to the first four statutory factors, section 1125 provides the agencies with the authority to account for any other such factor that the agencies determine to be appropriate. /164/ Based on this authority, the agencies propose to include a fifth factor that would require mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that covered AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws.
FOOTNOTE 164 12 U.S.C. 3354(b). END FOOTNOTE
The objectives of, and legal basis for, the proposed rule are further discussed in parts I and II of the SUPPLEMENTARY INFORMATION.
3. Description of and, Where Feasible, Provision of an Estimate of the Number of Small Entities to Which the Proposed Rule Will Apply
A "small business" is determined by application of SBA regulations in reference to the North American Industry Classification System (NAICS) classification and size standards. /165/ Under such standards, the
FOOTNOTE 165 The current SBA size standards are found on SBA's website, Small Bus. Admin., Table of size standards (
The following table summarizes the
Table A-Estimated Number of Small Entities by Industry
NAICS Industry SBA small Estimate Estimate Estimate
entity total number number
threshold entities in 2017 of small of small
entities in 2017 entities in 2022
522292 Real Estate Credit $ 41.5m 3,289 2,904 3,672
522294 Secondary Market Financing 41.5m 115 106 134
522390 Other Activities Related to 22.0m 566 566 716
Credit Intermediation
Column Total 3,970 3,576 4,521
Note: See footnote 148 for methodology to extrapolate 2017 numbers to 2022.
Source: 2017 County Business Patterns and Economic Census (Release Date: 5/28/2021).
In developing these estimates, the
Real Estate Credit companies (NAICS 522292). This industry encompasses establishments primarily engaged in lending funds with real estate as collateral, including mortgage companies and real estate credit lenders. Economic Census data states that there were 3,289 nondepository institutions (nondepositories) in 2017 that engaged in real estate credit and whose use of AVMs might be covered by the proposed rule. The SBA established a revenue threshold for small entities of average annual receipts of less than
FOOTNOTE 166 According to
Secondary market financing companies (NAICS 522294). This industry encompasses establishments primarily engaged in buying, pooling, and repackaging loans for sale to others on the secondary market, including collateralized mortgage obligation issuers and real estate mortgage investment conduits. Economic Census data states that there were 115 nondepository secondary market financing companies in 2017 whose use of AVMs might be covered by the proposed rule. This industry has a size standard threshold of less than
Other Activities Related to Credit Intermediation (NAICS 522390). This industry encompasses establishments primarily engaged in facilitating credit intermediation (except mortgage and loan brokerage; and financial transactions processing, reserve, and clearinghouse activities), and includes loan servicing firms. NAICS 522390 is a broader category than the previous two categories discussed in this section. Some examples of business activity in this NAICS industry are check cashing services, loan servicing, money transmission services, payday lending services, and traveler's check issuance services, but only loan servicing would fall under the proposed rule. To account for this broader categorization, using Economic Census data on number of establishments in this NAICS industry broken down by the North American Product Classification System (NAPCS), the
Finally, only small entities that themselves, or through or in cooperation with a third-party or affiliate, utilize AVMs in credit decisions or covered securitization determinations would be covered by the rule if finalized as proposed. The remaining small entities might opt for alternative valuation methods not involving AVMs. Due to the lack of data on the usage of AVMs by small entities in credit decisions or covered securitization determinations, the
Table B-Estimated Lower and Upper Bounds of Covered Small Entities in 2022
Lower bound Upper bound
Est. Number of Covered Small Entities 452 4,521
Assumed Proportion of Small Entities Using AVMs 10% 100%
In summary, the
In this analysis, the
4. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule, Including an Estimate of the Classes of Small Entities Which Would Be Subject to the Requirement and the Type of Professional Skills Necessary for the Preparation of the Report
The proposed rule would not impose new reporting or recordkeeping requirements for
Entities will likely have to spend time and resources reading and understanding the regulation and developing the required policies, practices, procedures, and control systems for their employees to follow to ensure compliance, in addition to engaging a legal team to review their draft policies, practices, procedures, and control systems. Costs associated with drafting compliance policies, practices, procedures, and control systems are likely to be higher for institutions who use AVMs for a more diverse set of circumstances. Such entities would likely need to tailor guidance for each specific use case. Small entities would also likely have to implement training of staff that utilize AVM output for covered purposes.
