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Rule2024-16197

Quality Control Standards for Automated Valuation Models

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Published

August 7, 2024

Effective

October 1, 2025

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) are adopting a final 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 final rule, institutions that engage in certain credit decisions or securitization determinations must adopt policies, practices, procedures, and control systems to ensure that AVMs used in these transactions to determine the value of mortgage collateral adhere to quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs; 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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[Federal Register Volume 89, Number 152 (Wednesday, August 7, 2024)]
[Rules and Regulations]
[Pages 64538-64580]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-16197]

[[Page 64537]]

Vol. 89

Wednesday,

No. 152

August 7, 2024

Part II

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; Final Rule

Federal Register / Vol. 89 , No. 152 / Wednesday, August 7, 2024 /
Rules and Regulations

[[Page 64538]]

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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: Final rule.

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SUMMARY: The OCC, Board, FDIC, NCUA, CFPB, and FHFA (collectively, the
agencies) are adopting a final 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 final rule, institutions that engage in
certain credit decisions or securitization determinations must adopt
policies, practices, procedures, and control systems to ensure that
AVMs used in these transactions to determine the value of mortgage
collateral adhere to quality control standards designed to ensure a
high level of confidence in the estimates produced by AVMs; 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: This final rule is effective October 1, 2025.

FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152; Mitchell Plave, Special Counsel, Joanne Phillips, Counsel, or
Marta Stewart-Bates, Counsel, Chief Counsel's Office, (202) 649-5490;
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: Andrew Willis, Manager, Policy Development Section, (202)
912-4323; Matthew McQueeney, Senior Financial Institution Policy
Analyst, (202) 452-2942; 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, Senior Counsel, (202) 452-3274, David Imhoff,
Senior 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; Navid K. Choudhury,
Counsel, Legal Division, (202) 898-6526; Mark Mellon, Counsel, Legal
Division, (202) 898-3884; Lauren A. Whitaker, Counsel, Legal Division,
(202) 898-3872; or Stuart Hoff, Senior Policy Analyst, Division of
Depositor and Consumer Protection, (202) 898-3852; or
<a href="/cdn-cgi/l/email-protection#cfbcbabfaabdb9a6bca6a0a18fa9aba6ace1a8a0b9">[email&#160;protected]</a>, 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; 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: George Karithanom, Regulatory Implementation & Guidance
Program Analyst, Office of Regulations at (202) 435-7700 or at <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you require this document in an
alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#91d2d7c1d3ced0f2f2f4e2e2f8f3f8fdf8e5e8d1f2f7e1f3bff6fee7">[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#fab08f96939fd4bd939f8998889f99928eba9c929c9bd49d958c">[email&#160;protected]</a>; or
Karen Heidel, Assistant General Counsel, Office of General Counsel,
(202) 738-7753, <a href="/cdn-cgi/l/email-protection#eda68c9f8883c3a58884898881ad8b858b8cc38a829b">[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
(FIRREA or title XI) \1\ to add a new section 1125 relating to quality
control standards for AVMs used in valuing real estate collateral
securing mortgage loans (section 1125).\2\ In June 2023, the agencies
invited comment on a notice of proposed rulemaking (proposal or
proposed rule) to implement these quality control standards.\3\ The
agencies received approximately 50 comments concerning the 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\ 88 FR 40638 (June 21, 2023).
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The term ``automated valuation model'' is commonly used to describe
computer programs that estimate a property's value and are used for a
variety of purposes, including loan underwriting and portfolio
monitoring.\4\ Section 1125 defines an AVM as ``any computerized model
used by mortgage

[[Page 64539]]

originators and secondary market issuers to determine the collateral
worth of a mortgage secured by a consumer's principal dwelling.'' \5\
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\4\ See Interagency Appraisal and Evaluation Guidelines, 75 FR
77450, 77468 (Dec. 10, 2010).
\5\ 12 U.S.C. 3354(d). This preamble uses the terms ``worth''
and ``value'' interchangeably when discussing mortgage collateral.
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Section 1125 directs the agencies to promulgate regulations to
implement quality control standards regarding AVMs.\6\ 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 automated valuation models; (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.'' \7\ As required by section 1125, the agencies
consulted with the staff of the Appraisal Subcommittee and the
Appraisal Standards Board of the Appraisal Foundation as part of
promulgating this rule.\8\
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\6\ 12 U.S.C. 3354(b).
\7\ 12 U.S.C. 3354(a).
\8\ See 12 U.S.C. 3354(b).
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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 Government Sponsored Enterprises or
GSEs) 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 shorten turnaround times in
the performance of property valuations, it is important that
institutions using such tools take appropriate steps, as required by
section 1125, to ensure the credibility and integrity of the valuations
produced by AVMs.

Existing Guidance Relating to the Use of AVMs and Enforcement of the
Final Rule

Since 2010, the OCC, Board, FDIC, and NCUA have provided
supervisory guidance on the use of AVMs by the institutions they
regulate in Appendix B to the Interagency Appraisal and Evaluation
Guidelines (Appraisal Guidelines).\9\ The Appraisal 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 Appraisal 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.\10\
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\9\ See supra note 4. The Appraisal Guidelines were adopted
after notice and comment.
\10\ Id.
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In addition to Appendix B of the Appraisal Guidelines, the OCC,
Board, and FDIC have issued guidance on model risk management practices
(Model Risk Management Guidance) that provides comprehensive
supervisory guidance on validation and testing of models.\11\ While the
NCUA is not a party to the Model Risk Management Guidance, the NCUA
monitors the model risk management efforts of federally insured credit
unions through its supervisory approach by confirming that the
governance and controls over AVMs are appropriate based on the size and
complexity of the transactions, the risk the transactions pose to the
credit union, and the capabilities and resources of the credit union.
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\11\ See Comptroller's Handbook, Model Risk Management, OCC
Bulletin 2021-39 (Aug. 18, 2021); Supervisory Guidance on Model Risk
Management, OCC Bulletin 2011-12 (Apr. 4, 2011); Guidance on Model
Risk Management, Federal Reserve Board SR Letter 11-7 (Apr. 4,
2011); and Adoption of Supervisory Guidance on Model Risk
Management, FDIC FIL-22-2017 (June 7, 2017).
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The CFPB and FHFA are also not parties to the Appraisal 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.\12\
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\12\ See Supplement Guidance to Advisory Bulletin 2013-07--Model
Risk Management Guidance 2013-07, FHFA Advisory Bulletin 2022-03
(Dec. 21, 2022) and Model Risk Management Guidance, FHFA Advisory
Bulletin 2013-07 (Nov. 20, 2013).
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The OCC, Board, FDIC, NCUA, CFPB, and FHFA 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.\13\ For example, under the guidance issued by the Federal
banking agencies, regardless of whether activities are performed
internally or using a third party, banking organizations are required
to operate in a safe and sound manner and in compliance with applicable
laws and regulations. A banking organization's use of third parties
does not diminish its responsibility to meet these requirements to the
same extent as if its activities were performed by the banking
organization in-house. To operate in a safe and sound manner, a banking
organization establishes risk management practices to effectively
manage the risks arising from its activities, including from third-
party relationships. These guidance documents address the
characteristics, governance, and operational effectiveness of a banking
organization's risk management program for outsourced activities.
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\13\ See Third-Party Relationships: Interagency Guidance on Risk
Management, OCC Bulletin 2023-17 (June 6, 2023); Interagency
Guidance on Third-Party Relationships: Risk Management, Federal
Reserve Board SR Letter 23-4 (June 7, 2023); Interagency Guidance on
Third-Party Relationships: Risk Management, FDIC FIL 29-2023 (June
6, 2023); Guidance on Managing Outsourcing Risk, Federal Reserve
Board SR Letter 13-9 (Dec. 3, 2013); Evaluating Third Party
Relationships, NCUA Supervisory Letter 07-01 (Oct. 2007); Due
Diligence Over Third Party Service Providers, NCUA Letter 01-CU-20
(Nov. 2001); Oversight of Third-Party Provider Relationships, FHFA
Advisory Bulletin 2018-08 (Sept. 28, 2018); CFPB, Compliance
Bulletin and Policy Guidance; 2016-02, Service Providers (Oct. 31,
2016); and CFPB, Examination Procedures--Compliance Management
Review (Aug. 2017). See also, Third-Party Relationships: A Guide for
Community Banks, OCC Bulletin 2024-11 (May 3, 2024); Third-Party
Risk Management: A Guide for Community Banks, Federal Reserve Board
SR Letter 24-2 (May 7, 2024); Third-Party Risk Management, A Guide
for Community Banks, FDIC FIL-29-2024 (May 3, 2024).
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Institutions that are not regulated by the agency or agencies
providing the guidance may still look to the guidance for assistance
with compliance. The OCC, FDIC, Federal Reserve, NCUA, CFPB, FHFA, FTC,
and State attorneys general each have an important role in enforcing
this rule as to their respective regulated entities or covered market
participants.\14\
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\14\ See 12 U.S.C. 3354(c); 12 U.S.C. 4631(a)(1).
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II. Brief Summary of the Proposed Rule, Comments, and the Final Rule

The proposed rule would have required 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 (as defined below) 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) avoid conflicts of interest; (4) require
random sample testing and reviews; and (5) comply with applicable
nondiscrimination laws. The proposed rule would not have set specific
requirements for how institutions are to structure these policies,
practices, procedures, and

[[Page 64540]]

control systems. The proposed rule stated that this approach would
provide institutions with the flexibility to set quality controls for
AVMs as appropriate based on the size, complexity, and risk profile of
the institution and the transactions for which they would use AVMs
covered by the proposed rule. The proposed rule further stated that, as
modeling technology continues to evolve, this flexible approach would
allow institutions to refine their policies, practices, procedures, and
control systems as appropriate and that the agencies' existing guidance
related to AVMs would remain applicable.
The agencies received approximately 50 comments on the proposed
rule to implement the quality control standards for AVMs in title XI,
including comments from financial institutions, financial institution
trade associations, real estate trade associations, mortgage insurance
trade associations, appraiser trade associations, nonprofit advocacy
organizations, AVM developers, and appraisers. Most commenters
recognized that quality control standards for AVMs are required by
title XI and are important to the safety and soundness of mortgage
lending and securitizations involving mortgages. Most commenters also
expressed support for the flexibility in the proposed rule for
institutions to set quality controls for AVMs as appropriate based on
the size, complexity, and risk profile of the institution and the
transactions for which they would use AVMs covered by the proposed
rule.
While most commenters recognized the importance of ensuring that
AVMs used by mortgage originators and secondary market issuers do not
violate fair lending laws, some commenters expressed concern about how
to implement the proposed quality control standards, particularly the
fifth quality control factor on nondiscrimination, and suggested that
additional guidance from the agencies may be needed in the future. Some
commenters suggested that the rule should apply to AVM developers and
vendors, rather than lending institutions, given that mortgage
originators have no control over how AVMs are created. A number of
commenters recommended that the agencies work with the private sector
to develop a standard setting organization (SSO) for AVMs and an
independent third-party entity responsible for testing AVMs for
compliance with the proposed quality control standards.
The agencies are finalizing the proposed rule largely as proposed.
The agencies are also making clarifying edits to the definition of the
term ``mortgage originator,'' adding a definition of ``person'' in
response to comments received, and inserting the words ``seek to'' into
the third quality control factor in order to match the language of
section 1125, as discussed in the preamble to the proposed rule. The
flexible approach to implementing the quality control standards
provided by the final rule will allow the implementation of the
standards to evolve along with changes in AVM technology and minimize
compliance costs. Regarding the fifth quality control factor, the
agencies note that existing nondiscrimination laws apply to appraisals
and AVMs and that institutions have a preexisting obligation to comply
with all Federal laws, including Federal nondiscrimination laws.
Institutions will have flexibility to adopt approaches to implement
this quality control factor in ways that reflect the risks and
complexities of their individual business models. In addition, there is
existing guidance on fair lending considerations to inform compliance
with the nondiscrimination factor.\15\
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\15\ 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>.
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Regarding commenters' suggestion to apply the rule to AVM
developers and vendors, the agencies note that, while section 1125
applies to mortgage originators and secondary market issuers, financial
institutions should be able to work with AVM developers and vendors to
assist them with their compliance obligations under the rule, as they
do with other third-party vendors in order to comply with relevant
regulatory requirements. The agencies recognize that one or more SSOs
and third-party AVM testing entities could be beneficial to effective
compliance with the AVM rule. As long as financial institutions meet
the obligations provided in the final rule, they are free to work with
third parties to assist them with their compliance obligations.

III. Discussion of the Proposed Rule, Comments Received, and the Final
Rule

The following is a detailed discussion of the proposed rule, the
comments the agencies received, the responses to the comments, and the
final rule.

