COMMENT CALL: The NCUA and other federal banking regulators recently issued a proposed “quality control” rule for mortgage originators that use automated valuation models (AVMs). The proposed rule was required by Congress as part of the federal Dodd-Frank Act.
The proposal would cover all credit unions and other “mortgage originators” (a defined term) and apply when an AVM is used to determine the collateral worth of a mortgage secured by a principal residence, whether the credit union uses its own AVM or a third party’s.
An AVM would be defined 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 rule would apply whether the credit was for consumer purposes or for business purposes.
Credit unions would be required to adopt policies, practices, procedures, and control systems to ensure that AVMs meet five quality control factors:
- Ensure a high level of confidence in the estimates produced;
- Protect against the manipulation of data;
- Seek to avoid conflicts of interest;
- Require random sample testing and reviews; and
- Comply with non-discrimination laws.
The fifth factor – non-discrimination – is not specified in the Dodd-Frank Act. The agencies added it based on their authority under Dodd-Frank to account for any other factor that the agencies see as appropriate.
Addressing the proposal, CFPB Director Rohit Chopra said that automated systems may have baked-in biases, which the rule needs to address:
Algorithmic appraisals that use so-called automated valuation models can be used as a check on a human appraiser or in place of an appraisal. Unlike an appraisal or broker price opinion, where an individual person looks at the property and assesses the comparability of other sales, automated valuations rely on mathematical formulas and number crunching machines to produce an estimate of value.
While machines crunching numbers might seem capable of taking human bias out of the equation, they can’t. Based on the data they are fed and the algorithms they use, automated models can embed the very human bias they are meant to correct. And the design and development of the models and algorithms can reflect the biases and blind spots of the developers. Indeed, automated valuation models can make bias harder to eradicate in home valuations because the algorithms used cloak the biased inputs and design in a false mantle of objectivity.
Director Chopra also stated that “[e]merging AI-marketed technologies can negatively impact civil rights, fair competition, and consumer protection. Because technology has the power to transform our lives, we must ensure that AI-marketed technologies do not become an excuse for evasion of the law and consumer harm. It is critical that these emerging technologies comply with the law.”
A credit union would have the flexibility to set quality controls for AVMs according to its needs and refine them as appropriate. The agencies wrote in the preamble to the proposed rule that they “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.”
If the rule is finalized as proposed, it would amend Part 722 of the NCUA regulations, where NCUA’s appraisal rules are found. Unlike the other federal banking agencies, the NCUA maintains its position that CUSOs are not subject to regulation by the NCUA, therefore the FTC, CFPB, and State attorneys general would have enforcement authority over CUSOs in connection with the AVM rule.
Secondary market participants would also be subject to this proposal. This means that if a credit union requests an appraisal waiver decision from a secondary market issuer, the credit union would not be required to ensure that the AVM used to support the waiver meets the proposal’s quality control standards because the secondary market issuer would be the one using the AVM and would be subject to the rule’s requirements.
The proposal also does not apply to the use of AVMs by a certified or licensed appraiser in developing an appraisal as they do not solely rely on the AVM to determine the value of collateral, and applying these standards to those situations would be overly burdensome on the originator, the regulators said.
Make your voice heard
The League will submit comments to NCUA about the proposed AVM quality controls rule, but we need your input.
The proposal includes a list of 37 questions commenters are asked to consider, including these:
- What are advantages and disadvantages of specifying a 5th quality control factor on non-discrimination? What, if any, alternative approaches should the Agencies consider?
- To what extent is compliance with non-discrimination laws with respect to covered AVMs already encompassed in the 4 statutory factors listed …? Would specifying a non-discrimination quality control factor in the rule be useful in preventing market-distorting discrimination in the use of AVMs?
- What are the advantages and disadvantages of a flexible versus prescriptive approach to the non-discrimination quality control factors?
- Are lenders’ existing compliance management systems and fair lending monitoring programs able to assess whether a covered AVM, including the 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?
- What, if any, other approaches should the Agencies consider for incorporating non-discrimination requirements in this proposed rule?
Our comments are due to the NCUA by August 21, so we need to hear from interested credit unions by Aug. 14. Please share your feedback with Paul Guttormsson.
League Legal Affairs Attorney’s Conference
Jul 25, 2023 9:00 AM – 3:00 PM, Madison WI – Information and Registration.
The League Legal Affairs Attorney’s Conference brings together attorneys from Wisconsin’s Credit Unions for a day of discussion around Compliance and Legal matters of importance to our members. Please invite your credit union attorney to attend!
Agenda:
9:00 am – 3:00 pm
*More details on sessions coming soon
9:00 am – 9:30 am
Welcome and Coffee
9:30 am – 10:30 am
Paul Guttormsson, Senior Vice President & General Counsel | The League
10:30 am – 12:00 pm
Tom Theune, Director | Office of Credit Unions, DFI
12:00 pm – 12:30 pm
Lunch
12:30 pm – 1:00 pm
John Engel, Director of Legal Affairs | The League
1:00 pm – 2:00 pm
Melissa Caulum Williams | Senior Counsel | Husch Blackwell
Melissa will lead a session on HR Compliance issues
2:00 pm – 2:30 pm
Kim Hoppe, Compliance Resource Analyst | The League
2:30 pm – 3:00 pm
Roundtable Discussion Adjourn
Location:
Credit Union House
1 East Main Street, Suite 101
Madison, WI 53703
Fees:
$179 | Early Bird by July 7
$199 | Regular