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Proposed Rule2023-12187

Quality Control Standards for Automated Valuation Models

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Published

June 21, 2023

Issuing agencies

Treasury DepartmentComptroller of the CurrencyFederal Reserve SystemFederal Deposit Insurance CorporationNational Credit Union AdministrationConsumer Financial Protection BureauFederal Housing Finance Agency

Abstract

The OCC, Board, FDIC, NCUA, CFPB, and FHFA (collectively, the agencies) invite comment on a proposed rule to implement the quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer's principal dwelling. Under the proposal, the agencies would require institutions that engage in certain credit decisions or securitization determinations to 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; protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and comply with applicable nondiscrimination laws.

Full Text

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<title>Federal Register, Volume 88 Issue 118 (Wednesday, June 21, 2023)</title>
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[Federal Register Volume 88, Number 118 (Wednesday, June 21, 2023)]
[Proposed Rules]
[Pages 40638-40675]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12187]

[[Page 40637]]

Vol. 88

Wednesday,

No. 118

June 21, 2023

Part VII

Department of the Treasury

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Office of the Comptroller of the Currency

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Federal Reserve System

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Federal Deposit Insurance Corporation

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National Credit Union Administration

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Consumer Financial Protection Bureau

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Federal Housing Finance Agency

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12 CFR Parts 34, 225, 323, et al.

Quality Control Standards for Automated Valuation Models; Proposed Rule

Federal Register / Vol. 88, No. 118 / Wednesday, June 21, 2023 /
Proposed Rules

[[Page 40638]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. OCC-2023-0002]
RIN 1557-AD87

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Docket No. R-1807]
RIN 7100-AG60

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 323

RIN 3064-AE68

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 722 and 741

[Docket No. NCUA-2023-0019]
RIN 3133-AE23

CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1026

[Docket No. CFPB-2023-0025]
RIN 3170-AA57

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1222

RIN 2590-AA62

Quality Control Standards for Automated Valuation Models

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); National Credit Union
Administration (NCUA); Consumer Financial Protection Bureau (CFPB); and
Federal Housing Finance Agency (FHFA).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The OCC, Board, FDIC, NCUA, CFPB, and FHFA (collectively, the
agencies) invite comment on a proposed rule to implement the quality
control standards mandated by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) for the use of automated
valuation models (AVMs) by mortgage originators and secondary market
issuers in determining the collateral worth of a mortgage secured by a
consumer's principal dwelling. Under the proposal, the agencies would
require institutions that engage in certain credit decisions or
securitization determinations to 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; protect against the manipulation of data;
seek to avoid conflicts of interest; require random sample testing and
reviews; and comply with applicable nondiscrimination laws.

DATES: Comments must be received by August 21, 2023.

ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the agencies. Commenters should use the title
``Quality Control Standards for Automated Valuation Models'' to
facilitate the organization and distribution of comments among the
agencies. The agencies invite interested parties to submit written
comments to:
OCC: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal. Please use the title ``Quality Control
Standards for Automated Valuation Models'' to facilitate the
organization and distribution of the comments. You may submit comments
by any of the following methods:
<bullet> Federal eRulemaking Portal--<a href="http://Regulations.gov">Regulations.gov</a>: Go to <a href="https://regulations.gov/">https://regulations.gov/</a>.
Enter ``Docket ID OCC-2023-0002'' in the Search Box and click
``Search.'' Public comments can be submitted via the ``Comment'' box
below the displayed document information or by clicking on the document
title and then clicking the ``Comment'' box on the top-left side of the
screen. For help with submitting effective comments, please click on
``Commenter's Checklist.'' For assistance with the <a href="http://Regulations.gov">Regulations.gov</a>
site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5
p.m. ET, or email <a href="/cdn-cgi/l/email-protection#99ebfcfeecf5f8edf0f6f7eaf1fcf5e9fdfceaf2d9feeaf8b7fef6ef">[email&#160;protected]</a>.
<bullet> Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
<bullet> Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2023-0002'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the <a href="http://Regulations.gov">Regulations.gov</a> website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this action by the following method:
<bullet> Viewing Comments Electronically--<a href="http://Regulations.gov">Regulations.gov</a>: Go to
<a href="https://regulations.gov/">https://regulations.gov/</a>.
Enter ``Docket ID OCC-2023-0002'' in the Search Box and click
``Search.'' Click on the ``Dockets'' tab and then the document's title.
After clicking the document's title, click the ``Browse All Comments''
tab. Comments can be viewed and filtered by clicking on the ``Sort By''
drop-down on the right side of the screen or the ``Refine Comments
Results'' options on the left side of the screen. Supporting materials
can be viewed by clicking on the ``Browse Documents'' tab. Click on the
``Sort By'' drop-down on the right side of the screen or the ``Refine
Results'' options on the left side of the screen checking the
``Supporting & Related Material'' checkbox. For assistance with the
<a href="http://Regulations.gov">Regulations.gov</a> site, please call 1-866-498-2945 (toll free) Monday-
Friday, 9 a.m.-5 p.m. ET, or email <a href="/cdn-cgi/l/email-protection#e99b8c8e9c85889d8086879a818c85998d8c9a82a98e9a88c78e869f">[email&#160;protected]</a>.
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
Board: You may submit comments, identified by Docket No. R-1807 and
RIN No. 7100 AG60, by any of the following methods:
<bullet> Agency Website: <a href="http://www.federalreserve.gov">http://www.federalreserve.gov</a>. Follow the
instructions for submitting comments at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#07756260742964686a6a62697374476162636275666b7562746275716229606871">[email&#160;protected]</a>. Include the
docket number in the subject line of the message.
<bullet> Fax: (202) 452-3819 or (202) 452-3102.
<bullet> Mail: Ann Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.

[[Page 40639]]

In general, all public comments will be made available on the
Board's website at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a> as submitted, and will not be modified to remove
confidential, contact or any identifiable information. Public comments
may also be viewed electronically or in paper in Room M-4365A, 2001 C
St. NW, Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during
Federal business weekdays. Please call (202) 452-3684 to make an
appointment to visit the Board and inspect comments.
FDIC: The FDIC encourages interested parties to submit written
comments. Please include your name, affiliation, address, email
address, and telephone number(s) in your comment. You may submit
comments to FDIC, identified by RIN 3064-AE68, by any of the following
methods:
<bullet> FDIC Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow the instructions for submitting
comments on the FDIC's website.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments/Legal OES (RIN 3064-AE68), Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery/Courier: Comments may be hand delivered to
the guard station at the rear of the 550 17th Street NW building
(located on F Street NW) on business days between 7:00 a.m. and 5:00
p.m.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#e0838f8d8d858e9493a086848983ce878f96">[email&#160;protected]</a>. Comments submitted must include
``RIN 3064-AE68'' in the subject line of the message.
Public Inspection: Comments received, including any personal
information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of this notice will be retained in the public
comment file and will be considered as required under all applicable
laws. All comments may be accessible under the Freedom of Information
Act.
NCUA: You may submit written comments, identified by RIN 3133-AE23,
by any of the following methods (Please send comments by one method
only):
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments for Docket Number NCUA-
2023-0019.
<bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
You may view all public comments on the Federal eRulemaking Portal
at <a href="http://www.regulations.gov">http://www.regulations.gov</a> as submitted, except for those we cannot
post for technical reasons. The NCUA will not edit or remove any
identifying or contact information from the public comments submitted.
If you are unable to access public comments on the internet, you may
contact NCUA for alternative access by calling (703) 518-6540 or
emailing <a href="/cdn-cgi/l/email-protection#672820242a060e0b270904120649000811">[email&#160;protected]</a>.
CFPB: You may submit comments, identified by Docket No. CFPB-2023-
0025 by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#635153515022352e3216020f0a171a200c0d17110c0f23000513014d040c15">[email&#160;protected]</a>. Include Docket No.
CFPB-2023-0025 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--CFPB-2023-
0025, Consumer Financial Protection Bureau, c/o Legal Division Docket
Manager, 1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number for
this rulemaking. Because paper mail in the Washington, DC, area and at
the CFPB is subject to delay commenters are encouraged to submit
comments electronically. In general, the CFPB will post all comments
received without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
The CFPB will make all comments, including attachments and other
supporting materials, part of the public record and subject to public
disclosure. You should not include proprietary information or sensitive
personal information, such as account numbers or Social Security
numbers, or names of other individuals. The CFPB will not edit comments
to remove any identifying or contact information.
FHFA: You may submit your comments, identified by regulatory
identification number (RIN) 2590-AA62, by any of the following methods:
<bullet> Agency website: <a href="http://www.fhfa.gov/open-for-comment-or-input">www.fhfa.gov/open-for-comment-or-input</a>.
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at <a href="/cdn-cgi/l/email-protection#35675052765a5858505b414675535d53541b525a43">[email&#160;protected]</a> to ensure timely receipt by the agency.
Please include ``RIN 2590-AA62'' in the subject line of the message.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AA62,
Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW,
Washington, DC 20219. Deliver the package to the Seventh Street
entrance Guard's Desk, First Floor, on business days between 9 a.m. and
5 p.m.
<bullet> U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AA62, Federal Housing
Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC
20219. Please note that all mail sent to FHFA via U.S. Mail is routed
through a national irradiation facility, a process that may delay
delivery by approximately two weeks.
FHFA invites comment on all aspects of the proposed amendments and
will take all comments into consideration before adopting amendments
through a final rule. FHFA will post copies of all comments received
without change on the FHFA website at <a href="http://www.fhfa.gov">http://www.fhfa.gov</a>, and will
include any personal information you provide, such as your name,
address, email address, and telephone number. In addition, the FHFA
will make copies of all comments received available for examination by
the public through the electronic rulemaking docket for this proposed
rule also located on the FHFA website.

FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152; Mitchell Plave, Special Counsel, (202) 649-5490; or Joanne
Phillips, Counsel; or Marta Stewart-Bates, Counsel, Chief Counsel's
Office, (202) 649-5500; Office of the Comptroller of the Currency, 400
7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing,
or have a speech disability, please dial 7-1-1 to access
telecommunications relay services.
Board: Anna Lee Hewko, Associate Director, (202) 530-6260; Andrew
Willis, Manager, Policy Development

[[Page 40640]]

Section, (202) 912-4323; Carmen Holly, Lead Financial Institution
Policy Analyst, (202) 973-6122; Devyn Jeffereis, Senior Financial
Institution Policy Analyst, (202) 365-2467, Division of Supervision and
Regulation; Jay Schwarz, Assistant General Counsel, (202) 452-2970;
Matthew Suntag, Senior Counsel, (202) 452-3694; Derald Seid, Senior
Counsel, (202) 452-2246; Trevor Feigleson, Counsel, (202) 452-3274,
David Imhoff, Attorney (202) 452-2249, Legal Division, Board of
Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551. For users of telephone systems via text telephone
(TTY) or any TTY-based Telecommunications Relay Services, please call
711 from any telephone, anywhere in the United States.
FDIC: Patrick J. Mancoske, Senior Examination Specialist, Division
of Risk Management Supervision, (202) 898-7032; Lauren A. Whitaker,
Counsel, Legal Division, (202) 898-3872; Navid K. Choudhury, Counsel,
Legal Division, (202) 898-6526, <a href="/cdn-cgi/l/email-protection#0c626f6463796864797e754c6a68656f226b637a">[email&#160;protected]</a>; Mark Mellon,
Counsel, Legal Division, (202) 898-3884; Mark T. Heil, Senior Financial
Economist, Division of Insurance and Research, (202) 898-7232; or
Stuart Hoff, Senior Policy Analyst, Division of Depositor and Consumer
Protection, (202) 898-3852, Federal Deposit Insurance Corporation, 550
17th Street NW, Washington, DC 20429. For the hearing impaired only,
TDD users may contact (202) 925-4618.
NCUA: Policy and Accounting: Victoria Nahrwold, Associate Director;
Naghi H. Khaled, Director of Credit Markets; or Simon Hermann, Senior
Credit Specialist; Office of Examination and Insurance at (703) 518-
6360; National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314, Legal: Ian Marenna, Associate General
Counsel for Regulations and Legislation; John H. Brolin, Senior Staff
Attorney; or Ariel Pereira, Senior Staff Attorney; Office of General
Counsel, at (703) 518-6540; National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314.
CFPB: Shaakira Gold-Ramirez, Counsel; Pedro De Oliveira, Joseph
Devlin, Thomas Dowell, Joan Kayagil, or Melissa Stegman, Senior
Counsels, Office of Regulations, at 202-435-7700. If you require this
document in an alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#64272234263b2507070117170d060d080d101d24070214064a030b12">[email&#160;protected]</a>.
FHFA: Julie Giesbrecht, Senior Policy Analyst, Office of Housing
and Regulatory Policy, (202) 557-9866, <a href="/cdn-cgi/l/email-protection#a0ead5ccc9c58ee7c9c5d3c2d2c5c3c8d4e0c6c8c6c18ec7cfd6">[email&#160;protected]</a>; Karen
Heidel, Assistant General Counsel, Office of General Counsel, (202)
649-3073; or <a href="/cdn-cgi/l/email-protection#d19ab0a3b4bfff99b4b8b5b4bd91b7b9b7b0ffb6bea7">[email&#160;protected]</a>. For TTY/TRS users with hearing and
speech disabilities, dial 711 and ask to be connected to any of the
contact numbers above.

SUPPLEMENTARY INFORMATION:

I. Background

Section 1473(q) of the Dodd-Frank Act amended title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(title XI) \1\ to add a new section 1125 relating to the use of
automated valuation models (AVMs) in valuing real estate collateral
securing mortgage loans (section 1125).\2\ The term ``automated
valuation model'' is commonly used to describe computerized real estate
valuation models used for a variety of purposes, including loan
underwriting and portfolio monitoring.\3\ Section 1125 defines an AVM
as ``any computerized model used by mortgage originators and secondary
market issuers to determine the collateral worth of a mortgage secured
by a consumer's principal dwelling.'' \4\ The quality control standards
proposed in this rule are applicable only to AVMs used in connection
with making credit decisions or covered securitization determinations
regarding a mortgage (covered AVMs), as defined in this proposed rule.
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\1\ 12 U.S.C. 3331 et seq.
\2\ Public Law 111-203, 124 Stat. 1376, 2198 (2010), codified at
12 U.S.C. 3354.
\3\ See Interagency Appraisal and Evaluation Guidelines, 75 FR
77450, 77468 (Dec. 10, 2010).
\4\ 12 U.S.C. 3354(d).
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Section 1125 directs the agencies to promulgate regulations to
implement quality control standards regarding AVMs.\5\ Section 1125
requires that AVMs, as defined in the statute, adhere to quality
control standards designed to ``(1) ensure a high level of confidence
in the estimates produced by AVMs; (2) protect against the manipulation
of data; (3) seek to avoid conflicts of interest; (4) require random
sample testing and reviews; and (5) account for any other such factor
that the agencies determine to be appropriate.'' \6\ As required by
section 1125, the agencies consulted with the staff of the Appraisal
Subcommittee (ASC) and the Appraisal Standards Board of the Appraisal
Foundation (ASB) as part of promulgating this rule.
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\5\ 12 U.S.C. 3354(b).
\6\ 12 U.S.C. 3354(a).
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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. For example, the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) (collectively, the GSEs) may use proprietary AVMs in
their collateral valuation processes. While advances in AVM technology
and data availability have the potential to contribute to lower costs
and shorter turnaround times in the performance of property valuations,
it is important that institutions using such tools take appropriate
steps to ensure the credibility and integrity of the valuations
produced by AVMs.\7\
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\7\ See, e.g., U.S. Department of the Treasury, A Financial
System That Creates Economic Opportunities: Nonbank Financials,
Fintech, and Innovation 103-107 (July 2018), available at <a href="https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf">https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf</a>.
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A. Existing Guidance Relating to the Use of AVMs

Since 2010, the OCC, Board, FDIC, and NCUA have provided
supervisory guidance on the use of AVMs by their regulated institutions
in Appendix B to the Interagency Appraisal and Evaluation Guidelines
(Guidelines).\8\ The Guidelines recognize that an institution may use a
variety of analytical methods and technological tools in developing
real estate valuations, provided the institution can demonstrate that
the valuation method is consistent with safe and sound banking
practices. The Guidelines recognize that the establishment of policies
and procedures governing the selection, use, and validation of AVMs,
including steps to ensure the accuracy, reliability, and independence
of an AVM, is a sound banking practice.\9\ In addition to Appendix B of
the Guidelines, the OCC, Board, and FDIC have issued guidance on model
risk management practices (Model Risk Management Guidance) that
provides supervisory guidance on validation and testing of models.\10\
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\8\ See supra, note 3. The Guidelines were adopted after notice
and comment.
\9\ Id.
\10\ See Supervisory Guidance on Model Risk Management, OCC
Bulletin 2011-12 (Apr. 4, 2011); Federal Reserve Board SR Letter 11-
7 (Apr. 4, 2011); and Guidance on Model Risk Management, FDIC FIL-
22-2017 (June 7, 2017).
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The NCUA is not a party to the Model Risk Management Guidance. The
NCUA monitors the model risk efforts of federally insured credit unions
through its supervisory approach by confirming that the governance and
controls for an AVM are appropriate based on the size and complexity of
the transaction; the risk the transaction poses to the credit union;
and the capabilities and resources of the credit union.