A. Scope of the Rule

1. AVMs Used in Connection With Making Credit Decisions
The proposed rule would have applied to AVMs used in connection
with making a credit decision. The proposed rule would have defined
``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 proposed rule would have expressly excluded
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 have been a credit decision
under the proposed rule because the lending institution has already
made the credit decision. The scope of the proposed rule included, for
example, decisions regarding originating a mortgage; modifying the
terms of an existing loan; and renewing, increasing, or terminating a
home equity line of credit (HELOC). The proposed rule used the term
``credit decision'' to help clarify that the proposed rule would have
covered these various types of decisions.
The proposal to limit the scope of the rule to credit decisions
(or, as discussed below, covered securitization determinations)
reflected 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.'' \16\ The proposed rule distinguished 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 have covered a computerized
tax assessment model used to verify the valuation made during the
origination process).\17\ The proposed rule focused on those aspects of
mortgage and securitization transactions where the value of collateral
is typically determined.
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\16\ 12 U.S.C. 3354(d) (emphasis added).
\17\ 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
43.34(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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Most commenters expressed support for limiting the scope of the
rule to AVMs used in connection with making credit decisions (or, as
discussed below,

[[Page 64541]]

covered securitization determinations) and excluding use of AVMs for
portfolio monitoring, which does not involve credit decision-making.
The commenters also stated that excluding portfolio monitoring would
reduce some burdens and costs that may otherwise be passed on to
borrowers. One commenter stated that these exclusions would permit
lenders more certainty in using AVMs for purposes such as portfolio
monitoring.
Some commenters argued that the rule should apply to the use of
AVMs to value a consumer's principal dwelling for any purpose. For
example, one commenter argued that the statutory definition of
``automated valuation model'' at section 1125 does not limit
applicability only to AVMs used during underwriting.
The final rule limits the scope of the rule to credit decisions
and, as discussed below, covered securitization determinations. This
scope is consistent with the statutory language in section 1125, which
focuses on determinations of value. The focus on determinations of
value made in connection with credit decisions or covered
securitization determinations, and the exclusion of AVM use for
portfolio monitoring, will also reduce the compliance costs associated
with a broader application of the quality control standards.
Loan modifications and other changes to existing loans. The
proposed rule would have defined a credit decision broadly to include,
among other things, a decision regarding whether and under what
circumstances to modify or to make other changes to a mortgage. As a
result, the proposed rule would have covered AVMs used to determine the
value of an existing mortgage secured by a consumer's principal
dwelling in conjunction with a decision to modify or change the terms
of that mortgage when such decision is made by a ``mortgage
originator,'' ``secondary market issuer,'' or servicer working on
behalf of a mortgage originator or secondary market issuer. For
example, the proposed rule would have covered AVMs used by a ``mortgage
originator'' or ``secondary market issuer,'' or servicer working on
behalf of a mortgage originator or secondary market issuer to deny a
loan modification or to confirm the value of collateral in response to
a request to change or release collateral.
The agencies received several comments on this topic. Two
commenters asked the agencies to clarify how the rule would apply to
certain credit decisions. The first of these commenters expressed
support for treating a decision to modify a loan as a credit decision
because, like an initial credit decision, when a mortgage originator
assesses collateral value for a loan modification, the mortgage
originator is assessing whether the value of the collateral is
sufficient to support the decision to engage in the transaction.
However, the commenter asked the agencies to strike the reference to
``other changes'' from the definition of ``credit decision.'' The
commenter believed that this change would reduce ambiguity regarding
the type of conduct covered by the definition of credit decision. The
other commenter suggested that the agencies make clear that assumptions
are a credit event and would fall under the rule. This commenter added
that the use of assumptions may rise in the future, so the market would
benefit from that clarity.
As discussed further below, the agencies have considered these two
comments, but do not find it necessary to provide any additional
clarification regarding how the rule applies to credit decisions.
Section 1125 of FIRREA 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.'' \18\ As explained in the proposed rule, the agencies
interpret the scope of section 1125 as covering the use of an AVM to
make a credit decision, but not the use of an AVM to monitor, to
verify, or to validate a prior determination of value. The proposed
rule further provided that a ``credit decision'' is ``a decision
regarding whether and under what terms to originate, modify, terminate,
or make other changes to a mortgage, including a decision on whether to
extend new or additional credit or change the credit limit on a line of
credit.'' Striking the reference to ``other changes'' from the
definition of credit decision, as suggested by the first commenter,
would be inconsistent with the agencies' interpretation of the scope of
section 1125 because it would narrow the scope of the rule to apply
only to origination, modification, and termination decisions. The
agencies also find it unnecessary to clarify that assumptions are
credit events that fall under the rule, as suggested by the second
commenter, because the proposed definition of ``credit decision'' is
broad enough to cover assumptions.
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\18\ 12 U.S.C. 3354(d) (emphasis added).
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Several other commenters disagreed with applying the rule to AVMs
used to modify or change the terms of an existing loan. One of these
commenters suggested that covering loan modifications would present
operational challenges and is unsupported by an articulated benefit to
consumers. Another commenter stated that covering modifications could
discourage the use of AVMs and push lenders to use appraisals for
modifications, which are more costly and time-consuming. Two other
commenters expressed concern that covering loan modifications could
increase costs for borrowers already facing financial distress. One of
these commenters further noted that covering loan modifications also
could make the loss mitigation process take longer. Finally, another
commenter stated that the proposal to include loan modifications should
have minimal, if any, impact on the market because the majority of loan
modifications do not require a valuation of the property. However, the
commenter recommended that the rule align with the traditional practice
described in the Truth in lending Act (TILA) of distinguishing the role
of servicers from that of originators in cases where there is no new
extension of credit. The commenter argued that, unless this rule's
definition of credit decision excludes loan modifications that are not
a new extension of credit, the regulatory framework for this rule could
be misapplied to other regulations.
The agencies have considered these comments and are adopting the
final rule as proposed. AVMs are often used to determine the value of
collateral in connection with loan modifications and other changes to
mortgages. Further, the agencies continue to view quality control
standards for AVMs used to make credit decisions relating to loan
modifications and other changes to mortgages as important both to
safety and soundness and to consumer protection. As discussed below,
many institutions have already set up quality control systems for AVMs
and have third-party risk management programs in place. For those
institutions, existing quality control systems and third-party risk
management programs should mitigate the burden of implementing
additional quality control standards for AVMs used to modify or to
change the terms of existing loans as well as any related costs passed
on to consumers. In addition, the flexibility the rule provides to
institutions to design policies, practices, procedures, and control
systems to implement the quality control standards should reduce the
burden of implementing additional quality control standards for AVMs
used to modify or to change the terms of existing loans. This
flexibility should

[[Page 64542]]

reduce any related costs passed on to consumers.
Finally, the agencies considered the comment recommending that the
rule align with the traditional practice described in TILA of
distinguishing the role of servicers from that of mortgage originators
in cases where there is no new extension of credit. However, the
agencies decline to adopt changes to the proposed rule based on the
comment. Although, as discussed in detail in part III.C.7 of this
SUPPLEMENTARY INFORMATION, the rule defines mortgage originator by
adopting the full text of the TILA definition of the term with
technical revisions, this rulemaking is being conducted pursuant to
FIRREA and it is consistent with FIRREA for valuation requirements to
apply to both new and existing extensions of credit. For example, under
the appraisal regulations of the Federal banking agencies and NCUA,
loan modifications that are real estate-related financial transactions
must, in general, comply with appraisal requirements or obtain an
evaluation (for entities regulated by the banking agencies) or a
written estimate of market value (for credit unions) that is consistent
with safe and sound banking practices. Therefore, it is consistent with
the regulatory framework of FIRREA for the agencies to apply AVM
requirements to transactions involving both new and existing credit.
Home equity line of credit (HELOC) reductions or suspensions. The
proposed rule would have covered AVMs used in deciding whether or to
what extent to reduce or suspend a HELOC. In the proposal, the agencies
considered 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.
The agencies received several comments on this topic. Two
commenters generally supported applying the rule to HELOCs, while two
commenters opposed this application. These commenters expressed the
concern that the burden and expense of compliance would outweigh the
consumer protection and safety and soundness benefits. Another
commenter requested further clarification regarding how the rule would
apply when AVMs are used to make credit decisions relating to HELOC
reductions and suspensions.
The agencies have considered these comments and are adopting the
final rule as proposed. The agencies have determined that AVMs used to
make credit decisions relating to HELOC reductions and suspensions are
important both to safety and soundness and to consumer protection. As
discussed below, many institutions have already set up quality control
systems for AVMs and have third-party risk management programs in
place. These existing quality control systems and third-party risk
management programs should mitigate the burden and expense of
implementing additional quality control standards for AVMs used to make
credit decisions relating to HELOC reductions and suspensions as well
as any related costs passed on to consumers. In addition, the
flexibility provided to institutions under the final rule to design
policies, practices, procedures, and control systems to implement the
quality control standards should also reduce both the burden of
implementing additional quality controls standards for AVMs used to
make credit decisions relating to HELOC reductions and suspensions and
any related costs passed on to consumers.
2. AVMs Used by Secondary Market Issuers
The language of section 1125 includes not only mortgage
originators, but also secondary market issuers.\19\ For this reason,
the proposed rule would have extended to certain securitization
activities, defined as ``covered securitization determinations.''
---------------------------------------------------------------------------

\19\ 12 U.S.C. 3354(d).
---------------------------------------------------------------------------

Appraisal waivers by secondary market issuers. The proposed rule
defined ``covered securitization determination'' to include
determinations regarding, among other things, whether to waive an
appraisal requirement for a mortgage origination (appraisal waiver
decisions).\20\ Under the proposed rule, a secondary market issuer that
uses AVMs in connection with making appraisal waiver decisions would
have been 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 have needed to ensure
that the AVM used to support the waiver meets the rule's quality
control standards. This treatment is because the secondary market
issuer would be using the AVM to make the appraisal waiver decision in
this context, not the mortgage originator. The proposal noted that when
mortgage originators submit loans to GSEs for appraisal waiver
decisions, the mortgage originators offer an estimated value of the
property, but do not make a determination of value.
---------------------------------------------------------------------------

\20\ 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
[verbar] Fannie Mae.
---------------------------------------------------------------------------

Both GSEs have appraisal waiver programs and are the predominant
issuers of appraisal waivers in the current mortgage market.\21\ To
determine whether a loan qualifies for an appraisal waiver under any
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 this information through
its internal model(s), 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.\22\
---------------------------------------------------------------------------

\21\ 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>.
\22\ Id.
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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 have required
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, the mortgage originator in this context 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. 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.
Most commenters agreed that the GSEs make the valuation decision in
connection with appraisal waivers and should be covered by the quality
control

[[Page 64543]]

standards in the appraisal waiver context. One commenter requested
clarification in cases where AVMs are used to determine eligibility for
appraisal waivers and recommended that the proposed regulatory text
align with the description in the preamble. Another commenter supported
an exception for AVMs used to determine whether a loan may be eligible
for an appraisal waiver. Another commenter stated that the Equal Credit
Opportunity Act (ECOA) requires creditors to provide consumers with a
copy of any estimate of the value of a dwelling developed in connection
with a creditor's decision to provide credit, including those values
developed pursuant to a policy of a GSE or by an AVM, a broker price
opinion, or other methodology or mechanism. The commenter further
stated that the GSEs should be obligated to provide a consumer with any
valuation on which the waiver is based.
Many commenters stated that it would be very difficult for lenders
to conduct quality control of the GSEs' AVMs for reasons including that
the GSEs have treated their data, analytics, and testing as proprietary
and have not shared information with the industry. Commenters also
suggested that requiring lenders to conduct quality control of
secondary market issuers' AVMs would be redundant because the secondary
market issuers are already covered by the proposed rule and are better
positioned to implement quality controls on their AVMs.
The agencies have determined that secondary market issuers are best
positioned to conduct quality control for the AVMs they use in
appraisal waiver decisions. This is because the secondary market issuer
would be using the AVM to make the appraisal waiver decision in this
context, not the mortgage originator. For this reason and after
considering the comments, the final rule adopts the proposal to require
the secondary market issuers, rather than mortgage originators, to
implement the final rule for such AVM use.
Regarding providing to consumers copies of valuations used in
connection with appraisal waiver decisions, the comment is on a matter
outside the scope of this rulemaking. The agencies also note that the
CFPB's rules in Regulation B implementing ECOA generally require
creditors to provide applicants for first-lien loans on a dwelling with
copies of written valuations developed in connection with an
application.\23\ ``While some AVMs may use proprietary methods, the
[2013 ECOA Valuations Final Rule] does not require the disclosure of
these methods per se; rather, the [2013 ECOA Valuations Final Rule]
requires disclosure of the written valuations developed by the AVMs
which are provided to the creditors.'' \24\
---------------------------------------------------------------------------

\23\ See 12 CFR 1002.14; 78 FR 7216 (Jan. 31, 2013) (2013 ECOA
Valuations Final Rule).
\24\ 78 FR at 7239. The 2013 ECOA Valuations Final Rule ``does
not apply to persons who are not creditors within the meaning of
Regulation B, Sec. 1002.2(l), and thus does not impose any
obligation on a creditor to compel a third-party to provide a copy
of such documentation to the applicant.'' Id. at 7239 n.89.
---------------------------------------------------------------------------

