Federal agencies issue final rule on quality control standards for AVMs

A final rule issued on July 17 by six federal regulatory agencies will implement quality control standards for automated valuation models (AVMs) that are used by mortgage originators and secondary market issuers to value homes.

The final rule is designed to help ensure the credibility and integrity of AVMs, which are specifically used in valuations for certain mortgages secured by a consumer’s principal dwelling, according to the U.S. Treasury Department, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Consumer Financial Protection Bureau (CFPB), and the Federal Housing Finance Agency (FHFA).

The quality control standards, which are mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, require that institutions engaged in certain credit decisions or securitization determinations must adopt policies, practices, procedures, and control systems to ensure that AVMs used in these transactions to determine the value of mortgage collateral adhere to quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs, according to the final rule.

Additionally, they must protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and comply with applicable nondiscrimination laws, says the 190-page final rule.

“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,” according to the rule’s text. “For example, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) use proprietary AVMs in their collateral valuation processes.”

While advances in AVM technology and data availability have the potential to reduce costs and turnaround times of the property valuation process, the agencies say it’s important that institutions using AVMs take appropriate steps to ensure the credibility and integrity of the valuations produced, and to ensure that use of the AVMs adheres to quality control standards designed to comply with applicable nondiscrimination laws.

The final rule will become effective on the first day of the calendar quarter following 12 months after publication in the Federal Register .

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