[[Page 40641]]

The CFPB and FHFA are not parties to the Guidelines or the Model
Risk Management Guidance. The FHFA has separately issued model risk
management guidance that provides the FHFA's supervisory expectations
for its regulated entities in the development, validation, and use of
models.\11\
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\11\ See Model Risk Management Guidance, FHFA Advisory Bulletin
2013-07 (Nov. 20, 2013).
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The agencies have also provided guidance on managing the risk
inherent in the use of third-party service providers, such as outside
entities that provide AVMs and AVM services.\12\ Institutions that make
use of third parties are reminded that they remain responsible for
ensuring that third parties, in performing their activities, comply
with applicable laws and regulations, including the safety and
soundness requirements established by the OCC, Board, FDIC, and NCUA.
These guidance documents address the characteristics, governance, and
operational effectiveness of a financial institution's risk management
program for outsourced activities.
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\12\ See Third-Party Relationships: Risk Management Guidance,
OCC Bulletin 2013-29 (Oct. 31, 2013); Third-Party Relationships:
Frequently Asked Questions to Supplement OCC Bulletin 2013-29, OCC
Bulletin 2020-10 (March 5, 2020); Guidance on Managing Outsourcing
Risk, Federal Reserve Board SR Letter 13-9 (Dec. 3, 2013); Third-
Party Risk Guidance for Managing Third-Party Risk, FDIC FIL-44-2008
(June 6, 2008); Evaluating Third Party Relationships, NCUA
Supervisory Letter 07-01 (Oct. 2007); Oversight of Third-Party
Provider Relationships, Advisory Bulletin 2018-08 (Sept. 28, 2018);
and CFPB, Compliance Bulletin and Policy Guidance; 2016-02, Service
Providers (Oct. 31, 2016).
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II. The Proposed Rule

The agencies are inviting comment on a proposed rule to implement
quality control standards for the use of AVMs that are covered by this
proposal. The agencies' proposed rule would require that mortgage
originators and secondary market issuers adopt policies, practices,
procedures, and control systems to ensure that AVMs used in certain
credit decisions or covered securitization determinations adhere to
quality control standards designed to meet specific quality control
factors. The proposed rule would not set specific requirements for how
institutions are to structure these policies, practices, procedures,
and control systems. This approach would provide institutions the
flexibility to set quality controls for AVMs as appropriate based on
the size of the institution and the risk and complexity of transactions
for which they will use AVMs covered by this proposed rule. As modeling
technology continues to evolve, this flexible approach would allow
institutions to refine their policies, practices, procedures, and
control systems as appropriate. The agencies' existing guidance related
to AVMs would remain applicable.

A. Scope of the Proposed Rule

The quality control standards in section 1125 of title XI apply to
AVMs ``used by mortgage originators and secondary market issuers to
determine the collateral worth of a mortgage secured by a consumer's
principal dwelling.'' \13\ The proposed rule would implement the
statute by applying the quality control standards when an AVM is being
used to make a determination of collateral value, as opposed to other
uses such as monitoring value over time or validating an already
completed valuation. Determinations of collateral value are generally
made in connection with credit decisions or covered securitization
determinations as defined in this proposed rulemaking, for example when
determining a new value before originating a purchase-money mortgage or
placing a loan in a securitization pool.
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\13\ 12 U.S.C. 3354(d).
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Other uses of AVMs, such as for portfolio monitoring, do not
involve making a determination of collateral value, and thus are not
within the scope of the proposed rule. The agencies are further
proposing that the rule would not cover the use of AVMs in the
development of an appraisal by a certified or licensed appraiser, nor
in the review of the quality of already completed determinations of
collateral value (completed determinations). The proposed rule would
cover the use of AVMs in preparing evaluations required for certain
real estate transactions that are exempt from the appraisal
requirements under the appraisal regulations issued by the OCC, Board,
FDIC, and NCUA, such as transactions that have a value below the
exemption thresholds in the appraisal regulations.\14\
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\14\ See 12 CFR 34.43(b) (OCC); 12 CFR 225.62(c) (Board); 12 CFR
323.3(b) (FDIC); and 12 CFR 722.3(d) (NCUA). Under the NCUA's rule,
an ``evaluation'' is described as a ``written estimate.'' 12 CFR
722.3(d).
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Section 1125(c)(1) provides that compliance with regulations issued
under section 1125 shall be enforced by, ``with respect to a financial
institution, or subsidiary owned and controlled by a financial
institution and regulated by a Federal financial institution regulatory
agency, the Federal financial institution regulatory agency that acts
as the primary Federal supervisor of such financial institution or
subsidiary.'' \15\ Section 1125(c)(1) applies to a subsidiary of a
financial institution only if the subsidiary is (1) owned and
controlled by a financial institution, and (2) regulated by a Federal
financial institution regulatory agency. Section 1125(c)(2) provides
that compliance with regulations issued under section 1125 shall be
enforced by, ``with respect to other participants in the market for
appraisals of 1-to-4 unit single family residential real estate, the
Federal Trade Commission, the Bureau of Consumer Financial Protection,
and a State attorney general.'' \16\
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\15\ 12 U.S.C. 3354(c)(1) (emphasis added). The term ``Federal
financial institutions regulatory agencies'' means the Board, the
FDIC, the OCC, the former OTS, and the NCUA. 12 U.S.C. 3350(6).
Title III of the Dodd-Frank Act provides that the OCC is now the
Federal financial institutions regulatory agency for Federal savings
associations. Title III of the Dodd-Frank Act also provides that the
FDIC is the Federal financial institutions regulatory agency for
State savings associations. Finally, the Dodd-Frank Act provides
that the Board is responsible for regulation of savings and loan
holding companies. The term ``financial institution'' means an
insured depository institution as defined in 12 U.S.C. 1813 or an
insured credit union as defined in 12 U.S.C. 1752. See 12 U.S.C.
3350(7).
\16\ 12 U.S.C. 3354(c)(2).
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The NCUA has long acknowledged that subsidiaries of federally
insured credit unions--also referred to as credit union service
organizations (CUSOs)--and their employees are not subject to
regulation by the NCUA as contemplated by Congress under statutory
provisions similar to section 1125(c).\17\ This proposal would not
alter that position. The NCUA, unlike the Federal banking agencies that
do have supervisory and regulatory authority over subsidiaries of their
regulated institutions, does not have authority to supervise or examine
subsidiaries owned and controlled by federally insured credit
unions.\18\ Rather, the NCUA's regulations only indirectly affect
CUSOs. For example, part 712 and Sec. 741.222 of the NCUA's
regulations permit federally insured credit unions to invest only in
CUSOs that conform to

[[Page 40642]]

certain specified requirements.\19\ Given that the authority under
section 1125(c)(1), in the context of federally insured credit unions,
applies to subsidiaries owned and controlled by a federally insured
credit union \20\ and regulated by the NCUA,\21\ the NCUA would not
take action to enforce the requirements of this rule under section
1125(c)(1), if the rule is made final, with respect to CUSOs. Rather,
under section 1125(c)(2), the Federal Trade Commission, the CFPB, and
State attorneys general would have enforcement authority over CUSOs,
whether owned by a State or federally chartered credit union, in
connection with a final AVM rule.\22\ Accordingly, the second sentence
in proposed Sec. 722.201(b)(1) would provide that subpart B of part
722 of the NCUA's regulations applies to credit unions insured by the
NCUA that are mortgage originators or secondary market issuers.
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\17\ See Registration of Mortgage Loan Originators, 75 FR 51623,
51626 (Aug. 23, 2010) (applying similar reasoning to the licensing
of mortgage loan originators who were employees of CUSOs under the
Secure and Fair Enforcement for Mortgage Licensing Act of 2008); and
Minimum Requirements for Appraisal Management Companies, 80 FR
32657, 32665 (Aug. 10, 2015) (applying similar reasoning to the
registration and regulation of appraisal management company CUSOs
under 12 U.S.C. 3353).
\18\ See, e.g., Bank Service Company Act, 12 U.S.C. 1861-1867;
NCUA, Third-Party Vendor Authority 7-10 (March 2022) available at
<a href="https://ncua.gov/files/publications/regulation-supervision/third-party-vendor-authority.pdf">https://ncua.gov/files/publications/regulation-supervision/third-party-vendor-authority.pdf</a>; and Financial Stability Oversight
Council, 2021 Annual Report 125 (2021) available at <a href="https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf</a>.
\19\ 12 CFR part 712.
\20\ The term ``financial institution'' means an insured
depository institution as defined in 12 U.S.C. 1813 or an insured
credit union as defined in 12 U.S.C. 1752. See 12 U.S.C. 3350(7).
\21\ 12 U.S.C. 3354(c)(1).
\22\ 12 U.S.C. 3354(c)(2).
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The NCUA is also proposing to amend Sec. 741.203(b) to clearly
include the proposed AVM regulations in the NCUA's list of regulatory
provisions applicable to federally insured, state-chartered credit
unions. Accordingly, proposed Sec. 741.203(b) would provide that
insured credit unions must adhere to the requirements stated in part
722 of this chapter.
1. AVMs Used in Connection With Making Credit Decisions
The proposed rule would apply to AVMs used in connection with
making a credit decision. The proposed rule would define ``credit
decision,'' in part, to include a decision regarding whether and under
what terms to originate, modify, terminate, or make other changes to a
mortgage. The scope provision of the proposed regulatory text would
expressly exclude the use of AVMs in monitoring the quality or
performance of mortgages or mortgage-backed securities. The use of AVMs
solely to monitor a creditor's mortgage portfolio would not be a credit
decision under the proposed rule because the lending institution has
already made the credit decision. The scope of the proposed rule would
include, for example, decisions regarding originating a mortgage,
modifying the terms of an existing loan, or renewing, increasing, or
terminating a line of credit. The proposed rule uses the term ``credit
decision'' to help clarify that the proposed rule would cover these
various types of decisions.
The proposal to limit the scope of the rule to credit decisions and
covered securitization determinations reflects the statutory definition
of AVM, which focuses on the use of an AVM ``by mortgage originators
and secondary market issuers to determine the collateral worth of a
mortgage secured by a consumer's principal dwelling.'' \23\ The
proposed rule would distinguish between using AVMs to determine the
value of collateral securing a mortgage and using AVMs to monitor,
verify, or validate a previous determination of value (e.g., the
proposed rule would not cover a computerized tax assessment used to
verify the valuation made during the origination process).\24\ The
proposed rule focuses on those aspects of mortgage and securitization
transactions where the value of collateral is typically determined.
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\23\ 12 U.S.C. 3354(d) (emphasis added).
\24\ Many secondary market transactions by regulated entities
require an appraisal unless an appraisal consistent with regulatory
standards was obtained at the time of origination. See 12 CFR
43.43(a)(8) (OCC); 12 CFR 225.63(a)(8) (Board); 12 CFR 323.3(a)(8)
(FDIC); 12 CFR 722.3(a)(5) (NCUA).
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Loan modifications and other changes to existing loans. The
proposed rule would cover the use of AVMs in deciding whether to change
the terms of an existing mortgage even if the change does not result in
a new mortgage origination, as long as a ``mortgage originator'' or
``secondary market issuer,'' or servicers that work on the originator's
or secondary market issuer's behalf, uses the AVM to determine the
value of a mortgage secured by a consumer's principal dwelling. For
example, the proposed rule would cover AVMs used in making decisions to
deny a loan modification or to confirm collateral values, such as when
there is a request to change or release collateral. In relevant part,
section 1125 provides that an AVM is ``any computerized model used by
mortgage originators and secondary market issuers to determine the
collateral worth of a mortgage. . . . '' \25\ The agencies' view is
that the phrase ``determine the collateral worth'' broadly covers
instances where mortgage originators and secondary market issuers use
AVMs in connection with making credit decisions. Under the proposal,
the agencies consider mortgage originators and secondary market issuers
or servicers that work on their behalf to be using AVMs in connection
with making a credit decision when they use AVMs to modify or to change
the terms of existing loans.
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\25\ 12 U.S.C. 3354(d) (emphasis added).
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Question 1. How, if at all, could the agencies' proposal to cover
loan modifications and other changes to existing loans be made clearer?
Home equity line of credit (HELOC) reductions or suspensions. The
proposed rule would cover AVMs used in deciding whether or to what
extent to reduce or suspend a HELOC. The proposed rule would apply to
AVMs used in connection with making credit decisions. The agencies
consider mortgage originators and secondary market issuers to be using
AVMs in connection with making a credit decision when they use AVMs to
decide whether or to what extent to reduce or suspend a HELOC.
Question 2. Part II.B of this SUPPLEMENTARY INFORMATION discusses
the proposed definitions of mortgage originator and secondary market
issuer. To what extent do financial institutions purchase or service
HELOCs without engaging in mortgage originator or secondary market
issuer activities as defined by the proposed rule?
Question 3. How might a rule covering only AVM usage by mortgage
originators and secondary market issuers disadvantage those entities
vis-[agrave]-vis their competitors?
2. AVMs Used by Secondary Market Issuers
The language of section 1125 includes not only mortgage
originators, but also secondary market issuers. Given that the statute
refers to secondary market issuers and the primary business of
secondary market issuers is to securitize mortgage loans and to sell
those mortgage-backed securities to investors, the proposed rule would
cover AVMs used in securitization determinations. In addition, covering
AVMs used in securitizations could potentially protect the safety and
soundness of institutions and protect consumers and investors by
reducing the risk that secondary market issuers will misvalue homes.
For example, misvaluation by secondary market issuers could in turn
incentivize mortgage originators to originate misvalued loans when
making lending decisions.\26\ Such misvaluations could

[[Page 40643]]

pose a risk of insufficient collateral for financial institutions and
secondary market participants and could limit consumers' refinancing
and selling opportunities.\27\
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\26\ For example, the 2008 financial crisis was precipitated in
part by secondary market issuers that ``lowered the credit quality
standards of the mortgages they securitized'' and mortgage
originators that ``took advantage of these lower credit quality
securitization standards . . . to relax the underwriting discipline
in the loans they issued'' because, ``[a]s long as they could resell
a mortgage to the secondary market, they didn't care about its
quality.'' Financial Crisis Inquiry Commission, The Financial Crisis
Inquiry Report, at 425 (2011), available at <a href="https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf</a>.
\27\ See, e.g., Appraisals for Higher-Priced Mortgage Loans, 78
FR 10367, 10418 (Feb. 13, 2013).
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Appraisal waivers. The proposed rule would define ``covered
securitization determination'' to include determinations regarding,
among other things, whether to waive an appraisal requirement for a
mortgage origination (appraisal waiver decisions).\28\ Under the
proposal, a secondary market issuer that uses AVMs in connection with
making appraisal waiver decisions would be required to have policies,
practices, procedures, and control systems in place to ensure that the
AVM supporting those appraisal waiver decisions adheres to the rule's
quality control standards. In contrast, a mortgage originator that
requests an appraisal waiver decision from a secondary market issuer
would not need to ensure that the AVM used to support the waiver meets
the rule's quality control standards because the secondary market
issuer would be using the AVM to make the appraisal waiver decision in
this context, not the mortgage originator.
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\28\ On March 1, 2023, Fannie Mae began a transition in
terminology away from ``appraisal waivers'' and to ``value
acceptance.'' As stated in the March 1 announcement, ``value
acceptance is being used in conjunction with the term `appraisal
waiver' to better reflect the actual process of using data and
technology to accept the lender-provided value. We are moving away
from implying that an appraisal is a default requirement.'' See
Fannie Mae Provides Updates Regarding Valuation Modernization [bond]
Fannie Mae.
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For example, both GSEs have appraisal waiver programs and are the
predominant issuers of appraisal waivers in the current mortgage
market.\29\ To determine whether a loan qualifies for an appraisal
waiver under either GSE program, a mortgage originator submits the loan
casefile to the GSE's automated underwriting system with an estimated
value of the property (for a refinance transaction) or the contract
price (for a purchase transaction). The GSE then processes that
information through its internal model, which may include use of an
AVM, to determine the acceptability of the estimated value or the
contract price for the property. If the GSE's analysis determines,
among other eligibility parameters, that the estimated value or
contract price meets its risk thresholds, the GSE offers the lender an
appraisal waiver.\30\
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\29\ See Fannie Mae, Appraisal Waivers, available at <a href="https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers">https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers</a> (last visited January 26, 2023); Freddie Mac, Automated
Collateral Evaluation (ACE), available at <a href="https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation">https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation</a>.
\30\ See Fannie Mae, Appraisal Waivers, available at <a href="https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers">https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers</a>; Freddie Mac, Automated Collateral Evaluation (ACE),
available at <a href="https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation">https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation</a>.
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In this example, when the GSEs use AVMs to determine whether the
mortgage originator's estimated collateral value or the contract price
meets acceptable thresholds for issuing an appraisal waiver offer, the
GSEs would be making a ``covered securitization determination'' under
the proposed rule. As a result, the proposed rule would require the
GSEs, as secondary market issuers, to maintain policies, practices,
procedures, and control systems designed to ensure that their use of
such AVMs adheres to the rule's quality control standards. On the other
hand, when a mortgage originator submits a loan to determine whether a
GSE will offer an appraisal waiver, the mortgage originator would not
be making a ``covered securitization determination'' under the proposed
rule because the GSE would be using its AVM to make the appraisal
waiver decision in this context. As a result, the mortgage originator
would not be responsible for ensuring that the GSEs' AVMs comply with
the proposed rule's quality control standards.
Question 4. To what extent do secondary market issuers other than
the GSEs issue appraisal waivers?
Question 5. Please address the feasibility of mortgage originators
performing quality control reviews of the AVMs that secondary market
issuers use to evaluate appraisal waiver requests. What, if any,
consequences would such an approach have for mortgage originators' use
of appraisal waiver programs?
Other uses by secondary market issuers. The proposed rule would
define ``covered securitization determination'' to include
determinations regarding, among other things, structuring, preparing
disclosures for, or marketing initial offerings of mortgage-backed
securitizations.\31\ Monitoring collateral value in mortgage-backed
securitizations after the securities have already been issued would not
be a covered securitization determination.
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\31\ See, e.g., Asset Backed Securities, 70 FR 1505, 1544 (Jan.
7, 2005) (examples of asset characteristics that are ``material''
include LTV ratios); Appraisals for Higher-Priced Mortgage Loans, 78
FR 78519, 78533 (Dec. 26, 2013) (``[t]he credit risk holder of the
existing obligation might obtain a valuation . . . to estimate LTV
for determining the appropriate securitization pool for the
loan.'').
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The proposed rule would cover AVM usage if and when a secondary
market issuer uses an AVM as part of a new or revised value
determination in connection with covered securitization determinations.
For example, the GSEs use the origination appraised value or the
estimated value in appraisal waivers when issuing mortgage-backed
securities. Hence, AVMs are not used by the GSEs to make a new or
revised value determination in connection with MBS issuances. However,
because the GSEs provide guarantees of timely payment of principal and
interest on loans that are included in an MBS, they are obligated to
purchase loans that are in default from MBS loan pools. The GSEs may
modify such loans and subsequently re-securitize them as new MBS
offerings. In these instances, the GSEs may use an AVM to estimate
collateral value for investor transparency and disclosure. AVMs used in
this manner by the GSEs would be considered covered securitization
determinations because there are new or revised value determinations.
As discussed in part II.A.3 of this SUPPLEMENTARY INFORMATION, the
proposed rule distinguishes between secondary market issuers using AVMs
to determine the value of collateral securing a mortgage versus using
AVMs solely to review completed value determinations. For example, AVMs
used solely to review appraisals obtained during mortgage origination
would not be covered by the proposed rule.
Question 6. The agencies are proposing to include securitizations
within the scope of the proposed rule where the AVM is being used to
determine collateral value for loans being considered for inclusion in
pools collateralizing mortgage-backed securities. To what extent do
secondary market issuers use AVMs to determine collateral value in
securitizations?
Question 7. Would covering uses of AVMs for securitizations hinder
small entities' access to secondary market liquidity and, if so, how
might such impacts be mitigated?
Question 8. What would be the advantages and disadvantages of
exempting federally backed securitizations from the AVM quality control
standards?
Question 9. Are the compliance obligations of lenders and
securitizers clear under this proposed rule?
3. AVM Uses Not Covered by the Proposed Rule
Uses of AVMs by appraisers. The proposed rule would not cover use
of an AVM by a certified or licensed appraiser