Other uses by secondary market issuers. As noted earlier, the
language of section 1125 includes not only mortgage originators, but
also secondary market issuers. Given that section 1125 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 have covered
AVMs used in securitization determinations. In the proposal, the
agencies stated that covering AVMs used in securitizations could
potentially protect the safety and soundness of institutions and could
protect consumers and investors by reducing the risk that secondary
market issuers would misvalue homes. For example, misvaluation by
secondary market issuers could, in turn, incentivize mortgage
originators to originate misvalued loans when making lending
decisions.\25\ Such misvaluations could pose a risk of insufficient
collateral for financial institutions and secondary market participants
and could limit consumers' refinancing and selling opportunities.\26\
---------------------------------------------------------------------------

\25\ 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>.
\26\ See, e.g., Appraisals for Higher-Priced Mortgage Loans, 78
FR 10367, 10418 (Feb. 13, 2013).
---------------------------------------------------------------------------

The proposed rule would have covered AVM usage when a secondary
market issuer uses an AVM as part of a new or revised value
determination in connection with a covered securitization
determination. For example, the GSEs currently use the origination
appraised value or the estimated value in appraisal waivers when
issuing mortgage-backed securities (MBS). 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 have been
considered covered securitization determinations because there are new
or revised value determinations. As discussed below, the proposed rule
would have distinguished 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 have been covered by the proposed rule.
Most commenters supported the proposal to cover AVMs used by
secondary market issuers in connection with covered securitization
determinations. One commenter expressed general support for covering
securitizations, stating that transparency in how AVMs are tested,
measured, and applied would allow for better valuations and more
informed risk decision-making. Another commenter expressed support for
consistent requirements across all activities by institutions,
including secondary market issuers, stating that covering
securitizations would alleviate the risk of an inconsistent approach to
the development of quality control standards. Another commenter stated
that it is important for the GSEs to be covered by the proposed rule
because the GSEs (1) finance more than half of all purchase
originations, and (2) the internalization of valuation risk by the GSEs
poses a systemic threat to the housing finance system that could
undermine investor confidence if questioned, especially if they exit
conservatorship without an explicit Federal backstop.
One commenter echoed this point, stating that it is important to
cover secondary market issuers because the issuers significantly
influence how mortgage originators perform their underwriting.
Similarly, another commenter stated it is important to cover the GSEs
because they are two of the largest users and managers of AVMs in the
market. The commenter stated further that there is additional potential
for increased taxpayer risk if an AVM

[[Page 64544]]

produces a property valuation that misprices or eliminates loan-level
private mortgage insurance credit protection.
One commenter also suggested that, because AVMs are developed using
data and models that reflect past and ongoing discrimination, the
agencies should seek broad coverage of AVMs, including those used by
the GSEs. Another commenter suggested that covering AVMs used by
secondary market issuers also would promote financial stability. A
number of commenters stated that Federal governmental support for the
GSEs and the Government National Mortgage Association provides an
additional reason to apply quality control standards to AVMs used by
these entities.
As stated in the proposal, covering secondary market issuers is
consistent with the plain language of the statute and provides quality
control for AVMs used in an expansive and crucial segment of the
mortgage lending market. For these reasons and after considering the
comments, the agencies are adopting the proposal to cover secondary
market issuers' use of AVMs in covered securitization determinations.
3. AVM Uses Not Covered by the Rule
Use of AVMs by appraisers. The proposed rule would not have covered
the use of an AVM by a certified or licensed appraiser in developing an
appraisal.\27\ This approach reflects the fact that, while appraisers
may use AVMs in preparing appraisals, they must achieve credible
results in preparing an appraisal under USPAP and its interpreting
opinions.\28\ 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 proposal stated
that it also 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 whom they work.
---------------------------------------------------------------------------

\27\ 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
proposed 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 the Uniform Standards of
Professional Appraisal Practice (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.
\28\ 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.
---------------------------------------------------------------------------

Under the appraisal regulations issued by the OCC, Board, FDIC, and
NCUA, lenders regulated by those agencies are required to obtain
``evaluations,'' or ``written estimates of market value'' under the
NCUA's regulations, for certain transactions that fall within
exceptions specified in the appraisal regulations.\29\ Such evaluations
must be consistent with safe and sound banking practices.
---------------------------------------------------------------------------

\29\ 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) (requiring that written
estimates of market value be performed for transactions not
requiring an appraisal and providing differing requirements for such
estimates). See also Appraisal Guidelines, 75 FR at 77460
(discussing transactions that require evaluations under the
appraisal rules and providing recommendations for evaluation
development).
---------------------------------------------------------------------------

The proposed rule would have covered AVMs used in the process of
preparing evaluations. This distinction between application of the rule
to appraisals versus evaluations reflects the fact 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 reflected the more extensive use
of, and reliance on, AVMs within the evaluation function.
Most commenters agreed with the proposed exclusion of appraisals
performed by licensed or certified appraisers from the scope of the
rule. The commenters noted that appraisers are already subject to
quality control standards and that exempting appraisers would avoid
duplicative and burdensome regulation in an area where banks are
already encountering shortages of appraisers. One commenter stated that
the proposal's excluded uses do not involve credit decision making and
suggested that excluding these uses will reduce burden and costs that
may otherwise be passed on to consumers.
One commenter stated that, while appraisers often use an AVM or
other tools to provide support and understanding for their opinions,
appraisers are experts designated by Congress to protect public trust
and they dedicate their lives to studying real estate data. Another
commenter observed that appraisers do not use ``lending grade'' AVMs to
develop full, traditional appraisals. The commenter stated that some
appraisers may use AVMs to gauge a starting point for appraisals, but
that appraisers have limited access to lending-grade AVMs. Another
commenter noted that under USPAP, an AVM is a tool that appraisers may
use for their work (such as for internal checks and balances), but not
for the completion of an appraisal in determining the appraiser's
opinion of value. The commenter expressed agreement with the statement
in the preamble that 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. One commenter stated that AVM
use by appraisers is low and infrequent and noted that higher quality
AVMs are often cost prohibitive for appraisers to use. The commenter
suggested that imposing compliance costs on use of AVMs by appraisers
would discourage the use of AVMs as a check for obvious errors.
A small number of commenters argued that the quality control
standards should be broadly applicable and advocated for removing the
exclusions for development of appraisals by appraisers. For example,
one commenter suggested that allowing appraisers to use AVMs that are
not subject to quality control would create institutional and consumer
confusion and a heightened risk of misapplication of AVM results. The
commenter noted that USPAP provides that an appraiser may only use an
AVM as part of the valuation process if the appraiser has a basic
understanding of how the AVM works.
As discussed earlier, while appraisers may use AVMs in preparing
appraisals, they must achieve credible results in preparing an
appraisal under USPAP and its interpreting opinions. 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. In addition, it may be impractical for mortgage
originators and secondary market issuers to adopt policies, practices,
procedures, and control systems to ensure quality controls for AVMs
used by the numerous independent appraisers with whom they work. For
these reasons and after considering the comments, the final rule
excludes from coverage the use of AVMs by a certified or licensed
appraiser in developing an appraisal, consistent with the proposal. The
agencies did not receive specific comments on covering evaluations. For

[[Page 64545]]

the reasons stated above, the final rule covers AVMs used in
preparation of evaluations.
Reviews of completed collateral valuation determinations. The
proposed rule would not have covered AVMs used in reviews of completed
collateral value determinations (completed 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, including those where an AVM is used in
the review, serves as a separate and independent quality control
function.\30\
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\30\ 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.
---------------------------------------------------------------------------

Many commenters expressed support for not covering the use of AVMs
for reviews of completed determinations in the rule. The commenters
stated such exclusion would reduce some burdens and costs that may
otherwise be passed on to borrowers. One commenter stated that an
institution may, but is not required to, use an AVM to test the
reasonableness of an appraisal or evaluation. The commenter recommended
that the rule cover such AVM use. Other commenters suggested that AVMs
used for appraisal review should be covered to avoid inconsistent
standards, to ensure that discriminatory valuations are identified, or
because all AVMs used in housing finance should be subject to quality
control standards.
As discussed earlier, the agencies continue to view the focus on
value determinations as consistent with section 1125. For this reason
and those stated above, after considering the comments, the agencies
are adopting the proposal to exclude reviews of completed
determinations from the scope of the rule. The agencies note that the
rule does not make distinctions based on the amount of time between the
completed determination and the subsequent review; if an AVM is being
used solely to review the completed determination, the AVM use is not
covered by the rule regardless of when the AVM is used after that
determination.

A. Quality Control Standards

1. Proposed Requirements for the First Four Quality Control Factors
The proposed rule would have required 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 certain quality control standards. The
proposed rule would have required those quality control standards be
designed to 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. These four
quality control factors would have implemented the minimum standards
required by the statute. The proposal would have allowed mortgage
originators and secondary market issuers covered by the proposal the
flexibility to set their quality control standards for covered AVMs as
appropriate based on the size, complexity, and risk profile of the
institution and the transactions for which they would use AVMs covered
by the proposed rule.
Most commenters supported the proposed flexibility for implementing
the statutory quality control standards. These commenters agreed that
mortgage originators and secondary market issuers should have the
flexibility to adopt policies, practices, procedures, and control
systems to implement the quality control standards based on size,
complexity, and risk profile of the institution and the transactions
for which they would use AVMs covered by the rule. One commenter stated
that AVM models will continue to grow and evolve, making the flexible
approach appropriate in order to allow institutions to make refinements
as technology changes. The commenter also stated that the flexible
approach would reduce regulatory burden and that a prescriptive
approach could constrain meaningful use of AVMs. Another commenter
stated that a more prescriptive rule might not adjust to changing
industry developments.
One commenter stated that the principles-based approach of the rule
would give credit unions flexibility to narrowly tailor their quality
control standards to their unique circumstances. Another commenter
stated that a prescriptive rule could present an undue burden on small
institutions. Another commenter indicated that a principles-based
option could mitigate compliance costs and foster innovation in the AVM
space but suggested that there is a need for uniformity and consistency
when determinations of relevancy and confidence levels are required.
The commenter suggested that the rule specifically cite those
determinations of relevance and confidence levels.
One commenter who supported the flexible approach stated that banks
already adhere to supervisory guidance on model risk management,
appraisals, and third-party risk management, making prescriptive
regulation unnecessary. This commenter also suggested that a ``one size
fits all'' approach would not work well, given the variety of mortgage
originators and their business models. The commenter also argued that
prescriptive AVM standards would impede technical innovation but
suggested that it would be helpful for the agencies to provide guidance
on the types of issues the agencies have identified with AVMs, as well
as potential remedies of those issues, with narratives, analytical and
quantitative examples, and case studies to inform stakeholders. Another
commenter stated that flexible, transparent, principles-based
approaches to AVM standards are relatively inexpensive and not time-
consuming to incorporate and apply and that AVM testing and individual
AVM model performance detail may be readily available through a firm's
internal testing group or numerous third-party, independent testing
organizations.
One commenter stated that principles-based quality control
standards would help foster innovation that will ultimately benefit
consumers and the housing market. The commenter stated that as AVM
technology continues to develop, a prescriptive approach to regulation
would likely become outdated and ineffective quickly, impeding
innovation and limiting regulators' ability to protect consumers as
technology evolves. The commenter suggested, however, that focused
guidance is warranted to address issues such as testing of AVMs and
consideration of whether the use of pricing information in AVM models
is appropriate.
One commenter stated that the proposed quality control standards
would not hinder competition among AVM developers, AVM users, or future
innovation. The commenter stated further that the standards would
empower AVM users to utilize risk management practices consistent with
the Appraisal Guidelines.
Another commenter who expressed support for the nonprescriptive
approach suggested that the wide variety of AVMs and the vast diversity
in lender, investor, guarantor, and related stakeholder uses of AVMs
would make a prescriptive approach difficult