Costs to small entities. The
Using the cost methodology outlined in the SBREFA Panel Report, the
The
5. Identification, to the Extent Practicable, of All Relevant Federal Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
As discussed in the SBREFA Panel Report, the
FOOTNOTE 167
FOOTNOTE 168 See, e.g., 12 U.S.C. 3331; 75 FR 77450, 77465 (
FOOTNOTE 169 15 U.S.C. 1639h (added by Dodd-Frank Act section 1471). END FOOTNOTE
FOOTNOTE 170
In addition to these Federal laws and regulations requiring a licensed or certified appraiser for various transactions, other Federal laws and regulations broadly address determining the collateral worth of a mortgage, whether using an appraisal, AVM, or other method. For consumer credit transactions secured by a consumer's principal dwelling, TILA section 129E /171/ and its implementing regulations require valuation independence by, for example, prohibiting material misrepresentation of property value and conflicts of interest for persons preparing valuations or performing valuation management functions. /172/ Title XI, as amended by the Dodd-Frank Act, provides in part that, "[i]n conjunction with the purchase of a consumer's principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property." /173/ ECOA section 701(e) /174/ and its implementing regulation, Regulation B, generally require creditors to provide applicants for first-lien loans on a dwelling with copies of written valuations developed in connection with an application. /175/
FOOTNOTE 171 15 U.S.C. 1639e (added by Dodd-Frank Act section 1472). END FOOTNOTE
FOOTNOTE 172
FOOTNOTE 173 Dodd-Frank Act section 1473(r), 124 Stat. 2198-99 (codified at 12 U.S.C. 3355) (adding section 1126 to FIRREA). Under FIRREA section 1126, a "broker price opinion" means "an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property's condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model." 12 U.S.C. 3355(b). END FOOTNOTE
FOOTNOTE 174 15 U.S.C. 1691(e) (amended by Dodd-Frank Act section 1474). END FOOTNOTE
FOOTNOTE 175 12 CFR 1002.14. END FOOTNOTE
Moreover, in the SBREFA Outline the
FOOTNOTE 176
FOOTNOTE 177 15 U.S.C. 1691(a) (prohibiting discrimination on the basis of race, color, religion, national origin, sex or marital status, age (provided the applicant has the capacity to contract), because all or part of the applicant's income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act); see also 12 CFR part 1002. END FOOTNOTE
FOOTNOTE 178
FOOTNOTE 179 42 U.S.C. 3605 (prohibiting discrimination because of race, color, religion, national origin, sex, handicap, or familial status in residential real estate-related transactions); 42 U.S.C. 3605(b)(2) (defining "real estate-related transactions" to include the "selling, brokering, or appraising of residential real property."); see also 24 CFR part 100. END FOOTNOTE
SERs also provided suggestions of other potentially related Federal statutes and regulations. A SER expressly highlighted that the prudential agencies' title XI regulations for residential mortgages set a dollar-based threshold for requiring an appraisal. Another SER stated that many of the prudential agencies' safety and soundness regulations, including liquidity and interest rate risk management regulations, have potential intersections with section 1125. Some SERs also identified other statutes they believe have some potential intersections with section 1125, including the Fair Credit Reporting Act (FCRA), /180/ the Gramm-Leach-Bliley Act (GLBA), /181/ and HMDA. /182/
FOOTNOTE 180 15 U.S.C. 1681 et seq. END FOOTNOTE
FOOTNOTE 181 Public Law 106-102, 113 Stat. 1338 (1999). END FOOTNOTE
FOOTNOTE 182 12 U.S.C.
The
6. Description of Any Significant Alternatives to the Proposed Rule That Accomplish the Stated Objectives of Applicable Statutes and Minimize Any Significant Economic Impact of the Proposed Rule on Small Entities
In drafting this proposed rule, the
The
Coverage of loan modifications and other changes to existing loans. The
Coverage of credit line reductions or suspensions. The
Nondiscrimination quality control factor. The
FOOTNOTE 183
The
The
7. Discussion of Impact on Cost of Credit for Small Entities
The
During the SBREFA process, the
F. FHFA
The RFA requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. FHFA need not undertake such an analysis if the Agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities (5 U.S.C 605(b)). FHFA has considered the impact of the proposed rule under the RFA and FHFA certifies that the proposed rule, if adopted as a final rule, will not have a significant economic impact on a substantial number of small entities because the regulation only applies to
VI. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal banking agencies to use plain language in all proposed and final rules published after
* Have the agencies organized the material to suit your needs? If not, how could they present the rule more clearly?
* Are the requirements in the rule clearly stated? If not, how could the rule be more clearly stated?
* Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?
* Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?
* Is this section format adequate? If not, which of the sections should be changed and how?
* What other changes can the agencies incorporate to make the regulation easier to understand?
VII.
Pursuant to section 302(a) of the
FOOTNOTE 184 12 U.S.C. 4802(a). END FOOTNOTE
FOOTNOTE 185 12 U.S.C. 4802. END FOOTNOTE
The Federal banking agencies note that comment on these matters has been solicited in other sections of this SUPPLEMENTARY INFORMATION section and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. The Federal banking agencies invite comments that will further inform the Federal banking agencies' consideration of RCDRIA.
VIII. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the proposed rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of
FOOTNOTE 186 The OCC estimates the UMRA inflation adjustment using the change in the annual
The burden associated with the proposed rule would be limited to reviewing the rule, ensuring that existing practices, procedures, and control systems adequately address the four statutory quality control standards, and adopting policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws. The OCC estimates that expenditures to comply with the proposed rule's mandates would be approximately
IX. NCUA Executive Order 13132 on Federalism
Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on State and local interests. The NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order to adhere to fundamental federalism principles. This proposed rule would not have substantial direct effects on the states, on the relationship between the National Government and the states, or on the distribution of power and responsibilities among the various levels of government. Although the AVM statute and the proposed rule apply to federally insured, state-chartered credit unions, the NCUA does not believe that the rule would change the relationship between the NCUA and State regulatory agencies. The NCUA would anticipate coordinating with State regulatory agencies to implement and enforce the rule after it is adopted as part of its ongoing coordination with these agencies. Accordingly, the NCUA believes that the effect of this change on the states would be limited. The NCUA has therefore determined that this rule does not constitute a policy that has federalism implications for purposes of the executive order.
X. NCUA Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule would not affect family well-being within the meaning of section 654 of the
FOOTNOTE 187 Public Law 105-277, 112 Stat. 2681 (1998). END FOOTNOTE
XI. Severability
Each of the agencies preliminarily intend that, if any provision of the proposed rule, if adopted as final, or any application of a provision, is stayed or determined to be invalid, the remaining provisions or applications are severable and shall continue in effect.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banking, Banks, Consumer protection, Credit, Mortgages, National banks, Reporting and recordkeeping requirements, Savings associations, Truth in lending.
12 CFR Part 225
Administrative practice and procedure, Banks, banking,
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 722
Appraisal, Appraiser, Credit unions, Mortgages, Reporting and recordkeeping requirements, Truth in lending.
12 CFR Part 741
Credit, Credit Unions.
12 CFR Part 1026
Advertising, Banks, Banking, Consumer protection, Credit, Credit unions, Mortgages, National banks, Reporting and recordkeeping requirements, Savings associations, Truth in lending.
12 CFR Part 1222
Appraisals, Government sponsored enterprises, Mortgages.
DEPARTMENT OF THE
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance For reasons set out in the joint preamble, the Office of the Comptroller of the Currency proposes to amend part 34 of chapter I of title 12 of the Code of Federal Regulations to read as follows:
PART 34--REAL ESTATE LENDING AND APPRAISALS
1. The authority citation for part 34 is revised to read as follows:
Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and 5412(b)(2)(B).
2. Subpart I is added to part 34 to read as follows:
Subpart I--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
Sec.
34.220Authority, purpose, and scope.
34.221Definitions.
34.222Quality control standards.
(a) Authority. This subpart is issued pursuant to section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376, 2198 (2010)).
(b) Purpose and scope. (1) The purpose of this subpart is to implement the quality control standards in section 3354 of title 12 for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. This subpart applies to entities regulated by the OCC that are mortgage originators or secondary market issuers.
(2) This subpart does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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 used in this subpart:
(a) Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
(b) Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
(c) Covered securitization determination means a determination regarding:
(1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
(2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
(d) Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
(e) Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, factory-built housing, or manufactured home, if it is used as a residence. A consumer can have only one "principal" dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this subpart.
(f) Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
(g) Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
(h) Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance For the reasons set forth in the joint preamble, the Board proposes to amend part 225 of chapter II of title 12 of the Code of Federal Regulations, as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y)
3. The authority citation for part 225 is revised to read as follows:
Authority:12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3354, 3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
4. Add subpart O to part 225 as follows:
Subpart O--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
Sec.
225.350Authority, purpose and scope.
225.351Definitions.
225.352Quality control standards.