[[Page 40644]]

in developing an appraisal.\32\ This approach reflects the fact that,
while appraisers may use AVMs in preparing appraisals, they must
achieve credible results in preparing an appraisal under the Uniform
Standards of Professional Appraisal Practice (USPAP) and its
interpreting opinions.\33\ As such, an appraiser must make a valuation
conclusion that is supportable independently and does not rely on an
AVM to determine the value of the underlying collateral. The agencies
also note that it may be impractical for mortgage originators and
secondary market issuers to adopt policies, procedures, practices, and
control systems to ensure quality controls for AVMs used by the
numerous independent appraisers with which they work.
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\32\ The appraisal regulations issued by the OCC, Board, FDIC,
and NCUA set forth, among other requirements, minimum standards for
the performance of real estate appraisals in connection with
federally related transactions. See 12 CFR part 34, subpart C (OCC);
12 CFR part 208, subpart E, and 12 CFR part 225, subpart G (Board);
12 CFR part 323 (FDIC); and 12 CFR part 722 (NCUA). The CFPB
proposes to codify the AVM requirements in Regulation Z, 12 CFR part
1026, and to cross-reference Regulation Z Sec. 1026.35(c)(1)(i),
which defines ``certified or licensed appraiser'' as a person who is
certified or licensed by the State agency in the State in which the
property that secures the transaction is located, and who performs
the appraisal in conformity with USPAP and the requirements
applicable to appraisers in title XI, and any implementing
regulations in effect at the time the appraiser signs the
appraiser's certification.
\33\ See USPAP STANDARDS RULE 1-1, GENERAL DEVELOPMENT
REQUIREMENTS (``In developing a real property appraisal, an
appraiser must . . . be aware of, understand, and correctly employ
those recognized methods and techniques that are necessary to
produce a credible appraisal''); see also Advisory Opinion 37 (AO-
37) on Computer Assisted Valuation Tools.
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Question 10. How often are AVMs used by certified or licensed
appraisers to develop appraisals?
Question 11. What would be the advantages and disadvantages of
excluding AVMs used by certified or licensed appraisers in developing
appraisal valuations?
Under the appraisal regulations issued by the OCC, FRB, and FDIC,
lenders regulated by those agencies are required to obtain
``evaluations'' for certain transactions that fall within exceptions in
the appraisal regulations.\34\ Evaluations must be consistent with safe
and sound banking practices.
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\34\ See 12 CFR 34.43(b) (OCC); 12 CFR 225.62(c) (Board); and 12
CFR 323.3(b) (FDIC); see also Interagency Appraisal and Evaluation
Guidelines, 75 FR at 77460 (discussing transactions that require
evaluations under the appraisal rules and providing recommendations
for evaluation development).
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The proposed rule would cover AVMs used in the process of preparing
evaluations. This distinction between appraisals and evaluations
reflects that USPAP standards and appraiser credentialing are not
required for individuals who prepare evaluations. The proposed rule's
coverage of AVMs used in the process of preparing evaluations also
reflects the more extensive use of, and reliance on, AVMs within the
evaluation function.
Reviews of completed collateral valuation determinations. The
proposed rule would not cover AVMs used in reviews of completed
collateral value determinations, given that the underlying appraisal or
evaluation determines the value of the collateral, rather than the
review of the appraisal or evaluation. The appraisal or evaluation
review serves as a separate and independent quality control
function.\35\ The agencies note that the proposed rule does not make
distinctions based on the amount of time between the completed
collateral valuation determination and the subsequent review; if an AVM
is solely being used to review the completed determination, such AVM
use is not covered by the proposed rule regardless of how soon the AVM
is used after that determination.
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\35\ Appraisals are subject to appropriate review under the
appraisal regulations. See 12 CFR 34.44(c); (OCC); 12 CFR 225.64(c)
(Board); 12 CFR 323.4(c) (FDIC); 12 CFR 722.4(c) (NCUA). While these
reviews are independent of, and subsequent to, the underlying
appraisals and evaluations, the reviews generally take place before
the final approval of a mortgage loan.
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Question 12. What would be the advantages and disadvantages of
including AVMs that are used in reviews of completed determinations
within the scope of the proposed rule? To what extent do institutions
use AVMs in reviewing completed determinations?
Question 13. What, if any, additional clarifications would be
helpful for situations where an AVM would or would not be covered by
the proposed rule?

B. Definitions

1. Automated Valuation Model
The Dodd-Frank Act defines an AVM, for purposes of section 1125, as
``any computerized model used by mortgage originators and secondary
market issuers to determine the collateral worth of a mortgage secured
by a consumer's principal dwelling.'' \36\ The proposed rule would
define an AVM 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 definition
is substantively identical to the definition in section 1125 but
reflects common terminology and clarifies that the determination of
value relates to the dwelling.
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\36\ 12 U.S.C. 3354(d).
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Question 14. What, if any, other definitions of AVM would better
reflect current practice with respect to the use of AVMs to determine
the value of residential real estate securing a mortgage?
2. Control Systems
The proposal would define control systems as the functions (such as
internal and external audits, risk review, quality control, and quality
assurance) and information systems that institutions use to measure
performance, make decisions about risk, and assess the effectiveness of
processes and personnel, including with respect to compliance with
statutes and regulations. The agencies intend for institutions to use
control systems that are appropriate for the size and complexity of
their mortgage origination and securitization businesses.
Question 15. What, if any, alternate definitions would be more
suitable than the proposed definition of control systems? What
challenges, if any, would be involved in integrating control systems
for AVMs into existing control systems?
3. Covered Securitization Determination
The proposed rule would define ``covered securitization
determination'' to mean a determination regarding (1) whether to waive
an appraisal requirement for a mortgage origination in connection with
its potential sale or transfer to a secondary market issuer, or (2)
structuring, preparing disclosures for, or marketing initial offerings
of mortgage-backed securitizations. Monitoring collateral value in
mortgage-backed securitizations after they have already been issued
would not be covered securitization determinations.
Question 16. Would the proposed definition of a covered
securitization determination hinder small entities' access to secondary
market liquidity and, if so, how might such impacts be mitigated?
Question 17. Other than the uses discussed in the proposed rule,
are there other ways that AVMs are used in the securitization process?
Is the scope of the proposed definition of ``covered securitization
determination'' appropriate and, if not, how should the agencies expand
or narrow the definition?

[[Page 40645]]

4. Credit Decision
The proposal would define credit decision to mean a decision
regarding whether and under what terms to originate, modify, terminate,
or make other changes to a mortgage. The proposed definition of credit
decision would include a decision whether to extend new or additional
credit or change the credit limit on a line of credit. Monitoring the
value of the underlying real estate collateral in their mortgage
originators' loan portfolios would not be a credit decision for the
purposes of this proposed rule. This reflects the fact that the
collateral worth of a mortgage is generally determined in connection
with credit decisions or covered securitizations rather than when the
value of the collateral supporting a mortgage is monitored or verified.
Question 18. What, if any, clarifications are needed for the
definition of the term ``credit decision''?
Question 19. What, if any, other decisions should the agencies
include within the definition of credit decision?
5. Dwelling
The section 1125 definition of AVM refers to a mortgage secured by
a ``consumer's principal dwelling.'' \37\ The OCC, Board, FDIC, NCUA,
and FHFA would define dwelling to mean a residential structure that
contains one to four units, whether or not that structure is attached
to real property. The term would include an individual condominium
unit, cooperative unit, factory-built housing, or manufactured home, if
any of these are used as a residence. The proposed definition of
dwelling also would provide that a consumer can have only one principal
dwelling at a time. Thus, a vacation or other second home would not be
a principal dwelling. However, if a consumer buys or builds a new
dwelling that will become the consumer's principal dwelling within a
year or upon the completion of construction, the new dwelling would be
considered the principal dwelling.\38\
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\37\ 12 U.S.C. 3354(d).
\38\ The NCUA notes that under its regulations, a Federal credit
union may make a mortgage loan to a member for a maturity of up to
40 years if the loan is secured by a one-to-four family dwelling
that is or will be the principal residence of the member-borrower,
among other requirements. 12 CFR 701.21(g). The use of the term
``principal residence'' in Sec. 701.21(g) of the NCUA's regulations
is distinct from the term ``principal dwelling'' used in this
proposed rule. The proposed definition of ``dwelling'' and the
condition that the dwelling is or will be a principal dwelling
within one year for purposes of this proposed AVM rule would not
change what type of dwelling is considered to be a principal
residence under the NCUA's regulations, the parameters of which are
drawn directly from the Federal Credit Union Act. 12 U.S.C.
1757(5)(A)(i). If this proposed rule is adopted as a final rule, the
NCUA would issue a clarifying statement to assist Federal credit
unions in distinguishing the two requirements.
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The CFPB proposes to codify the AVM requirements in Regulation Z,
12 CFR part 1026, which generally implements the Truth in Lending Act
(TILA). The definition of dwelling proposed by the other agencies is
consistent with the CFPB's existing Regulation Z.\39\ Unlike TILA,
title XI generally does not limit its coverage to credit transactions
that are primarily for personal, family, or household purposes.\40\
Because this rulemaking is conducted pursuant to title XI rather than
TILA, the CFPB proposes to revise Regulation Z Sec. Sec. 1026.1, .2,
.3, and .42, and related commentary, to clarify that this rule would
apply when a mortgage is secured by a consumer's principal dwelling,
even if the mortgage is primarily for business, commercial,
agricultural, or organizational purposes.\41\
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\39\ See 12 CFR 1026.2(a)(19) (definition of ``dwelling'') and
1026.2(a)(24) (definition of ``residential mortgage transaction'').
The phrase ``consumer's principal dwelling'' is used in the
Regulation Z provisions on valuation independence. 12 CFR 1026.42.
Regulation Z generally defines ``consumer'' as a natural person to
whom consumer credit is offered or extended. 12 CFR 1026.2(a)(11).
The CFPB notes that pursuant to Regulation Z comments 2(a)(11)-3 and
3(a)-10, consumer credit includes credit extended to trusts for tax
or estate planning purposes and to land trusts.
\40\ See 12 CFR 1026.2(a)(12) (definition of ``consumer
credit'').
\41\ Therefore, the exemptions in 12 CFR 1026.3 would not apply
to the requirements established by the CFPB under this rule.
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Question 20. What, if any, alternate definitions would be more
suitable than the proposed definition of dwelling and the approach to
what is a principal dwelling?
Question 21. Should the rule define the meaning of ``consumer'' or
is that term commonly understood?
Question 22. Because the CFPB proposes to apply its existing
Regulation Z definitions of ``dwelling'' and ``consumer,'' the CFPB
invites comment on whether, for purposes of the AVM requirements, it
should amend its definitions and associated commentary to address
particular circumstances, consistent with the objectives of section
1125. Should the rule exclude from coverage AVMs used only in making
determinations of the worth of particular residential structures or
AVMs used only in extending credit to a trust where a non-obligor
individual uses the residence as their principal dwelling? Should the
rule include language to address special circumstances, such as
dwellings purchased by active-duty military personnel for their future
permanent residence while assigned temporarily to a different duty
station? Please provide any supporting explanation and data.
6. Mortgage
Section 1125(d) defines an AVM with reference to determining ``the
collateral worth of a mortgage secured by a consumer's principal
dwelling.'' \42\ Section 1125 does not define ``mortgage.'' Because the
statute does not refer to ``mortgage loans'' or ``mortgage credit,''
but rather uses the word ``mortgage,'' the proposal would define
``mortgage'' to broadly cover the mortgage market as fully as the
statute appears to envision, in the language of section 1125(d) and
throughout section 1125. Consequently, for this purpose, the agencies
would adopt in part the Regulation Z definition of ``residential
mortgage transaction,'' \43\ which existed at the time the statute was
passed. The proposal would define the term mortgage to mean a
transaction in which a mortgage, deed of trust, purchase money security
interest arising under an installment sales contract, or equivalent
consensual security interest is created or retained in a consumer's
principal dwelling.
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\42\ 12 U.S.C. 3354(d).
\43\ 12 CFR 1026.2(a)(24).
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Question 23. What, if any, alternate definitions would be more
suitable than the proposed definition of mortgage?
Question 24. What are the benefits and disadvantages of including
purchase money security interests arising under installment land
contracts in the definition of mortgage? Please provide any data or
information you have about the use of AVMs in this market segment.
7. Mortgage Originator
For purposes of this proposal, the agencies would adopt the
definition of mortgage originator contained in TILA.\44\ Although
section 1125 of title XI does not define the term mortgage originator,
a recent amendment to title XI (section 1127) adopted the TILA
definition of mortgage originator by cross reference.\45\ The OCC,
Board, and FDIC implemented the same definition in their appraisal
regulations.\46\ Implementing the same definition in this proposal
would maintain consistency in the usage of this term

[[Page 40646]]

with other sections of title XI and the agencies' appraisal
regulations.
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\44\ 15 U.S.C. 1602(dd)(2).
\45\ 12 U.S.C. 3356(a)(1).
\46\ See 12 CFR 34.43(a)(14) (OCC), 225.63(a)(15) (Board), and
323.3(a)(14) (FDIC).
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As proposed, the term mortgage originator generally would include
creditors as defined by 15 U.S.C. 1602(g), notwithstanding that the
definition of mortgage originator at 15 U.S.C. 1602(dd)(2) excludes
creditors for certain other purposes.\47\ While the term mortgage
originator is broad enough to include mortgage brokers, in practice,
brokers generally would not be covered by the proposed rule when they
do not engage in the type of credit or securitization decisions covered
under the proposal.
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\47\ 15 U.S.C. 1602(dd)(2).
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Based on the exception provided at 15 U.S.C. 1602(dd)(2)(G), the
term mortgage originator would generally exclude servicers as defined
by 15 U.S.C. 1602(dd)(7) as well as their employees, agents, and
contractors. Consistent with the interpretation published in the CFPB's
2013 Loan Originator Compensation Rule, a person is a servicer with
respect to a particular transaction only after it is consummated and
that person retains or obtains its servicing rights.\48\ In addition,
whether a person is a servicer under the mortgage originator definition
depends on the type of activities the person performs.
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\48\ Loan Originator Compensation Requirements Under the Truth
in Lending Act (Regulation Z), 78 FR 11280, 11306 (Feb. 15, 2013).
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An entity that otherwise meets the definition of servicer at 15
U.S.C. 1602(dd)(7) is a ``mortgage originator'' for purposes of 15
U.S.C. 1602(dd)(2) only if it performs any of the activities listed in
15 U.S.C. 1602(dd)(2)(A) for a transaction that constitutes a new
extension of credit, including a refinancing or an assumption. As a
result, the proposed rule would apply to servicers and their employees,
agents, and contractors if, in connection with new extensions of
credit, they both use covered AVMs to engage in credit decisions and
perform any of the activities listed in 15 U.S.C. 1602(dd)(2)(A). Once
a servicer meets this definition of mortgage originator, the servicer
would be required to comply with the requirements of this proposed rule
any time it uses an AVM to determine the collateral worth of a mortgage
secured by a consumer's principal dwelling, including those instances
where the use of an AVM does not involve a new extension of credit such
as a loan modification or a reduction of a home equity line of credit.
Question 25. What, if any, alternate definitions would be more
suitable than the definition of mortgage originator proposed?
Question 26. Would the proposed definition of mortgage originator
disadvantage any covered entities vis-[agrave]-vis their market
competitors?
8. Secondary Market Issuer
The agencies are proposing to define secondary market issuer as any
party that creates, structures, or organizes a mortgage-backed
securities transaction. The agencies propose to define secondary market
issuer in this manner due to the statutory focus in section 1125 on
``issuers'' and ``determin[ing] the collateral worth'' of a mortgage.
This type of determination, as opposed to verification or monitoring of
such determination, would typically take place in the secondary market
in connection with the creation, structuring, and organization of a
mortgage-backed security.
A number of parties may be involved in the securitization process
and this proposed definition is designed to ensure coverage of entities
responsible for the core decisions required for the issuance of
mortgage-backed securities, including making determinations of the
value of collateral securing the loans in the securitization
transaction.
Question 27. What, if any, alternate definitions would be more
suitable than the proposed definition of secondary market issuer? What,
if any, additional types of entities should the agencies include in the
definition? Should the definition cover fewer types of entities and, if
so, which entities should not be covered?
Question 28. Would the proposed definition of secondary market
issuer hinder small entities' access to secondary market liquidity and,
if so, how might the agencies mitigate such impacts?
Question 29. What, if any, other terms should be defined in the
proposed rule?