[[Page 64546]]

to fashion. This commenter expressed concerns about the unintended
consequences of a prescriptive approach. Further, this commenter stated
that different stakeholders across the U.S. housing finance industry
will (and should) have different strategies, processes, and risk
tolerances for the use of AVMs. The commenter also argued that a
prescriptive approach would be ill-advised as technology is
continuously evolving at an increasing pace, citing artificial
intelligence as an example.
Another commenter stated that the proposed principles-based
approach is appropriate because AVMs are constantly evolving and model
development techniques, model deployment processes, data types, and
data sources will change, AVMs will evolve, and risk mitigation,
testing, and quality control will have to adapt.
Another commenter stated that the techniques used to train models,
including AVMs, that rely on artificial intelligence and machine
learning are developing rapidly, and that it would be imprudent to take
an overly specific approach that may be incompatible with--or even
deter the adoption of--advancements in AVM techniques that are likely
to be forthcoming. The commenter stated further that a flexible and
principles-based approach, on the other hand, will remain applicable
regardless of changes in AVM methodologies, quality control best
practices, and data availability. The commenter stated that this is
especially true for the proposed nondiscrimination quality control
factor, given that techniques for mitigating disparate impact,
debiasing models, and searching for less discriminatory alternatives
continue to develop. The commenter argued that a flexible, principles-
based approach will encourage and enable entities to adopt the latest,
most effective techniques for mitigating discrimination risk.
A minority of commenters preferred a more prescriptive approach to
implementing the quality control standards. One commenter argued that
the flexible approach would not likely help community banks that may
prefer or require clear and simple instructions on how to comply with
the quality control standards. Another commenter suggested that a
prescriptive approach would create uniformity in the use of AVMs in the
marketplace, provide broader consumer protection, and create a
consistent level of safety and soundness when institutions rely on AVM
conclusions.
One commenter suggested that the final rule include prescriptive
standards for AVM testing, validation, and confidence needed to assess
whether an AVM was appropriate to use for a particular transaction. Two
commenters suggested that the agencies use a blended approach to
quality control measures for AVMs, with some standardized reporting and
testing requirements, while also allowing covered entities to develop
tailored policies, practices, procedures, and control systems. One
commenter suggested that AVMs need standardized confidence scores and
standardized reporting formats to enable broader use and basic
statistics on the temporality, proximity, and homogeneity of the data.
Another commenter stated that the rule should provide specific
guidelines to explain how institutions are to structure policies,
practices, procedures, and control systems, and should add specific
minimum standards for the quality control standards in the final rule.
The commenter stated that consumers deserve the same level of
protection whether they are obtaining a loan from a larger or smaller
originator and recommended that the agencies adopt the Appraisal
Guidelines as a rule to make the Appraisal Guidelines stronger and more
effective.
Two commenters noted that there was an inconsistency in the
proposed rule concerning the third quality control factor relating to
avoiding conflicts of interest. The commenters noted that the preamble
referred to the third factor as ``seek to avoid conflicts of interest''
while the regulatory text used ``avoid conflicts of interest.'' These
commenters stated that the use of ``seek'' would be consistent with the
statutory language in section 1125. As discussed in more detail below,
some commenters also suggested that AVMs should be tested or certified
by a third-party tester instead of, or as a supplement to, the approach
taken in the proposed rule.
After considering the comments, the agencies have determined that
the proposed method was appropriate, and that a flexible approach to
implementing the quality control standards would allow the
implementation of the standards to evolve along with AVM technology and
reduce compliance costs. Different policies, practices, procedures, and
control systems may be appropriate for institutions of different sizes
with different business models and risk profiles, and a more
prescriptive rule could unduly restrict institutions' efforts to set
their risk management practices accordingly. As modeling technology
continues to evolve, this flexible approach will allow institutions to
refine their implementation of the rule as appropriate. The proposed
and now adopted approach will allow mortgage originators and secondary
market issuers the flexibility to set their quality control standards
for covered AVMs as appropriate based on the size, complexity, and risk
profile of their institution and the transactions for which they would
use AVMs covered by the rule.
In regard to the suggestion by some commenters that fostering
uniformity in the AVM market would benefit consumers and stakeholders,
such uniformity could interfere with the appropriate current and future
use of AVMs. In addition, the agencies determined that prescriptive
rules would pose a challenge due to the inherent complexity of AVMs and
their use cases and the differing size and activities of the
institutions that use AVMs. The quality control standards adopted are
clear and simple and a more prescriptive rule would become unmanageable
over time due to rapidly evolving technology.
Moreover, the quality control standards are also consistent with
practices that many participants in the mortgage lending market already
follow and with the guidance described above that applies to many
regulated institutions that will be subject to the final rule. For
example, the Model Risk Management Guidance provides comprehensive
suggestions for assessing and monitoring model risk, including on
appropriate governance, policies, and procedures for model risk
management. In addition, Appendix B of the Appraisal 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 is also consistent with third-party risk
guidance, as discussed earlier. Furthermore, in line with the agencies'
service provider guidance, regardless of whether mortgage originators
and secondary market issuers use their own AVMs or third-party AVMs,
the final rule requires 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.
Regarding one commenter's suggestion that existing agency guidance
be adopted as part of the rule, the agencies determined that doing so
is not necessary at this time and could make it more difficult to adapt
the guidance as new issues arise. As previously discussed, many of the
institutions that

[[Page 64547]]

will be covered by the final rule already consider existing guidance
for assistance in structuring their quality control standards for AVM
use. Furthermore, the agencies note that institutions that are not
regulated by the agency or agencies providing the guidance may still
look to the guidance for assistance with compliance. In addition, the
statute does not require the agencies to set prescriptive standards for
AVMs. For these reasons and those explained above, and after
considering the comments, the agencies have concluded that a rule
requiring institutions to develop policies, practices, procedures, and
control systems designed to satisfy the requirement for quality control
standards will more effectively carry out the purposes of section 1125
than a more prescriptive rule.\31\ Therefore, the agencies are adopting
the four quality control factors from the statute. The agencies are
also making a technical correction to the regulatory text to match the
factors with those in section 1125. The omission of ``seek to'' in
regulatory text, as pointed out by two commenters, was inadvertent and
has been added to the final text.
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\31\ 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)
(providing guidelines on federally insured credit unions'
requirement 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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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.'' \32\ Based on this authority, the agencies proposed to
include a fifth quality control 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. The agencies proposed that institutions would
have the flexibility to design policies, procedures, practices, and
control systems for AVMs that are in compliance with fair lending laws
and take into account their business models, as discussed above
regarding the first four quality control factors.
---------------------------------------------------------------------------

\32\ 12 U.S.C. 3354(a)(5).
---------------------------------------------------------------------------

Many commenters expressed support for the fifth factor, agreeing
that it is important to assess whether AVMs are consistent with fair
lending laws and that existing law requires this step. Many commenters
endorsed the proposal to add this fifth factor on nondiscrimination to
highlight this element of existing laws and create an independent legal
requirement for institutions to adopt policies, practices, procedures,
and control systems for AVMs that comply with applicable
nondiscrimination laws.
Many commenters stated that discrimination is an issue in
valuations, including in AVMs, and that specifying a nondiscrimination
factor would be useful for reinforcing the applicability of
nondiscrimination laws to AVMs. Several commenters asserted that AVMs
risk reproducing bias and perpetuating discrimination if they are not
adequately examined and tested. These commenters stated that the
information used to develop and train AVMs is often drawn from existing
data sets that may reflect human biases and historical prejudices. One
commenter stated that inclusion of the nondiscrimination factor for AVM
models serves as an important reminder to AVM developers and users
about the necessity of fair lending and fair housing to a functional
marketplace, while another commenter stated that it would help ensure a
level playing field. Some commenters asserted that the
nondiscrimination factor would work in parallel and reinforce the other
quality control factors. One commenter noted that nondiscrimination is
implicitly included in the first four factors. This commenter stated
further that the nondiscrimination quality control factor does not
introduce a new requirement, but rather emphasizes the applicability of
nondiscrimination laws to AVMs and is consistent with current law and
existing fair lending guidance.
One commenter stated that nondiscrimination should be understood as
a dimension of model performance and a required aspect of quality
control. The commenter further asserted that discrimination should be
understood as a safety and soundness risk. One commenter stated that
banks fully support fair lending laws and currently implement fair
lending requirements. The commenter stated further that they are aware
of the unique considerations that AVMs present and that banks in their
State rely on current fair lending requirements and underwriting and
appraisal management guidance to guide their use of AVMs, for example
through current model risk management guidance. Another commenter
stated that the advantages of specifying the fifth factor are that it
will emphasize the safe and effective use of AVMs and encourage
expanded use of AVMs as a valuation tool in the industry, both on a
stand-alone and independent basis where appropriate, as well as in
concert with, and as additional support for, traditional, hybrid, and
alternative approaches to value.
A number of commenters suggested that AVM use has the potential to
reduce bias in valuations, given that AVMs do not take into account the
race of the participants to a particular transaction. One commenter
suggested that use of nondiscriminatory AVMs has the potential to
provide significant benefits to industry and consumers. The commenter
stated that, since AVMs do not know the racial composition of the
borrower or neighborhood, an AVM may help provide a fair and unbiased
estimate of value. The commenter stated further that the fifth quality
control factor would encourage expanded use of AVMs as a valuation tool
in the industry. The commenter also stated that specifying a
nondiscrimination quality control factor in the rule would be useful in
emphasizing the importance of providing support for nondiscrimination
or analysis of the potential disparate impact in the use of AVMs.
Similar to the first four quality control factors, most commenters
supported a nonprescriptive approach to the

[[Page 64548]]

nondiscrimination factor. One commenter explained that a flexible
approach would assist in the process of adapting existing policies into
the framework of quality control standards. One commenter suggested
that a principles-based approach would enable innovation while building
a sustainable framework to reduce discrimination, advance fair lending
and fair housing, and ensure accuracy in home valuation processes by
requiring entities to align their policies and procedures with
promulgated principles. Another commenter stated that a nonprescriptive
approach would prevent interference with the industry developing
innovative solutions to address discrimination. A few commenters stated
that the principles-based approach would allow lenders to take into
account changes in AVM technology. One commenter noted that there is a
lack of consensus among stakeholders concerning how AVMs should be
evaluated with respect to fair lending and suggested that the proposed
flexible approach is best because it would account for the current
level of uncertainty.
One commenter stated that agency guidance would be the appropriate
venue to address the more nuanced issues of compliance, such as how to
conduct particular types of testing, including outcomes-based testing
for disparate impact, and how to evaluate potential less discriminatory
alternatives to an AVM that results in disparate outcomes. The
commenter suggested that the final rule should articulate baseline
standards for nondiscrimination from applicable statutes and
regulations, specifically the ECOA and Fair Housing Act's prohibitions
on disparate treatment and disparate impact. The commenter also
suggested that compliance with applicable antidiscrimination laws calls
for more than simply avoiding the use of prohibited bases as predictive
variables in an AVM and that a proper compliance program involves other
forms of antidiscrimination testing, such as disparate impact and bias
testing.
One commenter stated that existing compliance management systems
and fair lending monitoring programs should be able to assess whether
an AVM applies different standards or produces disparate valuations on
a prohibited basis. A few commenters supported a more prescriptive
approach and expressed a need for bias testing standards.
Commenters made additional recommendations, including that the
agencies release loan-level data from the Uniform Appraisal Dataset to
provide a robust data set to evaluate AVMs and identify less
discriminatory alternatives. One commenter also suggested that the
agencies organize and encourage private sector activities, such as
conferences and research, to inform ongoing guidance on compliance with
the quality controls standards. Other commenters suggested that the
agencies issue guidance on how to implement the fifth quality control
factor.
In contrast, several commenters opposed including the fifth factor.
Commenters expressed various concerns, including that the factor would
impose a significant compliance burden, lender systems are not able to
assess whether an AVM discriminates, the factor is not required by
statute, and the addition of the factor is unnecessary and duplicates
existing law and the other quality control factors. Two commenters
suggested that documented instances of bias in AVMs are not prevalent,
and one of these commenters stated that it would be a mistake to
attempt to eradicate through regulation the speculative possibility of
bias in AVMs, which could reduce AVM use, when the use of this
technology can remove the type of subjective, personal bias that
traditional appraisals bring to the valuation process. In addition,
some commenters stated that the agencies should use other tools to
address AVM bias concerns and the onus should be on AVM vendors to
ensure models comply with nondiscrimination laws. A few commenters
stated that adding this factor may have unintended effects, such as
increased loan costs for consumers and small institutions deciding to
stop using AVMs altogether in mortgage origination due to uncertainty
and the cost of compliance.
One commenter stated that banks support fair lending laws, dedicate
considerable resources to comply with them, and are regularly examined
for compliance with those laws. The commenter stated, however, that
adding a fifth factor on nondiscrimination is not necessary. This
commenter noted that long-standing fair lending laws have and will
continue to apply to mortgage transactions and the agencies regularly
assess banks' compliance management systems. According to this
commenter, the agencies can ensure through their examinations that
policies, procedures, and controls are in place to address fair lending
risk in AVM use. The commenter stated that the agencies can heighten
the awareness of fair lending risks without regulation through
bulletins and policy guidance. The commenter also expressed concern
that codifying the rule in Regulation Z could result in plaintiffs
challenging originators with the private right of action and statutory
damages set forth in the TILA, which could increase costs for banks and
their customers. The commenter stated that Congress clearly did not
intend such a result, given that it added the quality control
requirements in FIRREA, not TILA.
Several commenters expressed concerns about the ability of lenders
to apply quality control standards for fair lending to AVM models. Some
commenters expressed concern about how small entities can assess fair
lending issues in AVMs or know that they are violating the law. They
asserted that existing compliance management systems and fair lending
monitoring programs are not able to assess whether an AVM applies
different standards or produces disparate valuations on a prohibited
basis. They argued that small entities do not have access to an AVM's
data or methodology, are unable to validate the algorithms that AVM
providers use, and lack the staff to assess the AVM models results.
One commenter stated that most community banks lack in-house
expertise needed to test for disparate impact and will lack the volume
to yield the number of observations required for testing. The commenter
stated that even many larger institutions lack sufficient mortgage
lending activity to engage in testing and to justify the cost of
disparate impact testing. Another commenter stated that the quality
control factor for nondiscrimination may force community banks to shift
to using appraisals because of the compliance challenges and
uncertainty relating to implementation of the factor. The commenter
stated that this will likely disincentivize mortgage lending in rural
areas where AVMs can be utilized as a more cost-effective, efficient,
and accurate option. The commenter stated that requiring community
banks to assess and evaluate models for potential fair lending concerns
would be unreasonable, redundant, and extremely costly. The commenter
stated further that a community bank is unlikely to retain staff with
sufficient expertise to determine valuation accuracy and reverse
engineer the algorithms to assess any fair lending red flags.
One commenter stated that credit unions' existing systems are not
able to assess whether AVMs discriminate and that the data and
resources needed to undertake an analysis of AVMs, including analysis
for discriminatory bias, would be significant. Another commenter argued
that the inclusion of the factor may make it difficult for credit
unions to use AVMs in originating loans. The commenter stated

