The Office of the Comptroller of the Currency and FDIC today finalized a rule to regulate the credibility of algorithmic models used in real estate valuations, part of a larger effort to address alleged bias in the appraisal process. The rule—which was proposed by six federal agencies, including the Federal Reserve—requires institutions that engage in covered transactions to adopt policies, practices, procedures and control systems to ensure that automated valuation models, or AVMs, adhere to quality control standards designed “to ensure a high level of confidence in the estimates produced” by the models. Those policies and procedures must also protect against manipulation of data, seek to avoid conflicts of interest, require random sample testing and review, and comply with all applicable nondiscrimination laws.
The final rule will implement a Dodd-Frank Act provision creating new quality control standards for AVMs. The rule was first proposed last year by the Biden administration as part of a package of initiatives to address racial bias in home valuations. The final rule limits the scope of the regulation to credit decisions, including loan modifications, and covered securitization determinations. It will take effect one year following publication in the Federal Register.
The American Bankers Association last year expressed several concerns about the original proposal, saying it would likely overburden banks and discourage adoption of the very technology the rule is seeking to regulate. Among other things, the association 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.