C. Quality Control Standards

1. Proposed Requirements for the First Four Quality Control Factors
The proposed rule would require mortgage originators and secondary
market issuers that engage in credit decisions or covered
securitization determinations themselves, or through or in cooperation
with a third party or affiliate, to adopt and maintain policies,
practices, procedures, and control systems to ensure that AVMs used in
these transactions adhere to quality control standards designed to
ensure a high level of confidence in the estimates produced; protect
against the manipulation of data; seek to avoid conflicts of interest;
and require random sample testing and reviews. This approach would
allow mortgage originators and secondary market issuers the flexibility
to set their quality control standards for covered AVMs as appropriate
based on the size of their institution and the risk and complexity of
transactions for which they will use covered AVMs.
These quality control factors are consistent with practices that
many participants in the mortgage lending market already follow and
with the guidance described in part I.A of this SUPPLEMENTARY
INFORMATION that applies to many regulated institutions that would be
subject to this rule. For example, Appendix B of the Guidelines
contains detailed guidance for institutions seeking to establish
policies, practices, procedures, and control systems to ensure the
accuracy, reliability, and independence of AVMs. The requirement for
quality control standards in the proposed rule is also consistent with
model risk guidance, as discussed earlier. In line with the agencies'
service provider guidance, regardless of whether mortgage originators
and secondary market issuers use their own AVMs or make use of third-
party AVMs, the proposed rule would require the mortgage originators
and secondary market issuers to adopt and maintain policies, practices,
procedures, and control systems to ensure that AVMs adhere to the
rule's requisite quality control standards.
The agencies 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. In addition, as noted
earlier, guidance is already in place to assist regulated institutions
in using AVMs in a safe and sound manner, and institutions that are not
regulated by the agency or agencies providing the guidance may still
look to the guidance for assistance with compliance. The agencies also
considered that the statute does not require the agencies to set
prescriptive standards for AVMs. For these reasons, a rule requiring
institutions to develop policies, practices, procedures, and control
systems designed to satisfy the requirement for quality control
standards may more effectively carry

[[Page 40647]]

out the purposes of section 1125 than a more prescriptive rule.\49\
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\49\ The agencies have, in other contexts, allowed institutions
to adjust their compliance programs in a way that reflects
institution-specific factors, such as an institution's size and
complexity and the nature and scope of its lending activities. See,
e.g., Interagency Guidelines Establishing Standards for Safety and
Soundness, 12 CFR part 30, Appendix A (OCC); 12 CFR part 208,
Appendix D-1 (Board); 12 CFR part 364, Appendix A (FDIC) (requiring
institutions to have internal controls and information systems for
implementing operational and managerial standards that are
appropriate to their size and the nature, scope and risk of their
activities); 12 CFR 34.62 (OCC); 12 CFR 208.51 (Board); 12 CFR 365.2
(FDIC) (requiring institutions to adopt policies that establish
appropriate limits and standards for extensions of credit that are
secured by liens on or interests in real estate): Interagency
Guidelines Establishing Information Security Standards,12 CFR part
30, Appendix B, (OCC); 12 CFR part 208, Appendix D-2 (Board); 12 CFR
part 364, Appendix B (FDIC); 12 CFR part 748, Appendix A (NCUA)
(requiring institutions to implement a comprehensive written
information security program that is appropriate to the size and
complexity of the institution and the nature and scope of its
activities); and 12 CFR 41.90 (OCC); 12 CFR 222.90 (Board); 12 CFR
334.90 (FDIC) (requiring that banks establish policies and
procedures for the detection, prevention, and mitigation of identity
theft). See also Guidelines Establishing Standards for Residential
Mortgage Lending Practices,12 CFR part 30, Appendix C (OCC)
(providing that residential mortgage lending activities should
reflect standards and practices appropriate for the size and
complexity of the bank and the nature and scope of its lending
activities); 12 CFR 1007.104 (CFPB) (requiring policies and
procedures regarding the registration of mortgage loan originators
that are appropriate to the nature, size, complexity, and scope of
the financial institution's mortgage lending activities); and 12 CFR
1026.36(j) (CFPB) (requiring policies and procedures regarding
mortgage loan origination that are appropriate to the nature, size,
complexity, and scope of the mortgage lending activities of the
depository institution and its subsidiaries).
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Question 30. Is additional guidance needed on how to implement the
quality control standards to protect the safety and soundness of
financial institutions and protect consumers beyond the existing
supervisory guidance described in part I.A of this SUPPLEMENTARY
INFORMATION? Should such additional guidance explain how a regulated
entity would implement quality control for an AVM used or provided by a
third party?
Question 31. In what ways, if any, would a more prescriptive
approach to quality control for AVMs be a more effective means of
carrying out the purposes of section 1125 relative to allowing
institutions to develop tailored policies, practices, procedures, and
control systems designed to satisfy the requirement for quality control
standards? If so, what would be the key elements of such an alternative
approach?
2. Specifying a Nondiscrimination Quality Control Factor
Section 1125 provides the agencies with the authority to ``account
for any other such factor'' that the agencies ``determine to be
appropriate.'' \50\ Based on this authority, the agencies propose to
include a fifth factor that would require mortgage originators and
secondary market issuers to adopt policies, practices, procedures, and
control systems to ensure that AVMs used in connection with making
credit decisions or covered securitization determinations adhere to
quality control standards designed to comply with applicable
nondiscrimination laws.
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\50\ 12 U.S.C. 3354(a)(5).
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Existing nondiscrimination laws apply to appraisals and AVMs and
institutions have a preexisting obligation to comply with all Federal
laws, including Federal nondiscrimination laws. For example, the Equal
Credit Opportunity Act (ECOA) and its implementing Regulation B bar
discrimination on a prohibited basis in any aspect of a credit
transaction.\51\ The agencies have long recognized that this
prohibition extends to using different standards to evaluate
collateral,\52\ which would include the design or use of an AVM in any
aspect of a credit transaction in a way that would treat an applicant
differently on a prohibited basis or result in unlawful discrimination
against an applicant on a prohibited basis. Similarly, the Fair Housing
Act prohibits unlawful discrimination in all aspects of residential
real estate-related transactions, including appraisals of residential
real estate.\53\
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\51\ 15 U.S.C. 1691(a) (prohibiting discrimination on the basis
of race, color, religion, national origin, sex (including sexual
orientation and gender identity) or marital status, age (provided
the applicant has the capacity to contract), because all or part of
the applicant's income derives from any public assistance program),
or because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act); see also 12 CFR part 1002. This
prohibition includes discrimination on the prohibited basis
characteristics of ``the neighborhood where the property offered as
collateral is located.'' 12 CFR part 1002, supp. I, para. 2(z)-1.
\52\ See Interagency Task Force on Fair Lending, Policy
Statement on Discrimination in Lending, 59 FR 18266, 18268 (Apr. 15,
1994) (noting that under both ECOA and the Fair Housing Act, a
lender may not, because of a prohibited factor, use different
standards to evaluate collateral).
\53\ 42 U.S.C. 3605 (prohibiting discrimination because of race,
color, religion, national origin, sex, handicap, or familial status
in residential real estate-related transactions); 42 U.S.C.
3605(b)(2) (defining ``real estate-related transactions'' to include
the ``selling, brokering, or appraising of residential real
property.''); see also 24 CFR part 100; note 50, supra.
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As with models more generally, there are increasing concerns about
the potential for AVMs to produce property estimates that reflect
discriminatory bias, such as by replicating systemic inaccuracies and
historical patterns of discrimination. Models could discriminate
because of the data used or other aspects of a model's development,
design, implementation, or use.\54\ Attention to data is particularly
important to ensure that AVMs do not rely on data that incorporate
potential bias and create discrimination risks. Because AVMs arguably
involve less human discretion than appraisals, AVMs have the potential
to reduce human biases. Yet without adequate attention to ensuring
compliance with Federal nondiscrimination laws, AVMs also have the
potential to introduce discrimination risks. Moreover, if models such
as AVMs are biased, the resulting harm could be widespread because of
the high volume of valuations that even a single AVM can process. These
concerns have led to an increased focus by the public and the agencies
on the connection between nondiscrimination laws and AVMs.
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\54\ In other contexts, models and data have the potential to be
a source of bias and may cause consumer harm if not designed,
implemented, and used properly. See generally, Federal Trade
Commission, Big Data: A Tool for Inclusion or Exclusion?
Understanding the Issues (Jan. 2016), available at <a href="https://www.ftc.gov/system/files/documents/reports/big-data-tool-inclusion-or-exclusion-understanding-issues/160106big-data-rpt.pdf">https://www.ftc.gov/system/files/documents/reports/big-data-tool-inclusion-or-exclusion-understanding-issues/160106big-data-rpt.pdf</a>; Reva
Schwartz et al., A Proposal for Identifying and Managing Bias in
Artificial Intelligence, Nat'l Inst. of Standards & Tech., U.S.
Department of Commerce (June 2021), available at <a href="https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270-draft.pdf">https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270-draft.pdf</a>. See also Andreas Fuster et al., Predictably Unequal? The
Effects of Machine Learning on Credit Markets, 77 J. of Fin. 5 (Feb.
2022), available at <a href="https://doi.org/10.1111/jofi.13090">https://doi.org/10.1111/jofi.13090</a>; Emily
Bembeneck, et al., To Stop Algorithmic Bias, We First Have to Define
It, Brookings Inst. (Oct. 21, 2021), available at <a href="http://brookings.edu/research/to-stop-algorithmic-bias-wefirst-have-to-define-it/">http://brookings.edu/research/to-stop-algorithmic-bias-wefirst-have-to-define-it/</a>.
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While existing nondiscrimination law applies to an institution's
use of AVMs, the agencies propose to include a fifth quality control
factor relating to nondiscrimination to heighten awareness among
lenders of the applicability of nondiscrimination laws to AVMs.
Specifying a fifth factor on nondiscrimination would create an
independent requirement for institutions to establish policies,
practices, procedures, and control systems to specifically address
nondiscrimination, thereby further mitigating discrimination risk in
their use of AVMs. Specifying a nondiscrimination factor may also
increase confidence in AVM estimates and support well-functioning AVMs.
In addition, specifying a nondiscrimination factor could help protect
against potential safety and soundness risks, such as operational,
legal, and compliance risks, associated

[[Page 40648]]

with failure to comply with nondiscrimination laws.
In proposing to add a fifth quality control factor on
nondiscrimination, the agencies note that compliance with applicable
nondiscrimination laws with respect to AVMs may be indirectly reflected
within and related to three of the first four statutory quality control
factors. For example, the first factor requires quality control
standards designed to ensure a high level of confidence in the
estimates produced by AVMs. AVMs that reflect discriminatory bias in
the data or discriminatory assumptions could affect confidence in AVM
outputs and may also result in a form of data manipulation,
particularly with respect to model assumptions and in the interactions
among variables in a model, which bears on the second quality control
factor in section 1125. The fourth quality control factor requires
random sample testing and reviews of AVMs. The proposed fifth factor on
nondiscrimination may include an array of tests and reviews, including
fair lending reviews, which would support the general requirement for
random sampling testing and review in section 1125. The first four
factors do not, however, expressly address quality control measures
relating to compliance with nondiscrimination laws.
Requiring institutions using AVMs covered by this proposed rule to
adopt fair lending compliance policies and practices would be
consistent not only with current law but also with well-established
fair lending guidance. The OCC, Board, FDIC, NCUA, CFPB, and FHFA have
issued statements and other materials setting forth principles the
agencies will consider to identify discrimination.\55\ The OCC, Board,
FDIC, NCUA, and CFPB have further underscored the importance of robust
consumer compliance management to prevent consumer harm in the
Interagency Policy Statement on the Use of Alternative Data in Credit
Underwriting (Alternative Data Policy Statement). In the Alternative
Data Policy Statement, the agencies emphasized that ``[r]obust
compliance management includes appropriate testing, monitoring and
controls to ensure consumer protection risks are understood and
addressed.'' \56\ In addition, the CFPB has published procedures for
CFPB examiners to assess an institution's fair lending related risks
and controls related to the use of models--including, potentially,
AVMs--in the credit decision process.\57\
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\55\ See, e.g., Interagency Task Force on Fair Lending, Policy
Statement on Discrimination in Lending, 59 FR 18266 (Apr. 15, 1994),
available at <a href="https://www.govinfo.gov/content/pkg/FR-1994-04-15/html/94-9214.htm">https://www.govinfo.gov/content/pkg/FR-1994-04-15/html/94-9214.htm</a>; Interagency Fair Lending Examination Procedures (Aug.
2009), available at <a href="https://www.ffiec.gov/PDF/fairlend.pdf">https://www.ffiec.gov/PDF/fairlend.pdf</a>; CFPB,
Examination Procedures--ECOA (Oct. 2015), available at <a href="https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf">https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf</a>; Federal Housing Finance Agency, Policy Statement
on Fair Lending, 86 FR 36199 (July 9, 2021), available at <a href="https://www.govinfo.gov/content/pkg/FR-2021-07-09/pdf/2021-14438.pdf">https://www.govinfo.gov/content/pkg/FR-2021-07-09/pdf/2021-14438.pdf</a>.
\56\ Id. Interagency Statement on the Use of Alternative Data in
Credit Underwriting (Dec. 2019), available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_interagency-statement_alternative-data.pdf">https://files.consumerfinance.gov/f/documents/cfpb_interagency-statement_alternative-data.pdf</a>; CFPB, Supervisory Highlights: Summer
2013, 5-11 (Aug. 2013), available at <a href="https://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf">https://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf</a> (discussing the pillars of a well-functioning
CMS). See also Federal Financial Institutions Examination Council
(FFIEC), Notice and Final Guidance, Uniform Interagency Consumer
Compliance Rating System, 81 FR 79473 (Nov. 14, 2016), available at
<a href="https://www.ffiec.gov/press/PDF/FFIEC_CCR_SystemFR_Notice.pdf">https://www.ffiec.gov/press/PDF/FFIEC_CCR_SystemFR_Notice.pdf</a> (``in
developing the revised CC Rating System, the Agencies believed it
was also important for the new rating system to establish incentives
for institutions to promote consumer protection by preventing, self-
identifying, and addressing compliance issues in a proactive manner.
Therefore, the revised rating system recognizes institutions that
consistently adopt these compliance strategies.'').
\57\ CFPB, ECOA Baseline Review Module 2, 6 (Apr. 2019),
available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_ecoa-baseline-exam-procedures_2019-04.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_ecoa-baseline-exam-procedures_2019-04.pdf</a>).
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The agencies propose that institutions would have the flexibility
to design fair lending policies, procedures, practices, and control
systems that are in compliance with fair lending laws and take into
account their business models, as discussed in part II.C.1 of this
SUPPLEMENTARY INFORMATION regarding the first four quality control
factors.
The agencies seek comment on the proposal to specify a
nondiscrimination quality control factor, including ways they could
facilitate compliance for smaller financial institutions and whether
additional clarity should be provided to assist institutions in
complying with the proposed fifth factor.
Question 32. What are the advantages and disadvantages of
specifying a fifth quality control factor on nondiscrimination? What,
if any, alternative approaches should the agencies consider?
Question 33. To what extent is compliance with nondiscrimination
laws with respect to covered AVMs already encompassed by the statutory
quality control factors requiring a high level of confidence in the
estimates produced by covered AVMs, protection against the manipulation
of data, and random sampling and reviews? Should the agencies
incorporate nondiscrimination into those factors rather than adopt the
fifth factor as proposed? Would specifying a nondiscrimination quality
control factor in the rule be useful in preventing market-distorting
discrimination in the use of AVMs?
Question 34. What are the advantages and disadvantages of a
flexible versus prescriptive approach to the nondiscrimination quality
control factor?
Question 35. Are lenders' existing compliance management systems
and fair lending monitoring programs able to assess whether a covered
AVM, including the AVM's 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?
Question 36. What, if any, other approaches should the agencies
consider for incorporating nondiscrimination requirements in this
proposed rule?

D. Request for Comments

The agencies invite comments on all other aspects of the proposed
rulemaking.

E. Proposed Implementation Period

The agencies propose an effective date of the first day of a
calendar quarter following the 12 months after publication in the
Federal Register of any final rule based on this proposal. This
extended effective date would give institutions time to come into
compliance with the rule. The agencies seek comment on this extended
implementation period.
Question 37. In addition to providing time for implementation, in
what other ways should the agencies facilitate implementation for small
entities?