[[Page 64549]]

further that to the extent the quality control standards require fair
lending testing of AVM values, small credit unions may not have large
enough data sets to be able to do meaningful, statistically significant
testing of their AVM results. The commenter stated that credit unions
lack control over the proprietary inputs and data that feed into AVMs
and lack bargaining power and resources to examine third-party
proprietary algorithms that power AVMs.
Other commenters stated that the agencies should use other tools to
address AVM bias concerns, including asserting supervisory authority
over AVM vendors as service providers and utilizing Dodd-Frank Act
authority to supervise nonbank companies that pose risks to consumers.
Another commenter argued that fair lending guidelines and mandates
should remain within the purview of the Interagency Fair Lending
Examination Procedures, thereby creating clarity for compliance
management systems and a consistent examiner approach.
Several commenters stated that the burden of compliance with the
fifth factor should be placed on the AVM provider. Commenters argued
that lenders do not have access to proprietary models used by third
parties to be able to assess fair lending performance. One commenter
argued that to place the burden on financial institutions would be
excessive as financial institutions are obligated to comply with
existing regulatory regimes under the ECOA and the Fair Housing Act.
One commenter expressed concern regarding lender liability for
violating nondiscrimination law when relying on third-party AVMs.
Several commenters requested additional guidance regarding
compliance with the nondiscrimination factor. One commenter stated that
the agencies have not provided a clear performance indicator by which a
lender could discern any inherent bias within a data set. The commenter
urged the agencies to provide clear guidance on discriminatory red
flags in AVMs. The commenter stated that different industry players
have access to varying quality of data, that the agencies should
account for this in their guidance and recommendations, and that little
legal clarity exists around practices in the AVM industry that may
violate the Fair Housing Act.
As the agencies noted in the proposal, 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 ECOA and its implementing
Regulation B bar discrimination on a prohibited basis in any aspect of
a credit transaction.\33\ The agencies have long recognized that this
prohibition extends to using different standards to evaluate
collateral,\34\ which includes 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.\35\
---------------------------------------------------------------------------

\33\ 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.
\34\ 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).
\35\ 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.
---------------------------------------------------------------------------

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.\36\ 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.
---------------------------------------------------------------------------

\36\ 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>.
---------------------------------------------------------------------------

While existing nondiscrimination law applies to an institution's
use of AVMs, the agencies proposed 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 ensure
compliance with applicable nondiscrimination laws, thereby further
mitigating discrimination risk in their use of AVMs. Specifying a
nondiscrimination factor will increase confidence in AVM estimates and
support well-functioning AVMs. In addition, specifying a
nondiscrimination factor will help protect against potential safety and
soundness risks, such as operational, legal, and compliance risks,
associated with failure to comply with nondiscrimination laws.
In proposing to add a fifth quality control factor on
nondiscrimination, the agencies noted 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

[[Page 64550]]

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 sample testing,
and review in section 1125. The first four factors do not, however,
expressly address quality control measures relating to compliance with
nondiscrimination laws.
The fifth quality control factor is 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 they will consider to identify
discrimination.\37\ 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.'' \38\ 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.\39\
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\37\ 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>.
\38\ Id. Interagency Statement on the Use of Alternative Data in
Credit Underwriting, OCC Bulletin 2019-62 (Dec. 3, 2019); Federal
Reserve CA Letter 19-11 (Dec. 12, 2019); FDIC FIL-82-2019 (Dec. 13,
2019); NCUA Letter 19-CU-04 (December 2019); CFPB, Federal
Regulators Issue Joint Statement on the Use of Alternative Data in
Credit Underwriting (Dec. 3, 2019) available at <a href="https://www.consumerfinance.gov/about-us/newsroom/federal-regulators-issue-joint-statement-use-alternative-data-credit-underwriting/">https://www.consumerfinance.gov/about-us/newsroom/federal-regulators-issue-joint-statement-use-alternative-data-credit-underwriting/</a> and
<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.'').
\39\ 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 have determined that the fifth factor is important to
the quality control of AVMs and to fair lending. As with the four
statutory quality control factors, the agencies are aware of the
concerns expressed by some commenters that implementation hurdles, such
as access to AVM data and design, could complicate compliance,
especially for small entities. However, the existing guidance, as
discussed earlier, already addresses many of the elements of quality
control for AVMs, including fair lending considerations. In addition,
institutions will have the flexibility to adopt approaches to implement
the fifth factor in ways that reflect the risks and complexities of
institutions' business models.
Regarding a commenter's concern about lender liability for third-
party AVMs, the agencies remind institutions that make use of third-
party providers that they remain responsible for ensuring that the
third parties comply with applicable laws and regulations in performing
their activities, including nondiscrimination laws and the safety and
soundness requirements established by the OCC, Board, FDIC, and NCUA.
As discussed earlier, the agencies have already provided guidance on
implementing policies, practices, procedures, and control systems
relating to model risk, third-party risk, AVMs, and nondiscrimination.
Institutions should refer to relevant rules and statutes for the
specific requirements which may apply. Regarding a commenter's concern
that the CFPB codifying this rule in Regulation Z could result in
plaintiffs challenging originators with a private right of action and
statutory damages for some violations set forth in TILA, the CFPB notes
that the statutory authority for this AVM rulemaking is FIRREA rather
than TILA.
For these reasons and after considering the comments, the agencies
are adopting the proposed quality control factor on nondiscrimination.

C. Definitions

1. Automated Valuation Model
Section 1125 of title XI defines ``automated valuation model'' 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.'' \40\ The agencies proposed that
the rule 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 was substantively identical to the definition in
section 1125 but reflects common terminology and clarifies that the
determination of value relates to the dwelling.
---------------------------------------------------------------------------

\40\ 12 U.S.C. 3354(d).
---------------------------------------------------------------------------

Most comments supported using the statutory definition of AVM as
the basis for the definition in the proposed rule. A few commenters
questioned the need to revise the statutory language for ``plain
English'' purposes and to reflect current practice. Other commenters
offered proposals to expand the definition. One commenter stated that
the agencies should amend the definition to add the components of an
AVM, such as comparable sales values. Another commenter suggested that
the proposed definition be modified to clarify that an AVM means a
model used without alteration of valuation results by a person and that
the final rule should include the components of an AVM. Some commenters
suggested that the definition should be drafted more broadly to include
all market participants using AVMs in mortgage lending and
securitization determinations, rather than limiting the scope to
mortgage originators and secondary market issuers. One commenter stated
that a consumer-facing definition of AVM is needed that discloses the
significant uncertainty that exists when using AVMs.
The agencies have concluded that the nonsubstantive changes to the
statutory definition of AVM make the definition set forth in regulatory
text clearer and more understandable. Changes suggested by commenters
(to identify components of an AVM, add usages by other market
participants, and serve as a consumer-facing disclosure) would
represent a significant departure from the statutory language. For
these reasons, and after considering the comments, the agencies are
adopting the proposed definition of automated valuation model.

[[Page 64551]]

2. Control Systems
The proposal defined ``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. Under the proposal, the agencies intended for
institutions to use control systems that are appropriate for the size,
complexity, and risk profile of the institution and the transactions
for which they would use AVMs covered by the proposed rule.
Most commenters expressed support for the proposed definition of
``control systems.'' One commenter suggested that adding further detail
to the ``control systems'' definition could contribute to a
misalignment of controls and complexity, given that the proposed rule
allows entities to align control systems to the size, complexity, and
risk profile of the institution and the transactions for which they
would use covered AVMs. Another commenter stated that the definition
should address the analytical and statistical nature of control systems
designed for an AVM. The commenter suggested that the agencies provide
more guidance to ensure a clear understanding of control expectations.
Similarly, another commenter asked that the agencies provide more
information on how the proposed rule relates to existing guidance about
control systems and model usage. The commenter suggested that the
agencies issue a compliance guide and frequently asked questions to
facilitate implementation for small entities. One commenter stated
that, while a ``policies and procedures'' requirement is the
established, well-understood compliance implementation framework for
this type of regulation, the proposed definition of control systems is
nonstandard and overly defined. The commenter further stated that the
rule's related but undefined term ``practices'' is nonstandard. Other
commenters suggested that the final rule include specific control
standards.
As discussed earlier, guidance is already in place to assist
regulated institutions in implementing policies, practices, procedures,
and control systems relating to model risk, third-party risk, AVMs, and
nondiscrimination. Institutions that are not regulated by the agency or
agencies providing the guidance may still look to the guidance for
assistance with compliance. Regarding the comments concerning the
inclusion of control systems, the agencies note that policies,
practices, procedures, and control systems are all part of ensuring
that AVMs adhere to the rule's requisite quality control standards. In
addition, many institutions already employ control systems with respect
to AVM use. These factors, in addition to the rule's flexible approach
to implementing the statute, should allow institutions to implement
appropriate control systems and mitigate compliance costs, particularly
for smaller institutions. For these reasons, and after considering the
comments, the agencies are adopting the proposed definition of
``control systems.''
3. Covered Securitization Determination
The proposed rule defined ``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 have been
a covered securitization determination under the proposed rule. One
commenter, however, stated that small entities do not securitize loans
and remarked that the rule could create a cost burden and hinder access
to the secondary market, particularly for small mortgage originators.
The agencies received few comments on the proposed definition of
``covered securitization determination.'' As discussed earlier,
commenters supported the application of the quality control standards
to secondary market issuers and in the appraisal waiver context. The
agencies did not receive comments asking for changes to the proposed
definition of ``covered securitization determination.''
As discussed above, covering secondary market issuers' use of AVMs
in covered securitization determinations--including determinations
regarding appraisal waivers and structuring, preparing disclosures for,
or marketing initial offerings of mortgage-backed securitizations--is
consistent with protecting the safety and soundness of institutions and
protecting consumers and investors by reducing the risk that secondary
market issuers would misvalue homes. For these reasons and after
considering the comments, the agencies are adopting the proposed
definition of covered securitization determination.
4. Credit Decision
The proposed rule would have defined the term credit decision to
mean a decision regarding whether and under what terms to originate,
modify, terminate, or make other changes to a mortgage, including a
decision on whether to extend new or additional credit or change the
limit on a line of credit. Monitoring the value of the underlying real
estate collateral in loan portfolios would not have been a credit
decision for the purposes of the proposed rule. This point reflects the
fact that the collateral worth of a mortgage is generally determined in
connection with credit decisions or covered securitization
determinations, rather than when the value of the collateral supporting
a mortgage is monitored or verified.
The commenters generally did not offer any suggestions for making
the proposed definition of ``credit decision'' clearer, but one
commenter stated that the phrase ``make other changes to a mortgage''
is ambiguous and should be excluded from the definition. The phrase
``make other changes to a mortgage'' in the definition is clarified by
the context of other words in the definition (i.e., ``modify,''
``terminate,'' and ``extend new or additional credit or change the
credit limit''). Moreover, the phrase ``make other changes to a
mortgage'' ensures that other types of credit decisions are
appropriately encompassed within the rule's definition of credit
decision. For example, one commenter stated that decisions regarding
assumptions should be covered, and another commenter stated that
decisions regarding private mortgage insurance and shared equity should
also be covered. To the extent those are decisions regarding whether
and under what terms to originate, modify, terminate, or make other
changes to a mortgage, such decisions are credit decisions under the
rule. Therefore, mortgage originators and secondary market issuers that
engage in such decisions themselves, or through or in cooperation with
a third-party or affiliate, must adopt and maintain policies,
practices, procedures, and control systems to ensure that AVMs used in
these credit decisions adhere to the rule's requisite quality control
standards.
For these reasons, and for the reasons stated earlier with respect
to the scope of the rule and after considering the comments, the
agencies are adopting the proposed definition of ``credit decision.''

