ABA: Proposed quality control rule for AVMs would overburden banks

A proposed interagency rule to regulate the quality of algorithmic models used in real estate valuations would likely overburden—and therefore discourage—the very technology it is seeking to regulate, the American Bankers Association said today.

The proposed rule would require institutions that engage in covered transactions to adopt policies, practices, procedures and control systems to ensure that third parties’ automated valuation models, or AVMs, adhere to quality control standards designed to ensure the credibility and integrity of valuations. The agencies would also require institutions to test AVMs for fair lending concerns. The rule was introduced in June to implement Dodd Frank Act requirements, and as part of a larger effort by the Biden administration to address alleged bias in the appraisal process.

In comments to the federal agencies, ABA questioned the need for a requirement to test AVMs for fair lending, stating that banks support fair lending laws and are regularly examined for compliance with those laws, which have and will continue to apply to AVM use. ABA also noted that AVMs can provide an estimated property value in minutes and at a fraction of the cost of an appraisal, benefiting both mortgage originators and consumers. While the proposed rule would provide some flexibility for lenders, the additional layers of compliance burden “is unnecessary and inappropriate for banks in that they have long been subject to prudential regulators’ model risk guidance and are regularly examined for compliance,” ABA said.

The association also pointed out that it is grossly inefficient to require thousands of mortgage originators to each perform similar testing on the limited number of commonly used AVMs.