III. CFPB Small Business Review Panel

While Federal agencies generally must consider the impact that
their proposed rules could have on small entities, the Regulatory
Flexibility Act (RFA),\58\ as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA) \59\ and the Dodd-Frank Act,
imposes on the CFPB additional requirements with respect to small
entities.
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\58\ 5 U.S.C. 601 et seq.
\59\ Public Law 104-121, 110 Stat. 857 (1996) (5 U.S.C. 609)
(amended by Dodd-Frank Act section 1100G).
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Specifically, the CFPB must convene and chair a Small Business
Review Panel (Panel) whenever it is considering a proposed rule that
could have a significant economic impact on a substantial number of
small entities.\60\

[[Page 40649]]

This Panel must consist of the Chief Counsel for Advocacy of the Small
Business Administration (Advocacy) \61\ and full-time employees from
both the CFPB and the Office of Information and Regulatory Affairs
(OIRA) within the Office of Management and Budget (OMB).\62\
Additionally, the Panel must collect feedback regarding the proposed
rule under consideration from a group of small entity representatives
(SERs) that the rule likely would cover if it were implemented.\63\
Within 60 days of convening, the Panel must issue a report that
documents the SERs' feedback and presents the Panel's
recommendations.\64\
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\60\ 5 U.S.C. 609(b).
\61\ Advocacy is an independent office within the U.S. Small
Business Administration (SBA), so the views expressed by Advocacy do
not necessarily reflect the views of the SBA.
\62\ 5 U.S.C. 609(b)(3).
\63\ 5 U.S.C. 609(b)(4).
\64\ 5 U.S.C. 609(b)(5).
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In preparation for convening a Panel for this rulemaking and to
help facilitate the Panel's outreach to SERs, the CFPB issued an
Outline of Proposals and Alternatives under Consideration (SBREFA
Outline) on February 23, 2022.\65\ The CFPB then convened a Panel for
this rulemaking on March 14, 2022, and held two Panel outreach meetings
during March 15-16, 2022, conducted online via video conference.\66\
Sixteen SERs participated in this process through written and/or oral
feedback. The SERs included representatives from community banks,
credit unions, non-depository mortgage lenders, and mortgage brokers.
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\65\ CFPB, Small Business Advisory Review Panel For Automated
Valuation Model (AVM) Rulemaking--Outline of Proposals and
Alternatives Under Consideration (Feb. 23, 2022), available at
<a href="https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf">https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf</a>.
\66\ In advance of the Panel outreach meetings, the CFPB,
Advocacy, and OIRA also held six online conferences with the SERs to
describe the small business review process, obtain important
background information about each SER's current business practices,
and familiarize the SERs with selected portions of the SBREFA
Outline.
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On May 13, 2022, the CFPB released the Final Report of the Panel on
the CFPB's Proposals and Alternatives Under Consideration for the AVM
Rulemaking (SBREFA Panel Report).\67\ The SBREFA Panel Report includes
the following:
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\67\ CFPB, Final Report of the Small Business Review Panel on
the CFPB's Proposals and Alternatives Under Consideration for the
Automated Valuation Model (AVM) Rulemaking (May 13, 2022), available
at <a href="https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf">https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf</a>. The CFPB's SBREFA Outline and related materials,
as well as the CFPB's presentation slides framing the discussion
during the Panel outreach meetings, are appended to the SBREFA Panel
Report. See SBREFA Panel Report at app. D through F.
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<bullet> A description of the proposals that are being considered
by the CFPB and that were reviewed by the Panel;
<bullet> Background information on small entities that would likely
be subject to those proposals and on the particular SERs selected to
advise the Panel;
<bullet> A discussion of the feedback from and recommendations made
by the SERs; \68\ and
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\68\ In addition to oral feedback, ten of the 16 SERs provided
written feedback, which is appended to the SBREFA Panel Report at
Appendix B.
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<bullet> A discussion of the findings and recommendations of the
Panel.\69\
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\69\ As required by the RFA, the CFPB considers the Panel's
findings in its initial regulatory flexibility analysis, as set out
in part V of this SUPPLEMENTARY INFORMATION.
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The CFPB also invited other stakeholders to submit feedback on the
SBREFA Outline. Feedback from these other stakeholders on the SBREFA
Outline was not considered by the Panel and is not reflected in the
SBREFA Panel Report but will be placed on the public docket for this
notice. The CFPB received 11 submissions from a variety of other
stakeholders, including trade associations, a coalition of consumer and
civil rights groups, AVM developers and testers, a research center, and
a not-for-profit corporation responsible for setting appraiser
standards and qualifications.
As it prepared this proposed rule with the other agencies, the CFPB
considered the feedback it received from SERs and other stakeholders
(collectively, SBREFA feedback) and the findings and recommendations of
the Panel. The CFPB has summarized the feedback, findings, and
recommendations that it received during the SBREFA process in part
III.A of this SUPPLEMENTARY INFORMATION.\70\
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\70\ The SBREFA Panel Report provides a more complete summary of
feedback from the SERs and the findings and recommendations of the
Panel. The CFPB's documents and content from its SBREFA process for
this rulemaking should not be construed to represent the views or
recommendations of the Board, OCC, FDIC, NCUA, or FHFA.
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A. Summary of SBREFA Feedback and Panel Findings and Recommendations

In their feedback on the SBREFA Outline, SERs and other
stakeholders (collectively, SBREFA commenters) generally expressed
support for the rulemaking's goal of ensuring AVM accuracy. Many SBREFA
commenters noted that AVMs potentially save time and money but also
cautioned that they would need to have greater confidence in AVMs
before broadly expanding their usage of them. While acknowledging that
AVM developers are entitled to maintain trade secrets and protect their
intellectual property rights, several SBREFA commenters expressed
concern that AVM developers do not provide sufficient transparency
regarding how they calculate AVM values.
SBREFA commenters expressed some support for greater
standardization of AVM testing and reporting but cautioned that
prescriptive regulations could threaten innovation and increase costs.
The SBREFA Panel recommended that the CFPB continue to explore ways to
minimize the burden to small entities of the AVM rule in light of SERs'
concerns about compliance costs generally and their feedback regarding
the potential additional costs and delays that could result if the
industry substituted current AVM usage with appraisals.
While acknowledging that Congress has required the rulemaking
agencies to issue a rule, SBREFA commenters generally expressed a
preference for the less prescriptive, principles-based option presented
in the SBREFA Outline, along with nonbinding guidance to aid in
compliance with that rule. The not-for-profit corporation responsible
for setting appraiser standards and qualifications recommended its
USPAP as a starting point for flexible AVM regulations. A coalition of
consumer and civil rights groups also provided various examples for a
principles-based framework in an appendix to their submission.
SBREFA commenters generally supported aligning definitions in the
AVM rule with definitions in existing financial regulations to simplify
compliance. Some SERs and a trade association recommended that the AVM
rule incorporate a transaction-based exemption threshold, such as not
covering portfolio loans under $400,000. Other SERs asked the CFPB to
consider an asset-size threshold to exempt small entities from the
rule. However, a coalition of consumer and civil rights groups
advocated for the rule's coverage to be as broad as possible.
Several SBREFA commenters stated that it would be beneficial to
have a governmental or not-for-profit accrediting body for AVMs, so
that AVM users could rely on such accreditation for complying with the
AVM rule. Several SERs and other stakeholders also advocated for
greater information sharing regarding the GSEs' AVMs.
1. Defining ``Consumer's Principal Dwelling''
The section 1125 definition of AVM refers to a mortgage secured by
a

[[Page 40650]]

consumer's principal dwelling. The terms ``consumer,'' ``dwelling,''
and ``principal dwelling'' are not defined in title XI, although the
Dodd-Frank Act also added the phrase ``consumer's principal dwelling''
into provisions of title XI that address appraisal management company
requirements and broker price opinions.\71\ During the SBREFA process,
the CFPB presented to the SERs an approach that would base the scope of
``consumer's principal dwelling'' on how that phrase is used in the
Regulation Z Sec. 1026.42 provisions on valuation independence.\72\
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\71\ See Dodd-Frank Act section 1473(f)(4), adding section
1121(11) to title XI, codified at 12 U.S.C. 3350(11)): and Dodd-
Frank Act section 1473(r), adding section 1126(a) to title XI,
codified at 12 U.S.C. 3355(a), respectively.
\72\ The appraisal management company provisions in title XI
include a requirement that appraisal management companies apply
valuation independence standards established under TILA. 12 U.S.C.
3353(a)(4). TILA is implemented in the CFPB's Regulation Z, 12 CFR
part 1026 (Regulation Z). The CFPB implemented the valuation
independence standards in Regulation Z Sec. 1026.42 and is
proposing to also implement its AVM standards in Sec. 1026.42.
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Coverage of ``consumers.'' For most purposes Regulation Z defines
``consumer'' as a natural person to whom consumer credit is offered or
extended.\73\ The SBREFA Outline noted that, for certain purposes, the
scope of the Regulation Z term ``consumer'' may apply to additional
persons.\74\ The SBREFA Outline noted further that, unlike TILA,
section 1125 does not limit its coverage to credit transactions that
are primarily for personal, family, or household purposes.\75\
Therefore, the SBREFA Outline advised the SERs that the CFPB was
considering proposing language to clarify that its implementation of
AVM standards in Regulation Z does not exclude from section 1125
coverage any mortgage for which the proceeds are used for other
purposes, as long as the mortgage is secured by a consumer's principal
dwelling.\76\
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\73\ See 12 CFR 1026.2(a)(11).
\74\ To see how the CFPB has interpreted and applied the
definition of ``consumer'' in Regulation Z, see comments 2(a)(11)-1
through 4 and comment 3(a)-10 in Regulation Z, Supplement I.
\75\ See 12 CFR 1026.2(a)(12) (definition of ``consumer
credit'').
\76\ The terms ``dwelling'' and ``principal dwelling'' are
discussed separately in this section.
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The SERs provided a variety of observations about extending the AVM
requirements to business-purpose loans and defining the term
``consumer'' to include persons other than a natural person. In
addition to addressing the scope of coverage generally and consistency
with existing definitions, the SERs discussed valuation costs,
processing times, and business practices.\77\ The SBREFA Panel
recommended that the CFPB leverage existing definitions in Regulation Z
but consider whether adjustments should be made to apply the AVM
standards to business-purpose loans and loans to trusts and limited
liability companies.
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\77\ See SBREFA Panel Report at section 8.13.
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Coverage of ``dwelling'' and limiting coverage to ``principal''
dwelling. The section 1125 definition of AVM refers to determining the
collateral worth of a mortgage secured by a consumer's principal
dwelling. During the SBREFA process, the CFPB indicated it was
considering definitions of dwelling and principal dwelling that are
very similar to their treatment in the proposed rule, but the CFPB also
addressed the possibility of limiting the definitions' scope to
transactions in which the mortgage is secured by a lien on real
property. The SBREFA Outline cited to the CFPB's appraisal independence
requirements in Regulation Z Sec. 1026.42 as an approach under
consideration for clarifying whether second and vacation homes and new
construction would be considered principal dwellings.
Regarding the definition of ``dwelling,'' SERs discussed
considerations relevant to limiting application of the AVM quality
control standards to mortgages secured by real property, including
alternative valuation guides and sampling challenges.\78\ A coalition
of consumer and civil rights groups urged adoption of a broad
definition of dwelling and suggested considering adopting the Fair
Housing Act definition of dwelling.\79\
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\78\ See SBREFA Panel Report at section 8.13.
\79\ See 42 U.S.C. 3602(b) (`` `Dwelling' means any building,
structure, or portion thereof which is occupied as, or designed or
intended for occupancy as, a residence by one or more families, and
any vacant land which is offered for sale or lease for the
construction or location thereon of any such building, structure, or
portion thereof.'').
---------------------------------------------------------------------------

Regarding what would be a ``principal'' dwelling, the SERs
discussed considerations for applying the AVM standards to second
homes, vacation homes, and new construction.\80\ One SER commented on
the importance of considering how coverage might apply to active
military personnel who are purchasing a home for their future permanent
residence while assigned temporarily to a different duty station. One
trade association supported leveraging existing definitions for key
terms in the AVM rule, including dwelling and consumer's principal
dwelling. The SBREFA Panel recommended that the CFPB (i) consider
whether limiting coverage to dwellings secured by liens on real
property, and extending coverage to second homes and vacation homes,
would be consistent with the purposes of section 1125; and (ii) clarify
whether mortgages secured by undeveloped land, manufactured homes, and
other structures used as dwellings would be covered by the quality
control standards. The SBREFA Panel also recommended that the CFPB
assess whether any adjustment or clarification of the AVM rule would be
appropriate to accommodate the special circumstances of active-duty
military personnel. Finally, the SBREFA Panel recommended that the CFPB
seek comment on whether coverage of the AVM rule should vary from the
definition of principal dwelling used in other statutes and CFPB
regulations, including as applied to new construction.
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\80\ See SBREFA Panel Report at section 8.13.
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2. Defining ``Mortgage''
Section 1125 defines an AVM by reference to determining ``the
collateral worth of a mortgage,'' \81\ but does not define the term
``mortgage.'' In the SBREFA process, the CFPB was considering proposing
two alternative definitions of ``mortgage.'' The first alternative
would define ``mortgage'' as an extension of credit secured by a
dwelling. The second alternative would define it as a transaction in
which a mortgage, deed of trust, purchase money security interest
arising under an installment sales contract, or equivalent consensual
security interest is created or retained in a dwelling.
---------------------------------------------------------------------------

\81\ 12 U.S.C. 3354(d). Section 1125 focuses on mortgages
``secured by a consumer's principal dwelling.'' Id.
---------------------------------------------------------------------------

Most SERs did not express a preference for one definition over the
other, but some did request further clarity on what types of
transactions would be covered, and others asked that the definition be
coordinated with existing regulatory definitions. Two SERs preferred
the first mortgage definition. One of those SERs suggested that the
first definition of mortgage was easier to understand, and the other
SER preferred the first definition because it did not appear to include
installment sales contracts, which it said could be understood to
include consumer purchases for improvements to a home (for example,
financing an HVAC system).\82\
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\82\ The CFPB notes that the second definition, which the
agencies are proposing today, limits the ``installment sales
contract'' reference to ``purchase money'' transactions.
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A coalition of consumer and civil rights groups commenting on the
definition of mortgage preferred the second definition because it was

[[Page 40651]]

broader and would protect consumers using installment sales contracts,
who the stakeholder said are often Black homebuyers. A trade
association did not think that installment land contracts should be
included.
The SBREFA Panel recommended that the CFPB attempt to coordinate a
definition of ``mortgage'' with preexisting regulations, to the extent
feasible.
3. Defining ``Mortgage Originator''
Section 1125 covers AVMs used by ``mortgage originators,'' but does
not define the term.\83\ In the SBREFA Outline, the CFPB indicated that
it was considering a definition of ``mortgage originator'' that
potentially could cover persons who are loan originators, creditors,
and/or, under limited circumstances, servicers for purposes of
Regulation Z.\84\ Four SERs, a trade association, and a coalition of
consumer and civil right groups expressed support for a definition of
``mortgage originator'' that relies on definitions from existing
consumer financial laws because they believe that would simplify
implementation of any future final rule and/or minimize the compliance
burden on small businesses. The SBREFA Panel also endorsed this
approach in its recommendations.\85\
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\83\ 12 U.S.C. 3354(d).
\84\ Small Business Advisory Review Panel for Automated
Valuation Model (AVM) Rulemaking, Outline of Proposals and
Alternatives under Consideration 14-15 (Feb. 23, 2022), available at
<a href="https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf">https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf</a>.
\85\ Final Report of Small Business Review Panel on the CFPB's
Proposals and Alternatives under Consideration for the Automated
Valuation Model (AVM) Rulemaking 39 (May 13, 2022), available at
<a href="https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf">https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf</a>.
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Although there was support among SERs and other stakeholders for
defining ``mortgage originator'' based on definitions in existing
consumer financial laws, six SERs and a coalition of consumer and civil
rights groups indicated that the CFPB should consider alternative
existing definitions for the term. These alternative definitions
included defining ``mortgage originator'' (i) by reference to the
term's use in other consumer financial laws, such as SAFE Act,
Regulation G, or Regulation X, (ii) by reference to a person's current
licensure status, or (iii) by reference to a person's function, such as
covering lenders but not mortgage brokers or servicers. One SER in
particular expressed concern that the definition of ``mortgage
originator'' should not apply to mortgage brokers because, even though
mortgage brokers commonly are considered ``loan originators,'' they
rarely use AVMs and have no control over the valuation methods or
vendors used in mortgage transactions.
In addition to receiving requests from SERs asking it to consider
alternative definitions for the term ``mortgage originator,'' the CFPB
also received comments from three SERs regarding the scope of the
definition of the term ``mortgage originator.'' Two SERs asked the CFPB
to consider applying a transaction-based or asset-based threshold that
would exclude small entities from the scope of the definition of the
term ``mortgage originator.'' Another SER asked the CFPB to ensure that
any definition of the term ``mortgage originator'' it ultimately adopts
will apply equally to both traditional market participants and
financial technology firms.
4. Defining ``Secondary Market Issuer''
Section 1125 uses, but does not define, the term ``secondary market
issuers''; specifically, the statute defines an AVM by reference to
computerized models ``used by mortgage originators and secondary market
issuers to determine the collateral worth'' of certain mortgages.\86\
In the SBREFA Outline, the CFPB discussed two alternative definitions
of the term ``secondary market issuer.'' The first alternative would
define the term to include only entities that issue asset-backed
securities collateralized by mortgages (mortgage securities). The
second alternative would define the term more broadly to mean an
issuer, guarantor, insurer, or underwriter of mortgage securities. Most
SERs and other stakeholders providing feedback on the SBREFA Outline
did not express specific views regarding these alternatives, but a
coalition of consumer and civil rights groups as well as one SER
supported the broader definition. The SBREFA Panel recommended that the
CFPB continue to explore the extent to which a broader or narrower
definition of ``secondary market issuer'' would further the statutory
purposes of section 1125, along with the benefits and costs of such
approach.
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\86\ 12 U.S.C. 3354(d). Section 1125 focuses on mortgages
``secured by a consumer's principal dwelling.'' Id.
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5. Types of AVM Uses
Section 1125 defines an AVM as any computerized model ``used by
mortgage originators and secondary market issuers to determine the
collateral worth'' of certain mortgages.\87\ In the SBREFA Outline, the
CFPB noted that, depending on how that phrase in the statute is
implemented, the rule's quality control requirements might cover a
variety of AVM uses by mortgage originators and secondary market
issuers.
---------------------------------------------------------------------------

\87\ 12 U.S.C. 3354(d). Section 1125 focuses on mortgages
``secured by a consumer's principal dwelling.'' Id.
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Underwriting versus non-underwriting AVM uses. Section 1125 focuses
on AVMs used to ``determine'' the collateral worth. In the SBREFA
Outline, the CFPB discussed focusing the rule on AVMs used in making
underwriting decisions. Some SERs and trade associations providing
feedback on the SBREFA Outline supported that approach. However, a
coalition of consumer and civil rights groups advocated for the rule to
broadly cover uses of AVMs to produce any valuation estimate
whatsoever. The SBREFA Panel recommended that the CFPB continue to
explore the extent to which limiting the rule's coverage to uses of
AVMs for underwriting decisions would sufficiently further the
statutory purposes of section 1125, along with the benefits and costs
of such an approach. The SBREFA Panel also recommended that the CFPB
consider clarifying whether, and to what extent, the proposed rule
distinguishes between AVMs used before and after the origination of a
mortgage.
Loan modifications and other changes to existing loans. Section
1125 focuses on AVMs used to ``determine'' the collateral worth. Among
specific types of AVM uses, the CFPB's SBREFA Outline explored whether
the rule should apply in instances where a mortgage originator,
secondary market issuer, or service provider for a mortgage originator
or secondary market issuer uses an AVM to determine the value of
collateral in order to support a decision to modify or to change the
terms of an existing loan. Specifically, the SBREFA Outline presented
two alternatives. Under the first alternative, the rule would cover
AVMs used in transactions that result in a consumer receiving a new
mortgage origination. Under this alternative, the rule would cover a
transaction like a refinancing, but not a transaction like a loan
modification that would not result in a new mortgage origination. Under
the second alternative, the rule would cover any AVM used to decide
whether to change the terms of an existing mortgage even if the change
does not result in a new mortgage origination, so long as a ``mortgage
originator'' or ``secondary market issuer,'' or a service provider
acting on behalf of a mortgage originator or a secondary market issuer,
uses the AVM to determine the collateral worth of a mortgage secured by
a consumer's principal dwelling.