[[Page 64552]]

5. Dwelling
The definition of AVM in section 1125 refers to a mortgage secured
by a ``consumer's principal dwelling.'' \41\ The OCC, Board, FDIC,
NCUA, and FHFA proposed to 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, if used
as a residence, any individual condominium unit, cooperative unit,
factory-built housing, or manufactured home. The proposed definition of
``dwelling'' provided 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 a principal dwelling for purposes of this rule.\42\
---------------------------------------------------------------------------

\41\ 12 U.S.C. 3354(d).
\42\ 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 final
rule. The definition of ``dwelling'' and the condition that the
dwelling is or will be a principal dwelling within one year for
purposes of this AVM final rule would not change what type of
dwelling is considered to be a principal residence under the NCUA's
regulation, Sec. 701.21(g), the parameters of which are drawn
directly from the Federal Credit Union Act. 12 U.S.C. 1757(5)(A)(i).
---------------------------------------------------------------------------

The CFPB proposed to codify its AVM requirements in Regulation Z,
12 CFR part 1026, which generally implements TILA. The definition of
``dwelling'' proposed by the other agencies was consistent with the
CFPB's existing Regulation Z.\43\ Unlike TILA, however, title XI does
not limit its coverage generally to credit transactions that are
primarily for personal, family, or household purposes.\44\ Because this
rulemaking is conducted pursuant to title XI rather than TILA, the CFPB
proposed to revise Regulation Z Sec. Sec. 1026.1, 1026.2, 1026.3, and
1026.42, and related commentary, to clarify that the final AVM 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.\45\
---------------------------------------------------------------------------

\43\ 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.
\44\ See 12 CFR 1026.2(a)(12) (definition of ``consumer
credit'').
\45\ Therefore, the exemptions in 12 CFR 1026.3 would not apply
to the requirements established by the CFPB under this rule.
---------------------------------------------------------------------------

Several commenters suggested that the definition of ``dwelling''
should cover real property only and exclude AVMs used in lending for
manufactured homes and recreational vehicles (RVs), trailers, and other
structures that retain their mobility. These commenters similarly
suggested that the final rule should exclude from coverage cost
estimate guides and other valuation tools used to value such collateral
that may be a consumer's principal dwelling but is not real estate. One
commenter asked that the final rule confirm that the rule does not
apply to cost estimates like those used in complying with the higher-
priced mortgage loan appraisal requirements of Regulation Z Sec.
1026.35. In explaining its suggestion, the commenter stated that a cost
estimate is derived from closed sales data and that the designation as
a cost approach is significant as it does not rely on comparable sales
and is simply the cost to make less depreciation.
The commenter stated further that cost estimates are not location
(address or neighborhood) specific; they are region specific. The
commenter noted that, for example, one cost estimate guide was
developed exclusively for the factory built, manufactured housing
industry and that manufactured homeowners, consumers, retailers, and
lenders all rely on such independent cost estimates to confirm home
values. The commenter further stated that the burden of attempting to
comply with the AVM rule, should it be read to cover these cost
estimates, would be significant and nearly impossible, especially when
compared with any negligible risk to consumers. Another commenter
expressed similar concerns relating to valuation tools for non-real
estate related loans. This commenter noted that lenders in some markets
make non-real estate loans to meet the credit and housing needs of
their customers, and, in making these loans, use different tools that
might be considered AVMs under the proposed definition of dwelling. The
commenter stated that the increased burden associated with complying
with the rule could lead some lenders to exit this market.
One commenter expressed concern about the rule covering loans that
are used for business purposes, but are secured by principal
residences, suggesting that Congress intended to limit the statute to
consumer-purpose credit given that the statute refers to a ``consumer's
principal dwelling.''
In contrast, several other commenters recommended that the agencies
adopt a broad definition of dwelling. One stated that coverage should
extend to all mortgages involving loans for dwellings, including
manufactured housing classified as personal property and accessory
dwelling units. Two commenters suggested the agencies define dwelling
in a way consistent with uses in the Fair Housing Act and in other
relevant statutes. Another commenter suggested that it would be
consistent with safe and sound practices to expand the scope of the
rule to cover all dwellings, not only those that are principal
dwellings. One commenter stated that the agencies should consider how
the principal dwelling requirement may apply to active military
personnel who are purchasing a home for their future permanent
residence but who are assigned temporarily to a different duty station.
In response to these comments, the agencies note that section 1125
does not limit the definition of AVM to collateral that is deemed to be
real property, nor does it limit coverage by the AVM requirements to
credit transactions that are primarily for personal, family, or
household purposes. Instead, the statute focuses on the valuation of a
consumer's principal dwelling that secures a mortgage. In response to
the comments on limiting the rule to a principal dwelling, the agencies
note that the statute expressly defines an AVM as one used to value a
consumer's principal dwelling. The final rule is consistent with the
plain language of the statute and the agencies decline to expand the
scope of the requirements beyond principal dwellings.
With respect to the commenters' argument that valuation tools used
for manufactured homes, RVs, and boats are not AVMs, the definition of
AVM in the statute covers ``any computerized model'' used to determine
the value of a consumer's principal dwelling.\46\ The agencies do not
opine on whether any specific product, including a cost estimate and
other valuation tool, is an AVM that would be covered under this rule.
As noted by commenters, AVMs that rely on artificial intelligence,
machine learning, and other technologies are developing rapidly.

[[Page 64553]]

Since AVM modeling technology will continue to evolve, valuation
products that do not currently meet the definition of an AVM may meet
that definition in the future. As such, the agencies have determined
that a flexible and principles-based approach to this rule would be
more appropriate than a prescriptive approach. Under this principles-
based approach, mortgage originators and secondary market issuers will
need to consider whether the valuation products that they are using are
(1) automated (i.e., computerized); (2) a model; \47\ and (3) designed
to estimate the value of a consumer's principal dwelling
collateralizing a mortgage.
---------------------------------------------------------------------------

\46\ 12 U.S.C. 3354(d) (emphasis added).
\47\ For example, the Supervisory Guidance on Model Risk
Management, issued by the OCC, Board, and FDIC describes a ``model''
as follows:
[T]he term model refers to a quantitative method, system, or
approach that applies statistical, economic, financial, or
mathematical theories, techniques, and assumptions to process input
data into quantitative estimates. A model consists of three
components: an information input component, which delivers
assumptions and data to the model; a processing component, which
transforms inputs into estimates; and a reporting component, which
translates the estimates into useful business information. Models
meeting this definition might be used for analyzing business
strategies, informing business decisions, identifying and measuring
risks, valuing exposures, instruments or positions, conducting
stress testing, assessing adequacy of capital, managing client
assets, measuring compliance with internal limits, maintaining the
formal control apparatus of the bank, or meeting financial or
regulatory reporting requirements and issuing public disclosures.
The definition of model also covers quantitative approaches whose
inputs are partially or wholly qualitative or based on expert
judgment, provided that the output is quantitative in nature.
Supervisory Guidance on Model Risk Management, OCC Bulletin
2011-12 at 3 (Apr. 4, 2011) (emphasis in original); Guidance on
Model Risk Management, Federal Reserve SR Letter 11-7 (Apr. 4,
2011); Adoption of Supervisory Guidance on Model Risk Management,
FDIC FIL-22-2017 (June 7, 2017). Institutions that are not regulated
by the agency or agencies providing this guidance may still look to
the guidance for assistance with compliance.
---------------------------------------------------------------------------

With respect to the comment that the agencies consider the effect
of the rule on servicemembers who are purchasing a home for their
future permanent residence, but are assigned to temporary duty
stations, the final rule will not have an effect on the place
servicemembers designate as their principal dwelling.
For these reasons and after considering the comments, the agencies
are adopting the proposed definition of ``dwelling.'' Under the final
rule, a dwelling is defined as a residential structure that contains
one to four units, whether or not that structure is attached to real
property. Mortgages secured by non-real estate property are covered by
this rule if the property is used as the borrower's principal dwelling
and the mortgage originator or secondary market issuer uses an AVM to
determine the value of the collateral securing the loan.
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.'' \48\ 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 defined
``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
proposed to adopt, in part, the Regulation Z definition of
``residential mortgage transaction,'' \49\ 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.
---------------------------------------------------------------------------

\48\ 12 U.S.C. 3354(d).
\49\ 12 CFR 1026.2(a)(24).
---------------------------------------------------------------------------

Most commenters who addressed the definition of ``mortgage'' in the
proposal expressed support for the proposed language. Several
commenters supported including purchase money security interests
arising under installment sales contracts in the definition of
``mortgage.'' One commenter stated that consumers should have the same
protection in these contracts as in other types of mortgage financing.
The commenter also stated that TILA, the Real Estate Settlement
Procedures Act, and the S.A.F.E. Act apply to installment sales
contracts to the same extent as to traditional mortgage loans
(depending on whether the originating lender makes a certain volume of
transactions), so including installment contracts in the rule would be
consistent with other current laws. The commenter stated further that
including sales contracts in the AVM rule would ensure appropriate
protections for these transactions that disproportionately impact
homebuyers of color. The commenter also stated that sales contracts are
typically made for smaller amounts and used to purchase less expensive
homes, and thus AVMs are more likely to be used in these transactions.
Another commenter in support of covering installment contracts
stated that a narrower definition would have a disparate impact on
protected classes by excluding broad swaths of the market from the
quality control standards. Similarly, a different commenter stated that
applying quality controls for AVMs used in these contracts would
provide consumer protection in a space where consumers are often
vulnerable to coercive agreements.
Conversely, one commenter stated that, when combined with the
proposed definitions of ``consumer'' and ``dwelling,'' the definition
of ``mortgage'' is not clear. The commenter stated that the rule
proposes to adjust the definition of ``primary use,'' removing the
exception for business-purpose lending, among other exceptions, from
Regulation Z Sec. 1026.3. The commenter suggested that the proposed
definitions and changes to the TILA rules will cause a disconnect in
how organizations apply the rest of the TILA standards, which take the
exceptions into consideration when applying the rule to mortgage
transactions. The commenter stated further that the definitions would
not align with the current Federal credit union definitions of
mortgage. For those reasons, the commenter suggested that definitions
of ``consumer,'' ``dwelling,'' and ``mortgage'' should only be
applicable to AVM use, and not cause universal changes to Regulation Z.
In addition, a different commenter suggested that the inclusion of
sales contracts in the definition of ``mortgage'' should be decided
separately from a consideration of AVM standards and requested that the
agencies clarify whether the rule would include HELOCs and closed-end
home equity loans.
The agencies have determined that the comprehensive coverage of the
mortgage market that the proposed definition would bring about is the
best way to implement the statutory language. The agencies agree with
those commenters who stated that this definition will provide
appropriate consumer protection for the often-vulnerable consumers in
the installment sales contracts market. The agencies do not agree that
this definition, and the others adopted in this rule, will interfere
with the current interpretation of Regulation Z. The agencies note that
these definitions apply to AVM compliance alone, and are not meant to
alter the current definitions in Regulation Z. Furthermore, the
definition of ``mortgage'' does not exclude HELOCs and closed-end home
equity loans that are secured by a consumer's principal dwelling. For
these reasons and after considering the

[[Page 64554]]

comments, the agencies are adopting the proposed definition of
``mortgage.''
7. Mortgage Originator
The proposal would have defined the term ``mortgage originator'' in
the rule by cross reference to the TILA definition of ``mortgage
originator''.\50\ Thus, under the proposal, the term ``mortgage
originator'' generally would have included 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.\51\ The CFPB's proposal also would have added proposed
Regulation Z comment 42(i)(2)(vi)-1 to its rule reflecting this
clarification. Additionally, based on the exception provided at 15
U.S.C. 1602(dd)(2)(G), the term ``mortgage originator'' generally would
have excluded servicers as defined by 15 U.S.C. 1602(dd)(7) as well as
their employees, agents, and contractors. However, consistent with the
interpretation published in the CFPB's 2013 Loan Originator
Compensation Rule, the proposed rule would have applied to servicers as
defined by 15 U.S.C. 1602(dd)(7) as well as their employees, agents,
and contractors if, in connection with new extensions of credit, they
both use covered AVMs to engage in credit decisions and to perform any
of the activities listed in 15 U.S.C. 1602(dd)(2)(A). The CFPB's
proposal also would have added proposed Regulation Z comment
42(i)(2)(vi)-2 reflecting this clarification.
---------------------------------------------------------------------------

\50\ 15 U.S.C. 1602(dd)(2).
\51\ Id.
---------------------------------------------------------------------------

Although commenters generally supported this proposed definition,
two commenters asked the agencies to consider making substantive
changes to the definition. One of these commenters asked the agencies
to amend the definition of ``mortgage originator'' in the final rule so
that it would include servicing-only servicers in addition to the
persons covered as mortgage originators under TILA Sec. 103(dd)(2), 15
U.S.C. 1602(dd)(2). As explained in the proposal, the agencies proposed
to define the term ``mortgage originator'' by cross reference to the
TILA definition of ``mortgage originator'' because doing so ``would
maintain consistency in the usage of this term with other sections of
title XI and the agencies' appraisal regulations.'' \52\ Specifically,
Congress adopted the TILA definition of ``mortgage originator'' by
cross reference in a 2018 amendment to title XI (section 1127 on
appraisals in rural areas) \53\ and that the OCC, Board, and FDIC
implemented the same definition in the appraisal exception for certain
rural areas in their appraisal regulations.\54\
---------------------------------------------------------------------------

\52\ See 12 CFR 34.43(a)(14) (OCC), 12 CFR 225.63(a)(15)
(Board), and 12 CFR 323.3(a)(14) (FDIC).
\53\ 12 U.S.C. 3356.
\54\ Id.
---------------------------------------------------------------------------

