Proposed Rule Seeks To Establish Comprehensive Quality Control Standards For Mortgage AVMs

The landscape of real estate valuation is on the brink of transformation with the introduction of a proposed rule by key U.S. regulatory agencies, according to an article by Dechert LLP. The proposed rule, introduced by multiple U.S. regulatory agencies, aims to establish quality control standards for mortgage originators and issuers of mortgage-backed securities utilizing automated valuation models (AVMs) to assess real estate values. AVMs are algorithms employed by real estate platforms, including industry giants like Zillow and Redfin, to estimate property values for diverse real properties.

The rule currently adopts a flexible, principles-based approach, allowing institutions to set their quality control standards. While market participants are likely already adhering to non-discrimination standards, they must carefully address any additional requirements not covered by current practices and guidelines.

AVMs offer efficiency and accuracy in estimating real estate values, making them integral for institutional lenders in mortgage origination. However, concerns have been raised regarding privacy, transparency risks, and potential discriminatory practices associated with AVM usage, prompting regulators to scrutinize existing quality control standards.

The proposed rule requires certain mortgage originators and secondary market issuers to implement policies ensuring confidence in AVM estimates, protecting against data manipulation, avoiding conflicts of interest, conducting random sample testing and review, and complying with non-discrimination laws.

Market participants’ responses have focused on the rule’s scope, with some expressing concern that it may burden and discourage AVM use in mortgage origination by imposing additional compliance layers. Critics argue that the rule should target AVM providers directly, as they possess a better understanding of the technology.

The majority of market participants advocate for a flexible, principles-based approach, arguing against a more prescriptive rule that could hinder realistic risk management practices. However, smaller entities seek additional guidelines for compliance to avoid over-compliance and maintain fiscal efficiency.

The non-discrimination factor is a key element of the proposed rule, with some participants supporting its broad application, while others argue it may duplicate existing fair lending laws. The regulatory interest in implementing quality control measures to eliminate biases and discriminatory practices is evident, as seen in recent releases from the Consumer Financial Protection Bureau.

The Agencies tentatively consider a 12-month timeline for implementing the new AVM quality control requirements, but comments suggesting an extended timeline for certain businesses may lead to reconsideration.