[[Page 40652]]

With respect to the two alternatives, SERs generally expressed a
preference for the CFPB's first alternative over the second. One SER
stated that they preferred a rule that did not cover loan modifications
and other changes to existing loans, even if it ultimately covered
refinancing transactions, because such a rule would have lower
implementation costs. That SER further explained that consolidating the
AVM quality control processes in their institution's origination
functions (including refinancings) would be less burdensome than
building processes for multiple use cases. Several SERs expressed
concern that the second alternative could negatively impact consumers
who are pursuing loss mitigation options. Specifically, those SERs
stated that AVMs are quicker and less costly than appraisals, but that
the second alternative could discourage use of AVMs in favor of
appraisals during the loss mitigation process, which, in turn, would
harm consumers by increasing both property valuation costs and
application processing times. One SER also asked the CFPB to clarify
whether the first alternative would apply to transactions that are
withdrawn or denied in addition to transactions that are consummated.
The CFPB also received feedback on these alternatives from a trade
association. That trade association stated that their members supported
the first alternative because they wanted to exclude AVMs used in loan
modifications from the scope of the rule. The trade association further
stated that their members did not support the second alternative
presented in the SBREFA Outline because, in their view, it both was
inconsistent with title XI's directive to apply quality control
standards to mortgage originators and would place additional burdens on
the processing of loan workouts for distressed borrowers.
Credit line reductions or suspensions. Section 1125 focuses on AVMs
used to ``determine'' the collateral worth of a mortgage secured by a
consumer's principal dwelling. Among specific types of AVM uses, in the
SBREFA Outline, the CFPB was considering whether or not the rule would
cover AVMs used in deciding whether or to what extent to reduce or
suspend a home equity line of credit. SERs discussed balancing the
consumer protections of covering credit line reductions or suspensions
against the burdens of such regulation. One SER noted that AVMs used in
determining credit line reductions or suspensions ought to be covered
from a consumer protection standpoint. Another SER noted that such
decisions occur only a couple times a year at their institution, and
the burden of additional regulations could cause servicers like them to
abandon the use of AVMs for such purposes. The SBREFA Panel recommended
that the CFPB continue to explore the extent to which a rule not
covering uses of AVMs for credit line reductions and suspensions would
sufficiently further the statutory purposes of section 1125, along with
the benefits and costs of such approach. The Panel also recommended
that the CFPB consider whether covering such uses only for mortgage
originators and secondary market issuers disadvantages entities vis-
[agrave]-vis competitors that acquire mortgages but are not mortgage
originators or secondary market issuers.
Uses of AVMs by appraisers. Section 1125 applies to AVMs used by
``mortgage originators'' and ``secondary market issuers,''
respectively.\88\ Third-party appraisers generally would not be
mortgage originators or secondary market issuers; thus, appraisers
themselves generally would not be covered by the eventual rule. But, as
discussed in part I.A of this SUPPLEMENTARY INFORMATION, regulated
entities--including mortgage originators and secondary market issuers--
are responsible for managing risk inherent in the use of third-party
service providers, such as appraisers.\89\
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\88\ 12 U.S.C. 3354(d).
\89\ See supra note 12.
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In the SBREFA Outline, the CFPB indicated that it was considering
whether or not the rule would cover an AVM when a mortgage originator
(or secondary market issuer) relies on an appraisal developed by a
certified or licensed appraiser (appraiser), notwithstanding that the
appraiser used the AVM in developing an appraisal. Several SERs and a
trade association advocated for not covering such AVMs uses; they
explained that mortgage originators and secondary market issuers should
not be responsible for appraisers' AVM usage because appraisers are
already subject to other Federal and State regulation and supervision.
The SERs further stated that, given other Federal laws requiring
valuation independence,\90\ mortgage originators have limited ability
to oversee appraisers' use of AVMs. A coalition of consumer and civil
rights groups urged that the rule should cover AVMs used by appraisers
and stated that there are gaps in the training and licensing of
appraisers. The SBREFA Panel recommended that the CFPB continue to
assess the extent to which a rule not covering appraisers' uses of AVMs
would sufficiently further the statutory purposes of section 1125.
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\90\ For consumer credit transactions secured by a consumer's
principal dwelling, TILA section 129E, 15 U.S.C. 1639e, and its
implementing regulations require valuation independence by, for
example, prohibiting material misrepresentation of property value
and conflicts of interest for persons preparing valuations or
performing valuation management functions. CFPB: 12 CFR 1026.42;
Board: 12 CFR 226.42; see Truth in Lending, 75 FR 66554 (Oct. 28,
2010) (interim final rule); see also Truth in Lending, 75 FR 80675
(Dec. 23, 2010) (correction). TILA section 129E(g)(2) directed the
Board to issue an interim final rule. 15 U.S.C. 1639e(g)(2).
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Securitization. Section 1125 focuses on AVMs used to ``determine''
the collateral worth of a mortgage secured by a consumer's principal
dwelling. Among specific types of AVM uses, in the SBREFA Outline, the
CFPB was considering whether or not the rule would cover a secondary
market issuer's use of an AVM in the offer and sale of mortgage
securities. Most SERs and other stakeholders providing feedback on the
SBREFA Outline did not express specific views regarding whether to
cover AVMs used in securitization, but one SER expressly advocated for
not covering such uses because, otherwise, the rule would create a cost
burden and hinder access to the secondary market, particularly for
small mortgage originators. Another SER stated that most small entities
do not securitize loans and that they would be discouraged from doing
so if the eventual rule covered AVMs used in securitization. A
coalition of consumer and civil rights groups advocated for the rule's
coverage to be as broad as possible. The not-for-profit corporation
responsible for setting appraiser standards and qualifications
expressed concern regarding securitization creating moral hazard for
mortgage origination because securitizers often provide funding to
originators in exchange for loans with weak representations and
warranties that may result in originators having little to no incentive
for accurate valuations. The SBREFA Panel recommended that the CFPB
continue to explore the extent to which a rule not covering uses of
AVMs in securitizations would sufficiently further the statutory
purposes of section 1125, along with the benefits and costs of such an
approach.
Reviews of completed determinations. Section 1125 focuses on AVMs
used to ``determine'' the collateral worth of a mortgage secured by a
consumer's principal dwelling. Among specific types of AVM uses, in the
SBREFA Outline, the CFPB considered whether or not the rule would cover
AVMs used in a subsequent review of a completed

[[Page 40653]]

appraisal or other completed determination of collateral value
(completed determination). Several SERs and a trade association
expressly advocated for not covering such AVM uses, including a SER
that stated requiring quality control of AVMs when they are, in turn,
being used to quality control already completed determinations would be
an excessive amount of quality control and would not provide additional
benefit--but would increase the cost of credit for consumers. A
coalition of consumer and civil rights groups advocated for the rule's
coverage to be as broad as possible.
The SBREFA Panel recommended that the CFPB continue to explore the
extent to which a rule not covering uses of AVMs for subsequent reviews
of completed determinations would sufficiently further the statutory
purposes of section 1125, along with the benefits and costs of such an
approach. The SBREFA Panel also recommended that the CFPB consider
clarifying in the proposed rule whether, and to what extent, the
proposed rule makes distinctions based on the amount of time between
the completed determination and the subsequent review.
Appraisal waivers. Section 1125 focuses on AVMs used to
``determine'' the collateral worth of certain mortgages. In the SBREFA
Outline, the CFPB indicated that it was considering a rule that would
exclude a mortgage originator's use of AVMs for appraisal waiver
programs where the secondary market issuer's use of an AVM is covered
instead. Specifically, the CFPB indicated that it was considering two
potential options. One option was to exclude the mortgage originator's
use of the secondary market issuer's AVM for appraisal waiver programs.
The second option was to exclude the mortgage originator's use of any
AVM used exclusively to determine whether a loan qualifies for an
appraisal waiver program or to generate a value estimate exclusively
for an appraisal waiver program. SERs were supportive of a proposed
rule not covering a mortgage originator's use of AVMs for appraisal
waiver programs where the secondary market issuer's use of an AVM is
covered instead. One SER appreciated that such an approach did not
increase compliance burden on mortgage originators, while another SER
indicated that secondary market issuers, especially the GSEs, were in a
better position to perform quality control reviews of their AVMs than
the mortgage originators requesting the appraisal waiver evaluations.
6. Options for the First Four Quality Control Standards
Section 1125 requires that AVMs adhere to quality control standards
designed to: (1) ensure a high level of confidence in the estimates
produced; (2) protect against the manipulation of data; (3) seek to
avoid conflicts of interest; (4) require random sample testing and
reviews; and (5) account for any other such factor that the agencies
determine to be appropriate. Section 1125(b) requires the agencies to
promulgate regulations to implement these quality control standards.
In the SBREFA process, the CFPB was considering proposing two
alternative methods for compliance in regard to the first four AVM
quality control factors. In the first alternative (principles-based
option), the CFPB was considering proposing to require regulated
institutions to adopt and maintain their own policies, practices,
procedures, and control systems to ensure that AVMs used for covered
transactions adhere to quality control standards designed to meet those
factors, but not proposing specific requirements for those policies,
practices, procedures, and control systems. For the second alternative
regarding the quality control factors (prescriptive option), the CFPB
was considering proposing a prescriptive rule with more detailed and
specific requirements in regard to the quality control factors.
SERs overwhelmingly expressed support for the first option the CFPB
presented, which would require covered entities to develop policies and
procedures that would achieve the quality control standards but would
not set specific requirements for those policies and procedures. For
example, one SER explained that their institution focuses on the risk
assessed, especially the dollar amount of the loan, and the first
option would allow them to maintain that focus. That SER further stated
that a more prescribed approach would increase their costs and affect
their ability to offer services that utilize AVMs, and that the CFPB
should allow AVM use to evolve rather than shut down useful innovation
with specific controls. Another SER said that low-risk home equity
loans for relatively small amounts should not have to meet the same
requirements as half-million-dollar loans and that, otherwise, the
small-dollar mortgages would become unaffordable. One SER stated that a
prescriptive rule would result in a complex and expansive regulation
because it would need to address risk factors across many aspects of
the market, including product type, geographic area, loan purpose and
loan size.\91\
---------------------------------------------------------------------------

\91\ The SERs also discussed other topics besides the direct
question of whether the CFPB should adopt the policies and
procedures or the prescriptive rule options, such as their current
policies and procedures and their concerns about lacking the
expertise to effectively monitor AVM vendor compliance with the
rule. See CFPB, Final Report of the Small Business Review Panel on
the CFPB's Proposals and Alternatives Under Consideration for the
Automated Valuation Model (AVM) Rulemaking 24-30 (May 13, 2022),
available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf">https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf</a>.
---------------------------------------------------------------------------

Almost all other stakeholders who commented on the quality control
options in the SBREFA Outline preferred the principles-based approach,
largely for the same reasons that the SERs did. Some of these
stakeholders, particularly those involved in the appraisal and
valuation market, suggested that the CFPB should try to foster
standardization in the market, while also allowing flexibility. Several
of these commenters suggested that the market would benefit from some
form of credential or certification for AVM providers.
The SBREFA Panel recommended that the CFPB consider providing
additional clarity in the notice of proposed rulemaking (NPRM) on what
the rule would require of small entities in order to comply with the
quality control standards and seek comment on improving that clarity.
In addition, the Panel recommended that the CFPB consider seeking
comment in the NPRM on potential methods to facilitate compliance
targeted on small financial institutions. The Panel further suggested
that such methods considered could include clear instruction on how a
small entity can monitor compliance regarding use of third-party AVM
vendors. The CFPB notes that the proposed rule requests comment on the
possible use of additional guidance.
7. Specifying a Nondiscrimination Quality Control Standard
Section 1125 provides the agencies the authority to account for any
other such factor that the agencies determine to be appropriate.\92\ In
the SBREFA process, the CFPB was considering proposing that it exercise
its authority under section 1125 to specify a fifth quality control
factor designed to ensure that AVMs used for covered transactions
comply with applicable nondiscrimination laws. The CFPB was considering
proposing two alternative methods--a principles-based option or a
prescriptive option--for compliance with the nondiscrimination factor,

[[Page 40654]]

consistent with the first four quality control factors.
---------------------------------------------------------------------------

\92\ 12 U.S.C. 3354(a)(5).
---------------------------------------------------------------------------

During the SBREFA process, SERs uniformly voiced concern regarding
how they can assess AVM compliance with applicable nondiscrimination
law or know that they are in violation of the law. SERs stated that it
is impractical for them to assess AVM fair lending performance because
they are not equipped to validate the algorithms that AVM providers
use. SERs commented that, as small institutions, they do not have the
staff, the data, or the scale to assess AVM model results meaningfully.
In addition, SERs stated that lenders do not have access to the data or
methodology used by the AVM because the data is proprietary.
SERs expressed that it is important to ensure fairness in AVM
development and application, including ensuring that AVMs do not rely
on data that results in inadvertent discrimination. However, SERs
stated that the burden should be on AVM providers to comply with
nondiscrimination requirements, and the providers should be regulated.
In addition, SERs expressed that there is sufficient fair lending
regulatory infrastructure already in place and that adding a fair
lending requirement to the quality control standards for AVMs would be
duplicative and, therefore, unnecessary. SERs further stated that the
other four quality control standards required by statute already
account for fair lending compliance.
A number of other stakeholders, including several trade
associations, echoed many of the SERs' concerns about specifying a
nondiscrimination quality control standard. A coalition of consumer and
civil rights groups stated that while they fully support the addition
of nondiscrimination as a fifth quality control standard, the agencies
should incorporate nondiscrimination into each of the quality control
standards, asserting that fair lending risk should not be separated
from safety and soundness risk.
The SBREFA Panel recommended that the CFPB consider providing
additional clarity in the NPRM on what the rule would require of
institutions in order to comply with a nondiscrimination quality
control factor and seek comment on improving that clarity. In addition,
the Panel recommended that the CFPB consider seeking comment in the
NPRM on potential methods to facilitate compliance targeted on small
financial institutions, such as providing clear and simple
instructions, allowing some form of safe harbor, or some other method
or methods. Such methods considered could include clear instruction on
how a small entity can monitor compliance regarding use of third-party
AVM vendors.
8. Implementation Period
Title XIV of the Dodd-Frank Act requires an implementation period
within 12 months after issuance of the interagency final rule.\93\ Many
SERs and an AVM testing company providing feedback on the SBREFA
Outline stated that small entities would need more than the statutory
12-month period to comply with the eventual rule. Those stakeholders
highlighted the potential nondiscrimination quality control factor as
an aspect of the potential rule that would be particularly time
consuming to implement. One SER and a trade association stated that the
implementation period should be at least 12 months while a research
center estimated only six months would be necessary. The SBREFA Panel
recommended that the CFPB continue to explore the appropriateness of an
implementation period longer than 12 months.
---------------------------------------------------------------------------

\93\ 12 U.S.C. 1400(c)(1)(B).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995.\94\ In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a current Office of Management and Budget (OMB) control
number.
---------------------------------------------------------------------------

\94\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

The proposed rule would establish quality control standards
mandated by the Dodd-Frank Act for the use of AVMs by mortgage
originators and secondary market issuers in determining the collateral
worth of a mortgage secured by a consumer's principal dwelling. Section
1473(q) of the Dodd-Frank Act amended title XI to add section 1125
relating to the use of AVMs in valuing real estate collateral securing
mortgage loans. Section 1125 directs the agencies to promulgate
regulations to implement quality control standards regarding AVMs.
The proposed rule would require supervised mortgage originators and
secondary market issuers that engage in credit decisions or covered
securitization determinations themselves, or through or in cooperation
with a third-party or affiliate, to adopt and maintain policies,
practices, procedures, and control systems to ensure that AVMs used in
these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
The quality control standards in the proposed rule are applicable
only to covered AVMs, which are AVMs as defined in the proposed rule.
The proposed rule would require the regulated mortgage originators and
secondary market issuers to adopt policies, practices, procedures, and
control systems to ensure that AVMs adhere to the specified quality
control standards whenever they use covered AVMs while engaging in
certain credit decisions or covered securitization determinations.
As a result, the proposed rule creates new recordkeeping
requirements. The agencies are revising their current information
collections related to real estate appraisals and evaluations. The OMB
control number for the OCC is 1557-0190, the Board is 7100-0250, the
FDIC is 3064-0103, and the NCUA is 3133-0125. These information
collections will be extended for three years, with revision. In
addition to accounting for the PRA burden incurred as a result of this
proposed rule, the agencies are also updating and aligning their
information collections with respect to the hourly burden associated
with the Guidelines.
The information collection requirements contained in this proposed
rule have been submitted by the OCC, the FDIC, and the NCUA to the OMB
for review and approval under section 3507(d) of the PRA \95\ and
section 1320.11 of the OMB's implementing regulations.\96\ The Board
reviewed the proposed rule under the authority delegated to the Board
by OMB.
---------------------------------------------------------------------------

\95\ 44 U.S.C. 3507(d).
\96\ 5 CFR 1320.
---------------------------------------------------------------------------

Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on

[[Page 40655]]

respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the
collections of information should be sent to the address listed in the
ADDRESSES section of this document. A copy of the comments may also be
submitted to the OMB desk officer by mail to U.S. Office of Management
and Budget, 725 17th Street NW, #10235, Washington, DC 20503, or by
facsimile to 202-395-6974; or email to <a href="/cdn-cgi/l/email-protection#8ce3e5feedd3fff9eee1e5ffffe5e3e2cce3e1eea2e9e3fca2ebe3fa">[email&#160;protected]</a>,
Attention, Federal Banking Agency Desk Officer.