TILA Sec. 103(dd)(2)(G), 15 U.S.C. 1602(dd)(2)(G), generally
excludes servicers as well as their employees, agents, and contractors
from TILA's definition of ``mortgage originator'' as long as they do
not perform 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. Accordingly, the final rule does not
expand the definition of ``mortgage originator'' to cover servicing-
only servicers in the final rule. Relatedly, the CFPB adopts proposed
Regulation Z comment 42(i)(2)(vi)-2, which clarifies the activities
that can make a mortgage servicer a mortgage originator for purposes of
the rule, as proposed but redesignates it as Regulation Z comment
42(i)(2)(vi)-1.
Another commenter noted that the proposed definition of ``mortgage
originator'' does not align with the proposed changes to the term
``principal dwelling'' and the inclusion of business purpose loans. To
address this issue, the final rule no longer cross references the TILA
definition of ``mortgage originator,'' but instead defines the term
``mortgage originator'' by incorporating the full text of the TILA
definition of ``mortgage originator'' with several revisions as
discussed herein.
The TILA definition of ``mortgage originator'' applies to persons
performing activities relating to residential mortgage loans.\55\ In
relevant part, TILA defines the term ``residential mortgage loan'' as
``any consumer credit transaction that is secured by a mortgage, deed
of trust, or other equivalent consensual security interest on a
dwelling or on residential real property that includes a dwelling,
other than a consumer credit transaction under an open end credit plan.
. . .'' \56\ A consumer credit transaction is ``one in which the party
to whom credit is offered or extended is a natural person, and the
money, property, or services which are the subject of the transaction
are primarily for personal, family, or household purposes.'' \57\
---------------------------------------------------------------------------

\55\ The term ``mortgage originator'':
(A) means any person who, for direct or indirect compensation or
gain, or in the expectation of direct or indirect compensation or
gain--
(i) takes a residential mortgage loan application;
(ii) assists a consumer in obtaining or applying to obtain a
residential mortgage loan; or
(iii) offers or negotiates terms of a residential mortgage loan;
(B) includes any person who represents to the public, through
advertising or other means of communicating or providing information
(including the use of business cards, stationery, brochures, signs,
rate lists, or other promotional items), that such person can or
will provide any of the services or perform any of the activities
described in subparagraph (A). . . .
See 15 U.S.C. 1602(dd)(2)(A) and (B) (emphasis added).
\56\ 15 U.S.C. 1602(dd)(5) (emphasis added).
\57\ 15 U.S.C. 1602(i).
---------------------------------------------------------------------------

Title XI generally does not limit its coverage to consumer credit
transactions.\58\ As a result, the agencies intended the proposal to
cover a mortgage, including a HELOC, secured by a consumer's principal
dwelling, even if the mortgage were primarily for business, commercial,
agricultural, or organizational purposes.\59\ This intent is reflected
in the proposal's discussion of the definition of the term
``mortgage.'' In that discussion, the agencies explained that, although
they based the proposal's definition of the term ``mortgage'' in part
on TILA's definition of residential mortgage transaction, they proposed
``to broadly cover the mortgage market as fully as the statute appears
to envision.'' \60\ As a result, the agencies proposed to define the
term ``mortgage'' to cover not only consumer credit transactions but
any 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.\61\
---------------------------------------------------------------------------

\58\ 88 FR 40638 at 40645.
\59\ Id.
\60\ Id.
\61\ Id.
---------------------------------------------------------------------------

The agencies' proposal intended the term ``mortgage originator'' to
apply with breadth equal to that of the term ``mortgage'' and its
application only to persons performing activities relating to
residential mortgage loans was an oversight.
In defining ``mortgage originator'' by incorporating the full text
of the TILA definition of ``mortgage originator'', the final rule
replaces the term ``residential mortgage transaction'' with the term
``mortgage'' wherever it appears in the TILA definition. As discussed
in the next section, the term ``mortgage'' retains its meaning from the
proposal and means ``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.'' In line with the intent
of the

[[Page 64555]]

proposal, this change applies the term ``mortgage originator'' to any
person who, for direct or indirect compensation or gain, or in the
expectation of direct or indirect compensation or gain, takes a
mortgage application, assists a consumer in obtaining or applying to
obtain a mortgage, or offers or negotiates terms of a mortgage.
The final rule includes three additional conforming changes to the
text of the TILA definition of ``mortgage originator'' as incorporated
in the final rule's definition of ``mortgage originator.'' First, the
final rule removes the exclusion for seller financers provided at TILA
Sec. 103(dd)(2)(E), 15 U.S.C. 1602(dd)(2)(E), and replaces it with the
seller financer exclusions contained in Regulation Z Sec.
1026.36(a)(4) and (5). This change reflects that the seller financer
exclusion in TILA Sec. 103(dd)(2)(E) contains five elements, the last
of which is that the transaction ``meets any other criteria the Board
may prescribe.'' These additional criteria are incorporated into
Regulation Z Sec. 1026.36(a)(4) and (5),\62\ and, therefore, the
agencies, with the exception of the CFPB, are replacing the text from
TILA Sec. 103(dd)(2)(E) with the text from Regulation Z Sec.
1026.36(a)(4) and (5) with minor, non-substantive changes, as
necessary, to conform the text from Regulation Z Sec. 1026.36(a)(4)
and (5) with the paragraph structure of each agency's final rule.
Instead of replacing the text from TILA Sec. 103(dd)(2)(E) with the
text from Regulation Z Sec. 1026.36(a)(4) and (5), the CFPB will
provide a cross reference to Regulation Z Sec. 1026.36(a)(4) and (5)
in its version of the final rule.
---------------------------------------------------------------------------

\62\ 78 FR 11280, 11309-11311 (Feb. 15, 2013).
---------------------------------------------------------------------------

Second, the final rule removes the exclusion provided at TILA Sec.
103(dd)(2)(F), 15 U.S.C. 1602(dd)(2)(F). That exclusion provides that
the term ``mortgage originator'' is inapplicable to creditors for
purposes of TILA Sec. 129B(c)(1), (2), and (4), 15 U.S.C. 1639b(c)(1),
(2), and (4) (which relate to TILA's prohibition on the payment of
steering incentives).\63\ Since the exclusion applies only with respect
to TILA Sec. 129B(c)(1), (2), and (4), it is inapplicable in the
context of the AVM rule and has been deleted in the final rule. Because
the definition of ``mortgage originator'' in the final rule does not
contain the exclusion at TILA Sec. 103(dd)(2)(F), proposed Regulation
Z comment 42(i)(2)(vi)-1, which clarified that ``[t]he term mortgage
originator includes creditors, notwithstanding that the definition of
mortgage originator at 15 U.S.C. 1602(dd)(2) excludes creditors for
certain other purposes,'' is no longer necessary. As a result, the CFPB
does not adopt proposed Regulation Z comment 42(i)(2)(vi)-1. Third, the
final rule makes minor, nonsubstantive regulatory text changes and
adjusts paragraph designations and cross-references incorporated from
the full text of the TILA definition of ``mortgage originator'' as
necessary to align the text with the paragraph structure of each
agency's final rule.
---------------------------------------------------------------------------

\63\ 15 U.S.C. 1639b(c)(1), (2), and (4).
---------------------------------------------------------------------------

One commenter that noted that the proposed definition of ``mortgage
originator'' does not align with the proposed changes to the term
``principal dwelling'' and the inclusion of business purpose loans also
noted that some entities that make business purpose loans may not make
consumer purpose loans and that, consequently, those entities may face
uncertainty about their compliance obligations if, as proposed, they
were mortgage originators for purposes of the rule. The agencies have
considered this comment. However, because, as previously noted, title
XI generally does not limit its coverage to consumer credit
transactions, the agencies have determined that the final rule should
broadly cover the mortgage market. Accordingly, the final rule applies
the definition of ``mortgage originator'' to any person who, for direct
or indirect compensation or gain, or in the expectation of direct or
indirect compensation or gain, takes a mortgage application, assists a
consumer in obtaining or applying to obtain a mortgage, or offers or
negotiates terms of a mortgage secured by a consumer's principal
dwelling, even if the mortgage is primarily for business, commercial,
agricultural, or organizational purposes.\64\
---------------------------------------------------------------------------

\64\ 88 FR 40638 at 40645; see also, Frequently Asked Questions
on the Appraisal Regulations and the Interagency Appraisal and
Evaluation Guidelines 4, OCC Bulletin 2018-39 (Oct. 16, 2018);
Federal Reserve Board SR Letter 18-9 (Oct. 16, 2018); FDIC FIL-62-
2018 (Oct. 16, 2018).
---------------------------------------------------------------------------

The final rule includes another technical change relating to the
definition of ``mortgage originator.'' This technical change is the
addition of a definition of person by cross reference to the definition
of person in TILA. The addition of a stand-alone definition of
``person'' is needed because the final rule, unlike the proposed rule,
does not define ``mortgage originator'' by incorporating by reference
the definition of ``mortgage originator'' in TILA. As a result, the
definition of ``person,'' which is defined by cross reference within
the TILA definition of ``mortgage originator,'' is no longer part of
the final rule's revised definition of ``mortgage originator.'' The
adoption of a stand-alone definition of ``person'' does not change the
incorporated definition of person and is a technical change only. The
agencies other than the CFPB provide this clarification to ensure that
the definition of ``mortgage originator'' in the final rule covers both
natural persons and organizations. The CFPB's final rule does not
require this clarification because Regulation Z already defines the
term ``person'' at Sec. 1026.2(a)(22) in a manner that is consistent
with the meaning provided in TILA Sec. 103(e), 15 U.S.C. 1602(e).
8. Secondary Market Issuer
The agencies proposed to define a ``secondary market issuer'' as
any party that creates, structures, or organizes a mortgage-backed
securities transaction. The agencies proposed the definition 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. The proposed definition was 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.
The agencies received two comments on the proposed definition of
``secondary market issuer.'' One commenter expressed support for the
definition as proposed. Another commenter stated that the rule should
cover not only the GSEs, but also other secondary market issuers that
structure and market residential mortgage-backed securities, such as in
private-label securitization. The commenter asked that the agencies
clarify that the final rule will apply beyond the GSEs to these other
entities.
The agencies have determined that the proposed definition will
ensure coverage of entities responsible for the core decisions required
for the issuance of mortgage-backed securities. For this reason and
after considering the comments, the agencies are adopting the proposed
definition of ``secondary market issuer,'' which includes not only the
GSEs, but any other party that creates, structures, or organizes a
mortgage-backed securities transaction.

[[Page 64556]]

9. Comments Regarding Undefined Terms
One commenter stated that the terms ``mortgage-backed securities
transaction,'' ``securitizations,'' and ``mortgage-backed
securitizations'' should be defined. In response, the agencies note
that related terms (e.g., ``mortgage-backed securities'' and
``securitization'') are currently used without definition in other
sections of title XI and throughout the agencies' appraisal
regulations. Based on the agencies' experience, these terms have
commonly understood meanings and have not caused confusion. For these
reasons and after considering the comment, the final rule does not
include definitions of these terms.

D. Implementation Period

The agencies proposed 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. The proposed
extended effective date would have given institutions time to come into
compliance with the rule. Most commenters expressed support for the
proposed 12-month implementation period for the final rule. One
commenter asked the agencies to consider an 18-month implementation
period. Another commenter recommended a tiered implementation model
with at least 24 months for credit unions to work with vendors, test
systems, and train staff.
The agencies have determined that a 12-month effective date is
appropriate, given that many institutions already have in place
measures to assess AVMs for quality control and that the final rule
provides flexibility to tailor policies, practices, procedures, and
control systems as appropriate. For these reasons and after considering
the comments, the final rule will be effective on the first day of the
calendar quarter following the 12 months after publication in the
Federal Register.