Subpart O--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
(a) Authority. (1) In general. This subpart is issued pursuant to section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376, 2198 (2010)), as well as under the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); the Home Owners' Loan Act of 1933 (12 U.S.C. 1461 et seq.); section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5365); and the International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read to limit the authority of the Board to take action under provisions of law other than 12 U.S.C. 3354, including but not limited to action to address unsafe or unsound practices or conditions, or violations of law or regulation, under section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818).
(b) Purpose and scope. (1) The purpose of this subpart is to implement the quality control standards in section 3354 of title 12 for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or a mortgage-backed security. This subpart applies to entities and institutions regulated by the Board (Board-regulated institutions) that are mortgage originators or secondary market issuers.
(2) This subpart does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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 used in this subpart:
Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
Covered securitization determination means a determination regarding:
(1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
(2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, factory-built housing, or manufactured home, if it is used as a residence. A consumer can have only one "principal" dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this subpart.
Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
12 CFR Chapter III
Authority and Issuance For the reasons set forth in the joint preamble, the
PART 323--APPRAISALS
5. The authority citation for part 323 continues to read as follows:
Authority: 12 U.S.C. 1818, 1819(a) ("Seventh" and "Tenth"), 1831p-1 and 3331 et seq.
6. Add subpart C to part 323 to read as follows:
Subpart C--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
Sec.
(a) Authority. This subpart is issued pursuant to section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376, 2198 (2010)).
(b) Purpose and scope. (1) The purpose of this subpart is to implement the quality control standards in section 3354 of title 12 for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. This subpart applies to entities regulated by the
(2) This subpart does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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 used in this subpart:
Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
Covered securitization determination means a determination regarding:
(1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
(2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, factory-built housing, or manufactured home, if it is used as a residence. A consumer can have only one "principal" dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this subpart.
Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
12 CFR Part 722 and Part 741
Authority and Issuance For the reasons discussed above in the joint preamble, the NCUA Board proposes to amend 12 CFR parts 722 and 741 as follows:
PART 722--APPRAISALS
7. The authority citation for part 722 continues to read as follows:
Authority: 12 U.S.C. 1766, 1789, and 3331 et seq. Section 722.3(a) is also issued under 15 U.S.C. 1639h.
8. Redesignate [Sec.]
Subpart A--Appraisals Generally
Sec.
9. Add subpart B to read as follows:
Subpart B--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
Sec.
Subpart B--Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes
(a) Authority. This subpart is issued pursuant to section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1375, 2198 (2010)).
(b) Purpose and scope. (1) The purpose of this subpart is to implement the quality control standards in section 3354 of title 12 for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. This subpart applies to credit unions insured by the NCUA that are mortgage originators or secondary market issuers.
(2) This subpart does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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 used in this subpart:
Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
Covered securitization determination means a determination regarding:
(1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
(2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, factory-built housing, or manufactured home, if it is used as a residence. A consumer can have only one "principal" dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this subpart.
Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
PART 741--Requirements for Insurance
10. The authority citation for part 741 is revised to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, 1790d, 3331 et seq; 31 U.S.C. 3717.
11. Revise
*****
(b) Adhere to the requirements stated in part 722 of this chapter.
*****
CONSUMER FINANCIAL PROTECTION BUREAU
Authority and Issuance
For reasons set out in the joint preamble, the
PART 1026--TRUTH IN LENDING (REGULATION Z)
12. The authority citation for part 1026 is revised to read as follows:
Authority:12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 3354, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart A--General
13. Amend
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(c) * * *
(6) The requirements of
*****
14. Amend
(a) * * *
(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under [Sec.]
*****
15. Amend
*****
(i) The exemptions in this section are not applicable to
Subpart E--Special Rules for Certain Home Mortgage Transactions
16. Amend
(a) Scope. Except for paragraph (i) of this section, this section applies to any consumer credit transaction secured by the consumer's principal dwelling. Paragraph (i) of this section applies to any mortgage, as defined in paragraph (i)(2)(v), secured by the consumer's principal dwelling, even if the mortgage is primarily for business, commercial, agricultural, or organizational purposes.
*****
(i) Quality Control Standards for Automated Valuation Models--(1) Scope. The purpose of this paragraph (i) is to implement quality control standards for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. This paragraph (i) applies to the use of automated valuation models by any mortgage originator or secondary market issuer, other than either a financial institution as defined in 12 U.S.C. 3350(7), or a subsidiary owned and controlled by such a financial institution and regulated by one of the Federal financial institutions regulatory agencies as defined in 12 U.S.C. 3350(6). This paragraph (i) does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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
(2) Definitions. As used in this paragraph (i):
(i) Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
(ii) Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
(iii) Covered securitization determination means a determination regarding:
(A) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
(B) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
(iv) Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
(v) Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
(vi) Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
(vii) Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
(3) Quality control standards. Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(i) Ensure a high level of confidence in the 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.