Proposed Information Collection

Title of Information Collection: Recordkeeping and Disclosure
Requirements and Provisions Associated with Real Estate Appraisals and
Evaluations.
Frequency of Response: Annual and event generated.
Affected Public: Businesses, other for-profit institutions, and
other not-for-profit institutions.
Respondents:
OCC: National banks, Federal savings associations.
Board: State member banks (SMBs), bank holding companies (BHCs),
nonbank subsidiaries of BHCs, savings and loan holding companies
(SLHCs), nondepository subsidiaries of SLHCs, Edge and agreement
corporations, U.S. branches and agencies of foreign banks, and any
nonbank financial company designated by FSOC to be supervised by the
Board.
FDIC: Insured state nonmember banks and state savings associations,
insured state branches of foreign banks.
NCUA: Private Sector: Not-for-profit institutions.
General Description of Report:
For federally related transactions, title XI requires regulated
institutions \97\ to obtain appraisals prepared in accordance with
USPAP promulgated by the Appraisal Standards Board of the Appraisal
Foundation. Generally, these standards include the methods and
techniques used to estimate the market value of a property as well as
the requirements for reporting such analysis and a market value
conclusion in the appraisal. Regulated institutions are expected to
maintain records that demonstrate that appraisals used in their real
estate-related lending activities comply with these regulatory
requirements.
---------------------------------------------------------------------------

\97\ National banks, Federal savings associations, SMBs and
nonbank subsidiaries of BHCs, insured state nonmember banks and
state savings associations, and insured state branches of foreign
banks.
---------------------------------------------------------------------------

The proposed rule would require supervised mortgage originators and
secondary market issuers that engage in credit decisions or covered
securitization determinations themselves, or through or in cooperation
with a third-party or affiliate, to adopt and maintain policies,
practices, procedures, and control systems to ensure that AVMs used in
these transactions adhere to quality control standards designed to:
(a) Ensure a high level of confidence in the estimates produced;
(b) Protect against the manipulation of data;
(c) Avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
Current Action: The proposed rule creates new recordkeeping
requirements in connection with adopting and maintaining policies,
practices, procedures, and control systems. The agencies estimate that
the new recordkeeping burden associated with the proposed rule would
result in an implementation burden of 13.33 hours per respondent and an
annual ongoing burden of 5 hours per respondent. In addition to
accounting for the PRA burden incurred as a result of this proposed
rule, the agencies are also updating and aligning their information
collections (IC) with respect to the hourly burden associated with the
Guidelines. This would result in an annual ongoing burden of 10 hours
per respondent for recordkeeping and an annual ongoing burden of 5
hours per respondent for disclosure.

OCC Burden

Table 1--Summary of Estimated Annual Burden
[OMB No. 1557-0190]
----------------------------------------------------------------------------------------------------------------
Total number
Requirement Citations Number of Burden hours per of hours
respondents respondent annually
----------------------------------------------------------------------------------------------------------------
Recordkeeping: Resolution stating Sec. 7.1024(d)..... 6 5.................... 30
plans for use of property.
Recordkeeping: ARM loan Sec. 34.22(a); Sec. 164 6.................... 984
documentation must specify 160.35(b).
indices to which changes in the
interest rate will be linked.
Recordkeeping: Appraisals must be Sec. 34.44......... 976 1,465 responses per 119,072
written and contain sufficient respondent @5
information and analysis to minutes per response.
support engaging in the
transaction.
Recordkeeping: Written policies Sec. 34.62; 1,413 30................... 42,390
(reviewed annually) for appendix A to
extensions of credit secured by subpart D to part
or used to improve real estate. 34; Sec. 160.101;
appendix A to Sec.
160.101.
Recordkeeping: Real estate Sec. 34.85......... 9 5.................... 45
evaluation policy to monitor OREO.
Recordkeeping: New IC 1--AVM Rule-- Proposed Sec. 342 13.33 hours (40 hours 4,559
Policies and Procedures 34.222. divided by 3 years).
(Implementation).
Recordkeeping: New IC 2--AVM Rule-- Proposed Sec. 342 5.................... 1,710
Policies and Procedures (Ongoing). 34.222.
Recordkeeping: New IC 3-- N/A.................. 976 10................... 9,760
Interagency Appraisal and
Evaluation Guidelines--Policies
and Procedures.

[[Page 40656]]

Reporting: Procedure to be Sec. 34.22(b); Sec. 249 6.................... 1,494
followed when seeking to use an 160.35(d)(3).
alternative index.
Reporting: Prior notification of Sec. 34.86......... 6 5.................... 30
making advances under development
or improvement plan for OREO.
Disclosure: Default notice to Sec. 190.4(h)...... 42 2.................... 84
debtor at least 30 days before
repossession, foreclosure, or
acceleration of payments.
Disclosure: New IC 4--Interagency N/A.................. 976 5.................... 4,880
Appraisal and Evaluation
Guidelines.
-----------------------------------------------------------------------------
Total Annual Burden Hours..... ..................... .............. ..................... 185,038
----------------------------------------------------------------------------------------------------------------

Board Burden

Table 2--Summary of Estimated Annual Burden
[FR Y-30; OMB No. 7100-0250]
----------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated
FR Y-30 number of annual Estimated average hours annual burden
respondents frequency per response hours
----------------------------------------------------------------------------------------------------------------
Recordkeeping
----------------------------------------------------------------------------------------------------------------
Sections 225.61-225.67 for SMBs..... 701 519 5 minutes................. 30,318
Sections 225.61-225.67 for BHCs and 4,714 25 5 minutes................. 9,821
nonbank subsidiaries of BHCs.
Guidelines.......................... 5,415 1 10........................ 54,150
Policies and Procedures AVM rule 2,088 1 13.3...................... 27,770
(Initial setup).
Policies and Procedures AVM rule 2,088 1 5......................... 10,440
(Ongoing).
----------------------------------------------------------------------------------------------------------------
Disclosure
----------------------------------------------------------------------------------------------------------------
Guidelines.......................... 5,415 1 5......................... 27,075
---------------------------------------------------------------------------
Total Annual Burden Hours....... .............. .............. .......................... 159,574
----------------------------------------------------------------------------------------------------------------

FDIC Burden

Table 3--Summary of Estimated Annual Burden
[OMB No. 3064-0103]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average annual Number of
Information collection (obligation to Type of burden (frequency of number of responses per Time per response (hours/ Annual burden
respond) response) respondents respondent minutes) (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements Associated Recordkeeping (On Occasion).... 3,038 250 5 minutes (0.083).............. 63,039
with Real Estate Appraisals and
Evaluations (Mandatory).
New IC 1--AVM Rule--Policies and Recordkeeping (Annual)......... 1,042 1 13.33 hours (40 hours divided 13,890
Procedures--Implementation by 3 years).
(Mandatory).
New IC 2--AVM Rule--Policies and Recordkeeping (Annual)......... 1,042 1 5 hours........................ 5,210
Procedures--Ongoing (Mandatory).
New IC 3--2010 Guidelines--Policies Recordkeeping (Annual)......... 3,038 1 10 hours....................... 30,380
and Procedures--Ongoing (Mandatory).
New IC 4--2010 Guidelines--Disclosure-- Disclosure (Annual)............ 3,038 1 5 hours........................ 15,190
Ongoing (Mandatory).
-----------------------------------------------------------------------------------------------------------------
Total Annual Burden Hours......... ............................... .............. .............. ............................... 127,709
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 40657]]

NCUA Burden

Table 4--Summary of Estimated Annual Burden
[OMB No. 3133-0125]
----------------------------------------------------------------------------------------------------------------
Average annual Number of Time per
Information collection Type of burden number of responses per response Annual burden
respondents respondent (hours) (hours)
----------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements Recordkeeping 3648 618 0.0825 187,872
Associated with Real Estate (On Occasion).
Appraisals and Evaluations.
New IC 1--AVM Rule--Policies Recordkeeping 365 1 13.33 4,863
and Procedures-- (Annual).
Implementation.
New IC 2--AVM Rule--Policies Recordkeeping 365 1 5 1,824
and Procedures--Ongoing. (Annual).
New IC 3--2010 Guidelines-- Recordkeeping 3648 1 10 36,480
Policies and Procedures-- (Annual).
Ongoing.
New IC 4--2010 Guidelines-- Disclosure 3648 1 5 18,240
Disclosure--Ongoing. (Annual).
---------------------------------------------------------------
Total Annual Burden Hours. ................ .............. .............. .............. 249,279
----------------------------------------------------------------------------------------------------------------

The CFPB, in consultation with OMB, and the FHFA do not believe
that they have any supervised entities that will incur burden as a
result of this proposed rule and therefore will not be making a
submission to OMB. Comments are invited on this determination by the
CFPB and the FHFA.

V. Regulatory Flexibility Act Analysis

A. OCC

The RFA requires an agency, in connection with a proposed rule, to
prepare an Initial Regulatory Flexibility Analysis describing the
impact of the rule on small entities (defined by the Small Business
Administration (SBA) for purposes of the RFA to include commercial
banks and savings institutions with total assets of $850 million or
less and trust companies with total revenue of $47.5 million or less)
or to certify that the proposed rule would not have a significant
economic impact on a substantial number of small entities.
The OCC has assessed the burden of the proposed rule and has
determined that the costs associated with the proposed rule would be
limited to reviewing the rule; ensuring that existing practices,
procedures, and control systems adequately address the four statutory
quality control standards; and adopting policies, practices,
procedures, and control systems to ensure that AVMs adhere to quality
control standards designed to comply with applicable nondiscrimination
laws. To estimate expenditures, the OCC reviewed the costs associated
with the activities necessary to comply with the proposed rule. These
include an estimate of the total time required to implement the
proposed rule and the estimated hourly wage of bank employees who may
be responsible for the tasks associated with achieving compliance with
the proposed rule. The OCC used a bank employee compensation rate of
$120 per hour.\98\
---------------------------------------------------------------------------

\98\ To estimate wages the OCC reviewed May 2021 data for wages
(by industry and occupation) from the U.S. Bureau of Labor
Statistics (BLS) for credit intermediation and related activities
(NAICS 5220A1). To estimate compensation costs associated with the
rule, the OCC uses $119.63 per hour, which is based on the average
of the 90th percentile for six occupations adjusted for inflation
(6.1 percent as of Q1 2022), plus an additional 32.8 percent for
benefits (based on the percent of total compensation allocated to
benefits as of Q4 2021 for NAICS 522: credit intermediation and
related activities).
---------------------------------------------------------------------------

The OCC currently supervises approximately 661 small entities.\99\
The proposed rule would impact approximately 614 of these small
entities. The OCC estimates the annual cost for small entities to
comply with the proposed rule would be approximately $21,600 per bank
(180 hours x $120 per hour). In general, the OCC classifies the
economic impact on a small entity as significant if the total estimated
impact in one year is greater than 5 percent of the small entity's
total annual salaries and benefits or greater than 2.5 percent of the
small entity's total non-interest expense. Based on these thresholds,
the OCC estimates that the proposed rule would have a significant
economic impact on 26 small entities, which is not a substantial
number. In general, for RFA purposes, the OCC classifies substantial as
5 percent or more of OCC-supervised small entities. Therefore, the OCC
concludes that the proposed rule would not have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------

\99\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $850 million and $47.5
million, respectively. Consistent with the General Principles of
Affiliation in 13 CFR 121.103(a), the OCC counts the assets of
affiliated financial institutions when determining whether to
classify an OCC-supervised institution as a small entity. The OCC
uses December 31, 2022, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
on its four quarterly financial statements for the preceding year.''
See footnote 8 of the SBA's Table of Size Standards.
---------------------------------------------------------------------------

B. Board

The Board is providing an initial regulatory flexibility analysis
with respect to this proposal. The RFA requires an agency to consider
whether the rules it proposes will have a significant economic impact
on a substantial number of small entities. In connection with a
proposed rule, the RFA requires an agency to prepare an Initial
Regulatory Flexibility Analysis describing the impact of the rule on
small entities or to certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
An initial regulatory flexibility analysis must contain (1) a
description of the reasons why action by the agency is being
considered; (2) a succinct statement of the objectives of, and legal
basis for, the proposed rule; (3) a description of, and, where
feasible, an estimate of the number of small entities to which the
proposed rule will apply; (4) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities that will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (5) an
identification, to the extent practicable, of all relevant Federal
rules

[[Page 40658]]

which may duplicate, overlap with, or conflict with the proposed rule;
and (6) a description of any significant alternatives to the proposed
rule which accomplish its stated objectives.
The Board has considered the potential impact of the proposal on
small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the proposal is not expected to have a
significant economic impact on a substantial number of small entities.
Nevertheless, the Board is publishing and inviting comment on this
initial regulatory flexibility analysis. The Board will consider
whether to conduct a final regulatory flexibility analysis after any
comments received during the public comment period have been
considered.
1. Reasons Why Action Is Being Considered by the Board
As discussed above, the Dodd-Frank Act amended title XI to add a
new section governing the use of AVMs in mortgage lending and directing
the agencies to promulgate regulations to implement specified quality
control standards. The proposal serves to implement this statutory
mandate.
2. The Objectives of, and Legal Basis for, the Proposal
The proposed rule would implement statutorily mandated quality
control standards for the use of AVMs. The Board would adopt the
proposal pursuant to section 1125 of title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.\100\
---------------------------------------------------------------------------

\100\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

3. Estimate of the Number of Small Entities
The proposal would apply to Board-regulated small entities that are
mortgage originators or secondary market issuers. There are
approximately 472 state member banks and approximately 2,799 bank
holding companies and savings and loan holding companies that qualify
as small entities for purposes of the RFA.\101\
---------------------------------------------------------------------------

\101\ Under regulations issued by the SBA, a small entity
includes a depository institution, bank holding company, or savings
and loan holding company with total assets of $850 million or less.
See Small Business Size Standards: Adjustment of Monetary-Based Size
Standards, Disadvantage Thresholds, and 8(a) Eligibility Thresholds
for Inflation, 87 FR 69118 (Nov. 17, 2022). Consistent with the
General Principles of Affiliation in 13 CFR 121.103, the Board
counts the assets of all domestic and foreign affiliates when
determining if the Board should classify a Board-supervised
institution as a small entity. Small entity information for state
member banks is based on Reports of Condition and Income average
assets from September 30, 2022. Small entity information for bank
holding companies and savings holding companies is based on average
assets reflected in June 30, 2022 Parent Company Only Financial
Statements for Small Holding Companies (FR Y-9SP) data.
---------------------------------------------------------------------------

4. Description of the Compliance Requirements of the Proposal
The proposal would require Board-regulated small entities that are
mortgage originators or secondary market issuers to adopt and maintain
policies, practices, procedures, and control systems to ensure that
AVMs used in credit decisions or covered securitization determinations
adhere to specified quality control standards. These quality control
standards must ensure a high level of confidence in the estimates
produced, protect against the manipulation of data, avoid conflicts of
interest, and require random sample testing and reviews and comply with
applicable nondiscrimination laws. To the extent that small entities do
not already maintain adequate policies, practices, procedures, and
control systems, they could incur administrative costs to do so. It is
likely that the majority of Board-regulated small entities that are
mortgage originators or secondary market issuers either do not use AVMs
in credit decisions or covered securitization determinations would
already be in compliance with the proposed specified standards or could
become compliant with relatively minor modifications to their current
practices.\102\
---------------------------------------------------------------------------

\102\ For example, the Board has provided guidance to most such
entities on use of AVMs. See Interagency Appraisal and Evaluation
Guidelines, 75 FR 77450, 77468 (Dec. 10, 2010).
---------------------------------------------------------------------------

Board staff estimates that impacted Board-supervised small entities
would spend 160 hours establishing or modifying policies, practices,
procedures, and control systems, at an hourly cost of $99.32.\103\ The
estimated aggregate initial administrative costs of the proposal to
Board-supervised small entities amount to $7,500,646 or $15,891.00 per
bank \104\ and ongoing costs are expected to be small when measured by
small entities' annual expenses.
---------------------------------------------------------------------------

\103\ To estimate wages, the Federal Reserve reviewed May 2021
estimates for wages (by industry and occupation) from the BLS for
credit intermediation and related activities (NAICS 5220A1). To
estimate compensation costs associated with the rule. the Federal
Reserve uses $99.32 per hour, which is based on the average of the
90th percentile for six occupations adjusted for inflation (2
percent as of Q1 2021), plus an additional 33.4 percent for benefits
(based on the percent of total compensation allocated to benefits as
of Q4 2020 for NAICS 522: credit intermediation and related
activities). The number of hours, 160, to establish policies,
procedures and control systems is an estimate based on supervisory
experience.
\104\ This analysis assumes that the majority of credit decision
and securitization determinations are performed at depository
institutions. Therefore, only the number of State member depository
institutions that are small entities, 472, are included in the
calculation of administrative costs. The impact on the majority of
small bank holding companies and savings and loan holding companies
is expected to be minimal.
---------------------------------------------------------------------------

5. Consideration of Duplicative, Overlapping, or Conflicting Rules and
Significant Alternatives to the Proposal
The Board has not identified any Federal statutes or regulations
that would duplicate, overlap, or conflict with the proposal. The Board
is required by statute to promulgate regulations to implement the
quality control standards required under section 1125 of title XI, and
thus no significant alternatives are available.\105\
---------------------------------------------------------------------------

\105\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

Question 38. How frequently do bank holding companies and savings
and loan holding companies that meet the definition of small entity use
AVMs to engage in making credit decisions or securitization
determinations?
Question 39. Is the number of hours estimated to establish
policies, procedures and control systems to comply with the rule
realistic for small institutions. If not, what number is hours would be
more appropriate?