17. Amend Supplement
a. Under Section 1026.2--Definitions and Rules of Construction, in 2(a)(19)--Dwelling, revise paragraph 1 and add paragraph 4;
b. Under Section 1026.3--Exempt Transactions, add paragraph 2; and
c. Under Section 1026.42--Valuation Independence:
i. Under 42(a) Scope, revise paragraph 2;
ii. Under Paragraph 42(b)(2), revise paragraph 1.
iii. Add heading section 42(i) Quality Control Standards for Automated Valuation Models.
The revisions and additions read as follows:
Supplement
*****
Section 1026.2--Definitions and Rules of Construction
*****
2(a)(19) Dwelling
1. Scope. A dwelling need not be the consumer's principal residence to fit the definition, and thus a vacation or second home could be a dwelling. However, for purposes of the definition of residential mortgage transaction, the right to rescind, and the application of automated valuation model requirements, a dwelling must be the principal residence of the consumer. (See the commentary to [Sec.]
*****
4. Automated valuation models. For purposes of the application of the automated valuation model requirements in
*****
Section 1026.3--Exempt Transactions
*****
2. Relationship to
*****
Section 1026.42--Valuation Independence
42(a) Scope
*****
2. Consumer's principal dwelling. Except for section 1026.42(i), section 1026.42 applies only if the dwelling that will secure a consumer credit transaction is the principal dwelling of the consumer who obtains credit. Section 1026.42(i) applies if the dwelling that will secure a mortgage, as defined in
42(b) Definitions
*****
Paragraph 42(b)(2)
1. Principal dwelling. The term "principal dwelling" has the same meaning under
*****
42(i) Quality Control Standards for Automated Valuation Models
Paragraph 42(i)(2)(vi)
1. Creditors. The term mortgage originator includes creditors, notwithstanding that the definition of mortgage originator at 15 U.S.C. 1602(dd)(2) excludes creditors for certain other purposes.
2. Servicers. The term mortgage originator generally excludes servicers and their employees, agents, and contractors. However, a person is a servicer with respect to a particular transaction only after it is consummated, and that person retains or obtains its servicing rights. Therefore, the term mortgage originator includes a servicer and its employees, agents, or contractors when they perform mortgage originator activities for purposes of 15 U.S.C. 1602(dd)(2) with respect to any transaction that constitutes a new extension of credit, including a refinancing or a transaction that obligates a different consumer on an existing debt.
*****
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
Authority and Issuance For the reasons discussed in the joint preamble, the
PART 1222--APPRAISALS
18. The authority citation for part 1222 is revised to read as follows:
Authority:12 U.S.C. 3354(b); 12 U.S.C. 4501 et seq.; 12 U.S.C. 4526; and 15 U.S.C. 1639h.
19. Add subpart C to part 1222 to read as follows:
Subpart C--Quality Control Standards For Automated Valuation Models
Sec.
(a) Authority. This subpart is issued by the
(b) Purpose and scope. (1) The purpose of this subpart is to implement the quality control standards in section 3354 of title 12 for the use of automated valuation models in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. This subpart applies to entities regulated by the
(2) This subpart does not apply to the use of automated valuation models in:
(i) Monitoring of the quality or 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 used in this subpart:
Automated valuation model means any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer's principal dwelling collateralizing a mortgage.
Control systems means the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.
Covered securitization determination means a determination regarding:
(1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer, or
(2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
Credit decision means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, factory-built housing, or manufactured home, if it is used as a residence. A consumer can have only one "principal" dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this subpart.
Mortgage means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a consumer's principal dwelling.
Mortgage originator has the meaning given in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Secondary market issuer means any party that creates, structures, or organizes a mortgage-backed securities transaction.
Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
Acting Comptroller of the Currency.
By order of the Board Governors of the Federal Reserve System.
Deputy Associate Secretary of the Board.
By order of the Board of Directors.
Dated at
Assistant Executive Secretary.
Director, Consumer Financial Protection Bureau.
Director,
Secretary of the Board,
[FR Doc. 2023-12187 Filed 6-20-23; 8:45 am]
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