C. FDIC

The RFA generally requires an agency, in connection with a proposed
rule, to prepare and make available for public comment an initial
regulatory flexibility analysis that describes the impact of the
proposed rule on small entities.\106\ However, an initial regulatory
flexibility analysis is not required if the agency certifies that the
proposed rule will not, if promulgated, have a significant economic
impact on a substantial number of small entities. The SBA has defined
``small entities'' to include banking organizations with total assets
of less than or equal to $850 million.\107\ Generally, the FDIC
considers a significant economic impact

[[Page 40659]]

to be a quantified effect in excess of 5 percent of total annual
salaries and benefits or 2.5 percent of total noninterest expenses. The
FDIC believes that effects in excess of one or more of these thresholds
typically represents a significant economic impact for an FDIC-
supervised institution.
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\106\ 5 U.S.C. 601 et seq.
\107\ The SBA defines a small banking organization as having
$850 million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by the SBA on Nov. 17, 2022, Small Business Size
Standards: Adjustment of Monetary-Based Size Standards, Disadvantage
Thresholds, and 8(a) Eligibility Thresholds for Inflation, published
at 87 FR 69118, effective December 19, 2022). In its determination,
the ``SBA counts the receipts, employees, or other measure of size
of the concern whose size is at issue and all of its domestic and
foreign affiliates.'' See 13 CFR 121.103. Following these
regulations, the FDIC uses an insured depository institution's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the insured depository institution is
``small'' for the purposes of RFA.
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The FDIC does not believe that the proposed rule, if adopted, would
have a significant economic effect on a substantial number of small
institutions. However, since some expected effects of the proposed rule
are difficult to assess or accurately quantify given current
information, the FDIC has included an Initial RFA Analysis in this
section.
1. Why Action Is Being Considered
This action would fulfill the statutory mandate in the Dodd-Frank
Act that the agencies promulgate regulations to implement quality
control standards for AVMs used by mortgage originators and secondary
market issuers to determine the collateral worth of a mortgage secured
by a consumer's principal dwelling.\108\
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\108\ The legal basis is described in item (2) below.
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2. Policy Objectives of, and Legal Basis for, the Proposed Rule
Policy objectives. The overarching policy objectives of this
proposed rule are to promote credibility and integrity in the use of
AVMs for the purpose of residential mortgage lending valuation, thereby
supporting safe and sound banking practices as well as helping ensure
compliance with applicable nondiscrimination laws. If adopted, the
proposed rule would achieve these objectives by, among other things,
incorporating the principles stated in existing guidance \109\ through
requiring regulated financial institutions to adopt and maintain
policies, practices, procedures, and control systems to ensure that
AVMs adhere to a set of quality control standards, and by directly
linking nondiscrimination law to institutions' AVM policies, practices,
procedures, and controls. Further, as discussed above in Section II of
the SUPPLEMENTARY INFORMATION, the proposal provides institutions the
flexibility to tailor their quality control standards for AVMs as
appropriate based on the size of the institutions and the risk and
complexity of transactions for which they will use covered AVMs.
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\109\ The guidance is discussed below. It consists of FDIC
guidance on appraisals and evaluation and FDIC guidance on model
risk.
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Legal basis. The Dodd-Frank Act amended title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 by adding a
new section 1125 requiring AVMs to adhere to certain quality control
standards. Section 1125 directs the FDIC, OCC, FRB, NCUA, CFPB, and
FHFA in consultation with the staff of the Appraisal Subcommittee and
the Appraisal Standards Board of the Appraisal Foundation, to
promulgate regulations to implement quality control standards regarding
covered AVMs.\110\ The proposed rule would require institutions that
engage in certain credit decisions or securitization determinations to
adopt policies, practices, procedures, and control systems designed to
ensure that AVMs used in determining the value of mortgage collateral
secured by a consumer's principal dwelling to adhere to quality control
standards designed to: ensure a high level of confidence in the
estimates produced by AVMs; protect against the manipulation of data;
seek to avoid conflicts of interest; require random sample testing and
reviews; and account for any other such factor that the agencies
determine to be appropriate. The agencies exercised their statutory
authority to propose a fifth quality control standard that would
require institutions to adopt policies, practices, procedures, and
control systems to ensure that AVMs adhere to quality control standards
designed to assure compliance with applicable nondiscrimination laws.
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\110\ 12 U.S.C. 3354(a) through (b).
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3. Initial Regulatory Flexibility Act Analysis
A description and an estimate of the number of small institutions
to which the proposed rule will apply. As of December 31, 2022, there
were 3,038 FDIC-supervised institutions, and 2,356 of them were small
institutions for the purposes of the RFA.\111\ Of these, 2,284 FDIC-
supervised small institutions reported a non-zero value for mortgagees
on their books.\112\ Therefore, the FDIC estimates that 2,284 small
institutions could be subject to the proposed rule. The FDIC lacks data
on the number of small FDIC-supervised institutions that use AVMs for
their mortgage originations. Subject matter experts believe that up to
approximately 10 percent of all FDIC-supervised institutions currently
use an AVM for mortgage origination decisions, loan modification
decisions, and securitization decisions covered by the proposed rule.
However, based on supervisory experience, these experts believe a
smaller percentage of small FDIC-supervised institutions use AVMs
because they believe AVM use is strongly positively correlated with
institution size.
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\111\ Based on Call Reports data as of December 31, 2022.
\112\ Based on Call Reports data as of December 31, 2022. The
variable LNRERES represents balances for 1-4 family residential real
estate loans.
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Expected Effects. The costs and benefits discussed in this section
apply to any small FDIC-supervised institution that would be directly
subject to the proposed rule, in particular the 2,284 FDIC-supervised
small institutions estimated to be affected by the proposed rule.
Costs. The proposed rule would, if adopted, generally reflect
existing Guidelines, supervisory expectations, and statutory
obligations regarding the use of AVMs by supervised institutions. As
mentioned, since 2010, the FDIC has provided supervisory Guidelines on
the use of AVMs by its regulated institutions.\113\ The FDIC believes
the covered institutions \114\ using AVMs, including small
institutions, have considered the Guidelines in developing policies,
procedures, practices, and control systems, and therefore should also
be consistent with the proposed rule's quality control standards 1
through 4. This belief is supported by a review of ten years of FDIC
bank examination reports, which revealed that just 0.2 percent of the
examinations flagged shortcomings in AVM management practices.\115\
This suggests that the labor hours required to implement the four
quality control standards would be relatively modest.
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\113\ The FDIC provides guidance on the use of AVMs by their
regulated institutions in Appendix B to the Interagency Appraisal
and Evaluation Guidelines (``Guidelines'') (75 FR 77450, Dec. 10,
2010). The Guidelines advise that institutions should establish
policies, practices, and procedures governing the selection, use,
and validation of AVMs, including steps to ensure the accuracy,
reliability, and independence of an AVM. In addition, the FDIC has
issued guidance on model risk management practices (Model Risk
Guidance) that provides supervisory guidance on validation and
testing of computer-based financial models (FDIC FIL-22-2017, dated
June 7, 2017). See generally Section I.A. of SUPPLEMENTARY
INFORMATION.
\114\ The term ``covered institutions'' refers to financial
institutions that would be subject to the proposed rule.
\115\ The search of nearly 22,000 FDIC Reports of Examination
from June 2011 to June 2021 revealed just 44 instances of a flag
indicating an institution's AVM use or management practices needed
to improve. Therefore, 99.8 percent of the examination reports do
not mention AVM practices and imply satisfactory practices (or no
AVM use).
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The fifth quality control standard is consistent with existing
applicable nondiscrimination laws. For example, the ECOA and its
implementing Regulation B, bar discrimination on a prohibited basis in
any aspect of a credit

[[Page 40660]]

transaction.\116\ Similarly, the Fair Housing Act \117\ prohibits
unlawful discrimination in all aspects of residential real estate-
related transactions, including valuations of residential real estate.
However, the FDIC has not previously issued guidance or regulations
that directly address nondiscrimination laws as it relates to expected
or required AVM policies, procedures, practices, and controls. As a
result, some covered institutions may not have fully integrated
nondiscrimination laws directly into their AVM policies and risk
management practices.
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\116\ 15 U.S.C. 1691(a) (prohibiting discrimination on the basis
of race, color, religion, national origin, sex or marital status,
age (provided the applicant has the capacity to contract), because
all or part of the applicant's income derives from any public
assistance program, or because the applicant has in good faith
exercised any right under the Consumer Credit Protection Act); see
also 12 CFR part 1002.
\117\ 42 U.S.C. 3605 (prohibiting discrimination because of
race, color, religion, national origin, sex, handicap, or familial
status in residential real estate-related transactions); 42 U.S.C.
3605(b)(2) (defining ``real estate-related transactions'' to include
the ``selling, brokering, or appraising of residential real
property''); see also 24 CFR part 100.
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As mentioned, the FDIC lacks information on the labor hours and
costs that would be incurred by covered institutions to comply with the
proposed rule. Therefore, it assumes that small FDIC-supervised
institutions would expend 120 labor hours, on average, to comply with
the proposed rule during the first year of implementation, and 40 labor
hours, on average, in each successive year. This estimate assumes that
in the first year, institutions would need to review and understand the
implications of the newly enacted rule, conduct a review of their own
policies, practices, procedures, and controls for their consistency
with the rule, identify any deficiencies, and take corrective actions
as needed. In the second year, the institutions' expected costs would
be lower on average, as they limit their actions to primarily reviewing
and maintaining their compliance.
This analysis subdivides the assumed compliance-related average
labor hours spent by covered institutions into two types: (1) burdens
under the Paperwork Reduction Act (PRA), and (2) those for non-PRA
compliance activities. For PRA burdens, based on supervisory experience
the agency assumes that on average, covered FDIC-supervised small
institutions using AVMs for originations or modifications would spend
40 hours in the first year and 5 hours in each subsequent year to meet
the recordkeeping requirements.
The FDIC believes non-PRA requirements may impose additional
burdens on small institutions. For the first four quality control
standards, these requirements may include, for example, back-testing of
AVM outputs relative to property sale prices to understand the degree
of confidence they merit, and the development and implementation of
safeguards against data manipulation. The agency believes covered small
institutions' additional non-PRA compliance activities that are
attributable to the proposed rule would be relatively modest for the
first four quality control standards, largely because the 2010
Guidelines already encourage them to conduct such activities. Covered
small institutions may initially expend greater levels of effort to
comply with the fifth quality control standard. The FDIC lacks data on
the time required by the institutions to develop and implement the
nondiscrimination quality control standard.
Based on supervisory experience and subject matter expertise, the
FDIC assumes that all non-PRA compliance activities would average 80
hours per institution in the first year of the proposed rule's adoption
and 35 hours in subsequent years. Summing assumed burden hours for both
PRA (recordkeeping) activities and non-PRA activities associated with
the proposed rule, the FDIC estimates that average first year
compliance labor hours per covered institution would equal 120 (40 PRA
+ 80 non-PRA), and second year compliance labor hours would equal 40 (5
PRA + 35 non-PRA). These combined compliance labor hours represent
total estimated regulatory burden hours attributable to the proposed
rule.
This method multiplies the assumed average number of hours per year
required to comply with the proposed rule by the weighted average
estimated total compensation rate for each labor category expected to
be involved in associated activities.\118\ The resulting product
represents the cost estimate.
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\118\ The assumed distribution of occupation groups involved in
the actions taken by institutions in response to the proposed rule
in year 1 include Financial Analysts (40 percent of hours),
Compliance Officers (40 percent), Lawyers (15 percent), and
Executives and Managers (5 percent). In year 2 and beyond, the
assumed distribution is Financial Analysts (50 percent of hours),
Compliance Officers (40 percent), Lawyers (5 percent), and
Executives and Managers (5 percent). These combinations of
occupations results in an overall estimated hourly total
compensation rate of $96.57. This average rate is derived from the
BLS' Specific Occupational Employment and Wage Estimates, and BLS'
Cost of Employee Compensation data.
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The FDIC lacks access to data on the number of small FDIC-
supervised institutions that use AVMs for mortgage originations or loan
modifications for owner-occupied residential real estate, making it
difficult to estimate reliably the AVM use rates by covered small
institutions. Therefore, this illustrative exercise presents three sets
of potential cost figures. An upper-bound estimate assumes that all
small FDIC-supervised institutions that have residential real estate
loan balances use an AVM. A second estimate assumes that 10 percent of
small FDIC-supervised institutions with mortgage balances use an AVM
(an intermediate estimate is also presented). These assumed AVM use
rates exceed the expected rates for small institutions, according to
subject matter experts who suggest that only a small fraction use them
in practice. Therefore, the FDIC believes that the resulting range of
cost estimates likely tends to overestimate potential compliance costs.
The analysis assumes the current number of FDIC-supervised small
institutions with residential mortgage lending activity (2,284) is
representative of the number of covered institutions in the year of
implementation and in successive years. The aggregate estimated
compliance costs would span the range from (assuming a 10 percent AVM
use rate) $2.6 million in the first year and $0.9 million \119\ in the
second, to $26.4 million in the first year and $8.8 million \120\ in
successive years (assuming 100 percent AVM adoption). An intermediate
assumed 35 percent AVM use rate would generate estimated first-year
costs of $9.2 million and subsequent year costs of $3.0 million.\121\
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\119\ Calculations are as follows. Lower estimate: Year 1: $2.6
million = 274,080 hours x $96.57 per hour x 10% AVM use rate. Year
2: $0.9 million = 91,360 hours x $96.57 per hour x 10% use rate.
\120\ Upper-bound estimate: Year 1: $26.4 million = 274,080
hours x $96.57 per hour x 100% AVM use rate. Year 2: $8.8 million =
91,360 hours x $96.57 per hour x 100% use rate.
\121\ Year 1: $9.2 million = 274,080 hours x $96.57 x 35% use
rate. Year 2: $3.0 million = 91,360 hours x $96.57 x 35% use rate.
The 35 percent assumed AVM use rate is based on internal analysis of
2021-22 Y-14M data by the FRB and applies to large institutions not
regulated by the FDIC. Under the assumption that AVM use rates are
strongly positively correlated with institution size, this analysis
expects this use figure substantially exceeds the actual rate
applicable to FDIC-supervised small institutions.
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Further analysis shows that the estimated costs described above
would not impose a significant economic impact on a substantial number
of small institutions. The method estimates the average cost per
institution by multiplying the assumed number of labor hours in each
year by the estimated weighted average hourly labor cost rate. This
yields the average costs per institution in year 1 (approximately

[[Page 40661]]

$11,600) and year 2 (approximately $3,900).\122\ The method compares
these average costs to each covered institution's annual labor costs
and annual non-interest expenses to ascertain whether they may face
substantial economic impacts. Year 1 estimated average costs exceed the
5 percent threshold of annual salaries and benefits for 11 (0.48
percent) of the institutions, and year 2 average costs do not surpass
the threshold for any of the institutions. Similarly, year 1 estimated
average costs top the 2.5 percent threshold of annual noninterest
expenses for 11 (0.48 percent) of the institutions, and year 2 average
costs do not exceed the threshold for any of the institutions.
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\122\ The estimated average cost per institution is the same for
all assumed AVM use rates.
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The compliance costs incurred by any one covered institution is
likely to vary with the volume of covered AVM activity, the degree to
which current AVM compliance activities differ from the robust quality
control standards in the proposed rule, or the usage of in-house or
third-party AVM service providers.
Benefits. If adopted, the proposed rule would confer public
benefits by promoting the credibility and integrity of residential real
estate valuations used by covered institutions, thereby supporting
their safe and sound operations, and helping ensure that the use of
AVMs by institutions is consistent with nondiscrimination laws. These
benefits cannot be reliably quantified by the FDIC.
These benefits are predicated on the premise that some institutions
would enhance their AVM policies, practices, procedures, and controls
in response to the proposal's first four quality control standards,
despite most institutions already generally following the principles in
existing Guidelines. At the same time, the fifth standard may be more
likely to generate changes in institutions' policies and procedures and
potential associated benefits, than their responses to the first four
standards. Generally, to the extent the proposal drives actions that
result in more accurate and credible AVM valuations of residential real
estate, it may contribute to more efficient underwriting, lending
decisions, and risk management among covered institutions. Such effects
may be derived through multiple channels, for example:

--Improved risk information and its impacts: Improved valuation
accuracy would be expected to result in more precise residential
property credit risk assessment and pricing. Generally, valuation
error, whether generated by an AVM or appraiser, may reduce the
precision of risk measurement and pricing, for instance, by distorting
loan-to-value (LTV) ratios. This misvaluation affects both the
immediate transaction and the downstream users of valuation data to
inform loan decisions, valuations of comparable properties, and default
risk estimation.\123\ More accurate risk information would be expected
to enhance loan performance \124\ and reduce loss-given-default \125\
by more tightly matching loan decisions and terms to actual risk
exposures. In the aggregate, more accurate risk information may promote
the safety and soundness of the financial system by reducing the
likelihood of large negative asset valuation shocks and by enhancing
economy-wide mortgage default estimates.\126\ For example, research
identifies flawed home appraisals as a contributor to the 2008
financial crisis.\127\
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\123\ See Calem et al. (2021). Calem, Paul S., Lauren Lambie-
Hanson, Leonard I. Nakamura, and Jeanna H. Kenney, 2021,
``Appraising Home Purchase Appraisals.'' Real Estate Economics 49:
134-168.
\124\ Agarwal et al. (2015) and Lacour-Little and Malpezzi
(2003) find evidence that inaccurate collateral valuations are
associated with increased loan default rates. Agarwal, Sumit, Itzhak
Ben-David, and Vincent Yao, 2015, ``Collateral Valuation and
Borrower Financial Constraints: Evidence from the Residential Real
Estate Market.'' Management Science 61: 2220-2240. Lacour-Little,
Michael and Stephen Malpezzi, 2003, ``Appraisal Quality and
Residential Mortgage Default: Evidence from Alaska.'' Journal of
Real Estate Finance and Economics 27: 211-233.
\125\ Carillo et al. (2022) find evidence that larger markups in
home purchase transactions are associated with greater losses to
lenders, conditional on loan default. Carillo, Paul E., William M.
Doerner, and William D. Larson, 2022, ``House Price Markups and
Mortgage Defaults.'' Journal of Money, Credit, and Banking (online
early view).
\126\ Carillo et al. (2022) argue that LTV miscalculation can
reduce the reliability of aggregate default estimates.
\127\ See Ben-David (2011), Nakamura (2010), Eriksen (2019).
Ben-David, Itzhak, 2011, ``Financial Constraints and Inflated Home
Prices during the Real Estate Boom.'' American Economic J

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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.