E. Other Comments

1. Uniform Standards and Independent Testing
A number of commenters suggested that the agencies work with the
public to foster the development of an SSO for AVMs to create a level
playing field for AVM users and to reduce regulatory burden. One
commenter requested that the agencies engage in a full notice and
comment rulemaking process if the use of an SSO is contemplated.
Another commenter recommended that SSO members be comprised of AVM
providers, consumer advocates, investors, mortgage guarantors, mortgage
insurers, mortgage originators, underwriters, and servicers. The
commenter also suggested that regulators participate in the SSO. A
number of commenters called for the establishment of a separate, fully
independent third-party nonprofit organization to test AVM systems for
both accuracy and racial bias. Some commenters stated that SSOs and
third-party testing would save lenders considerable time and effort and
bolster quality control for AVMs. One commenter, for example, suggested
that it would be useful to have a set of standards similar to USPAP for
AVMs that includes key definitions, minimum reporting requirements, and
required certifications.
One commenter stated that it would be beneficial to have some level
of standardization of metrics used to measure an AVM's success or
failure. The commenter suggested that the industry is best suited to
continue working with developers and users of AVMs to promote
consistency in AVM measurement and testing, such as by developing a
consistent approach to confidence scores.
Another commenter suggested that regulated parties would greatly
benefit from more transparency and access to data from the FHFA, the
Uniform Collateral Data Portal, and the Uniform Mortgage Data Program.
This commenter further suggested that Federal regulators should
evaluate real estate data availability at the State and local level, as
these data are essential for ensuring AVM credibility.
In contrast, one commenter stated that industry stakeholders,
including originators, secondary market participants, and property
valuation vendors have already established straightforward,
transparent, and fair AVM testing and ranking (i.e., cascading rule
sets allowing for comparing predictions from different AVMs). The
commenter stated further that flexible, transparent, principles-based
approaches to AVM guidelines are relatively inexpensive and not time-
consuming to incorporate and apply and that AVM testing and individual
AVM model performance detail may be readily available through a firm's
internal testing group or numerous third-party, independent testing
organizations. In responding to the question in the proposal about the
impact on small entities, that commenter stated that AVM testing is
inexpensive and can be done easily by large or small entities. In
addition, the commenter stated that cascading rule sets and platforms
using multiple lending grade AVMs from quality providers are readily
available. For these reasons, the commenter argued that quality control
standards for AVMs would not disadvantage small entities.
Another commenter stated that AVM vendors already provide
comprehensive information to financial institutions to demonstrate the
quality control of their AVMs. The commenter further stated that
financial institutions currently require AVM vendors to fill out
numerous questionnaires (usually once to twice per year) to address
large numbers of compliance issues and best practices, in addition to
AVM developer, lender, and third-party testing. The commenter also
stated that financial institutions require explanations and testing
detail that documents how AVMs work, their accuracy, their multiple
models, and the models' infrastructure. The commenter stated that the
predominant purpose of the questionnaires is to address concerns that
the financial institution has, and that the financial institution is
following a process to protect its customers and its safety and
soundness. In addition, another commenter recommended that there be
education and training for users of AVMs.
The agencies recognize that SSOs and third-party AVM testing
entities could be beneficial to effective compliance with the AVM rule.
As long as financial institutions meet the obligations stated in the
final rule, they are free to work with third parties to assist them
with their compliance obligations. In regard to comments suggesting
other methods to promote uniformity in metrics and policies, the
agencies note that existing standards and guidance on model risk
management and on testing of AVMs remain applicable, and can be used by
institutions to assist with compliance.
2. Potential for Additional Guidance
A number of commenters suggested that the agencies issue guidance
focused specifically on AVM quality control to help institutions,
especially small institutions, implement the quality control standards.
Many of these commenters acknowledged that existing guidance, such as
model risk guidance and the Appraisal Guidelines, already address
elements of how to implement the AVM rule, but a number of commenters
requested additional guidance on how to evaluate AVMs, particularly
with respect to how to assess AVMs for potential discrimination under
the fifth factor. One commenter stated that the agencies should provide
some structure or examples of policies, practices, procedures, or
control systems. The commenter also stated that it should be

[[Page 64557]]

made clear that lenders can rely on data and external reviews produced
by the AVM provider to comply with this rule. In addition, one
commenter suggested that the agencies facilitate further efforts to
develop fair lending and fair housing testing for AVMs by making
additional GSE data available to industry stakeholders, organizing
hackathons and conferences, and encouraging academic research and
similar engagements that leverage private sector expertise to inform
ongoing guidance around AVM guidelines.
One commenter stated that additional guidance is not necessary,
highlighting the current guidance on third-party and model risk
management. However, the commenter suggested that commentary on how
existing guidance applies to third-party oversight of the AVM quality
control standards may be beneficial at some point in the future.
Another commenter stated that the Appraisal Guidelines and NCUA's
third-party risk management expectations already advise credit unions
that they need to understand the AVMs they use, including the AVM's
limitations; have controls in place to mitigate risks (including with
regard to non-discrimination laws); and monitor the relationship and
results to ensure that the AVM is working and being used as designed.
As discussed earlier, many of the agencies have already provided
guidance on implementing policies, practices, procedures, and control
systems relating to model risk, third-party risk, AVMs, and
nondiscrimination. As explained above, institutions that are not
regulated by the agency or agencies providing the guidance may still
look to the guidance for assistance with compliance. In addition,
institutions should be able to work with AVM providers to assist them
with their compliance obligations under the rule.
Under safety and soundness standards, and as reflected in related
guidance, while institutions should not rely solely on testing and
validation representations provided by an AVM vendor, an institution
does not necessarily need to conduct its own testing and validation,
provided that the institution's policies, practices, procedures, and
control systems for evaluating the sufficiency of the vendor's testing
and validation are appropriate based on the size, complexity, and risk
profile of the institution and the transactions for which they would
use AVMs covered by the rule.
As described above, the agencies have determined that a flexible
approach to implementing the quality control standards would allow the
implementation of the standards to evolve along with AVM technology and
reduce compliance costs. Different policies, practices, procedures, and
control systems may be appropriate for institutions of different sizes
with different business models and risk profiles, and a more
prescriptive rule could unduly restrict institutions' efforts to set
their risk management practices accordingly. For these reasons and
after considering the comments, the agencies are not issuing additional
guidance at this time and recommend that institutions review and
consider existing guidance when establishing and implementing
appropriate policies, practices, procedures, and control systems for
AVM quality control.
3. Small Entity Compliance
Several commenters asked the agencies to adopt a transaction
threshold for application of the AVM quality control standards. For
example, one commenter suggested that the agencies revise the proposed
rule to exempt loans at or below $400,000 held in portfolio from the
quality control requirements for AVMs, allow reliance on third-party
certifications of AVM providers, or provide a safe harbor for small
lenders. One commenter cited the appraisal thresholds as an example of
how the agencies could reduce burden for smaller lenders.
Another commenter stated that small entities do not control the
data that is used in the AVM and, therefore, do not have the ability to
quality control the data or the algorithms used by AVM vendors. This
commenter also argued that small businesses do not have the bargaining
power that a large company may have to demand information from an AVM
vendor and do not have the resources to assess the algorithms that are
used by AVMs. The commenter suggested that it is unreasonable to hold
small entities responsible for the actions of AVM vendors. The
commenter stated further that if an exemption is not possible, the
agencies should consider some type of safe harbor or a certification
program where a third party reviews the AVM and provides an approval to
assure small entities that the AVM complies with the regulatory
requirements.
As discussed earlier, the flexibility in the rule will limit the
burden of complying with the rule for institutions, particularly
smaller entities. As explained above, the policies, practices,
procedures, and control systems used to ensure compliance may vary
based on the size, complexity, and risk profile of the institution and
the transactions for which they would use AVMs covered by the rule. The
agencies also note that section 1125 does not include safe harbors or
exemptions, including for smaller entities. For these reasons and after
considering the comments, the final rule does not include an exemption
threshold, or other specific provision for smaller institutions.

IV. Paperwork Reduction Act

Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995.\65\ 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.
---------------------------------------------------------------------------

\65\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

The agencies received three comments on estimated labor hours and
costs for the information collection requirements of the proposed rule.
One commenter stated that the agencies' estimate of the labor hours
associated with recordkeeping by covered entities in years following
implementation may be appropriate for documentation of policies and
procedures, but suggested that the proposed rule underestimated other
regulatory burdens associated with ongoing compliance. Another
commenter stated that the agencies' estimate of labor hours associated
with recordkeeping by covered entities seemed relatively low given the
effort needed to establish control systems. Finally, one commenter
stated that incorporating principles-based guidelines regarding AVMs is
not costly or time consuming.
The agencies have carefully reviewed burdens associated with
recordkeeping, reporting, and disclosure for each section of the rule
in consideration of the comments received. The agencies note that,
consistent with the PRA, the PRA burden estimates reflect only the
burden related to recordkeeping, reporting, and disclosure requirements
in the final rule. PRA burdens, like compliance costs, may vary across
institutions, and the agencies' PRA burden estimates are meant to be
overall averages. The agencies believe the estimates of burden hours
are reasonable considering the recordkeeping requirements of the final
rule. For further discussion of response to commenters, particularly
related to other regulatory costs incurred by covered entities, please
refer to the part titled ``Discussion of the Proposed Rule,

[[Page 64558]]

Comments Received, and the Final Rule'' within the SUPPLEMENTARY
INFORMATION section of this document.
The final rule establishes 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 final rule requires 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) Seek to avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
The quality control standards in the final rule are applicable only
to covered AVMs, which are AVMs as defined in the final rule. The final
rule requires 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 final rule creates new recordkeeping requirements.
The agencies therefore revised their current information collections
related to real estate appraisals and evaluations. The OMB control
numbers are for the OCC, 1557-0190; for the Board, 7100-0250; for the
FDIC, 3064-0103; and for the NCUA, 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
final rule, the agencies are also updating and aligning their
information collections with respect to the estimated burden hours
associated with the Appraisal Guidelines.
The information collection requirements contained in this final
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 \66\ and
section 1320.11 of the OMB's implementing regulations.\67\ The Board
reviewed the final rule under the authority delegated to the Board by
OMB.
---------------------------------------------------------------------------

\66\ 44 U.S.C. 3507(d).
\67\ 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
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. Written comments and
recommendations for the proposed information collection should be sent
within 30 days of publication of this notice to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. Find this information collection by selecting ``Currently
under 30-day Review--Open for Public Comments'' or using the search
function.
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 Information Collection:
For federally related transactions, title XI requires regulated
institutions \68\ to obtain appraisals prepared in accordance with
USPAP as 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.
---------------------------------------------------------------------------

\68\ 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 final rule requires 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) Seek to avoid conflicts of interest;
(d) Require random sample testing and reviews; and
(e) Comply with applicable nondiscrimination laws.
Current Action: The final 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 final rule will result
in an implementation burden of 40 hours and .33 responses per
respondent and an annual ongoing burden of 5 hours and one response per
respondent. In addition to accounting for the PRA burden incurred, as a
result of this final rule, the agencies are also updating and

[[Page 64559]]

aligning their information collections (IC) with respect to the
estimated burden hours associated with the Appraisal Guidelines. This
will 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 4,560
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.
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..... ..................... .............. ..................... 185,039
----------------------------------------------------------------------------------------------------------------

Board Burden

Table 2--Summary of Estimated Annual Burden
[FR Y[dash]30; OMB No. 7100[dash]0250]
----------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated
FR Y[dash]30 number of annual Estimated average hours annual burden
respondents frequency per response hours
----------------------------------------------------------------------------------------------------------------
Recordkeeping
----------------------------------------------------------------------------------------------------------------
Sections 225.61--225.67 for SMBs.... 706 498 5 minutes................. 29,299
Sections 225.61--225.67 for BHCs and 4,516 409 5 minutes................. 153,920
nonbank subsidiaries of BHCs.
Guidelines.......................... 5,222 1 10........................ 52,220
Policies and Procedures AVM rule 2,036 1 13.3...................... 27,147
(Initial setup).
Policies and Procedures AVM rule 2,036 1 5......................... 10,180
(Ongoing).
----------------------------------------------------------------------------------------------------------------
Disclosure
----------------------------------------------------------------------------------------------------------------
Guidelines.......................... 5,222 1 5......................... 26,110
Total Annual Burden Hours....... .............. .............. .......................... 298,876
----------------------------------------------------------------------------------------------------------------

FDIC Burden

[[Page 64560]]

Table 3--Summary of Estimated Annual Burden
[OMB No. 3064-0103]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average
Information collection (obligation to Type of burden (frequency of annual number Number of Time per response (hours/ Annual burden
respond) response) of responses per minutes) (hours)
respondents respondent
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements Associated Recordkeeping (On Occasion).... 2,936 259 5 minutes (0.083).............. 63,369
with Real Estate Appraisals and
Evaluations (Mandatory).
New IC 1--AVM Rule--Policies and Recordkeeping (Annual)......... 1,010 .33 40 hours....................... 13,320
Procedures--Implementation
(Mandatory).
New IC 2--AVM Rule--Policies and Recordkeeping (Annual)......... 1,010 1 5 hours........................ 5,050
Procedures--Ongoing (Mandatory).
New IC 3--2010 Guidelines--Policies Recordkeeping (Annual)......... 2,936 1 10 hours....................... 29,360
and Procedures--Ongoing (Mandatory).
New IC 4--2010 Guidelines--Disclosure-- Disclosure (Annual)............ 2,936 1 5 hours........................ 14,680
Ongoing (Mandatory).
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Total Annual Burden Hours......... ............................... .............. .............. ............................... 125,779
--------------------------------------------------------------------------------------------------------------------------------------------------------

NCUA Burden

Table 4--Summary of Estimated Annual Burden
[OMB No. 3133-0125]
----------------------------------------------------------------------------------------------------------------
Average
annual number Number of Time per Annual burden
Information collection Type of burden of responses per response (hours)
respondents respondent (hours)
----------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements Recordkeeping 3,555 514 0.083 152,272
Associated with Real Estate (On Occasion).
Appraisals and Evaluations.
New IC 1--AVM Rule--Policies Recordkeeping 356 1 13.33 4,745
and Procedures-- (Annual).
Implementation.
New IC 2--AVM Rule--Policies Recordkeeping 356 1 5 1,780
and Procedures--Ongoing. (Annual).
New IC 3--2010 Guidelines-- Recordkeeping 3,555 1 10 35,550
Policies and Procedures-- (Annual).
Ongoing.
New IC 4--2010 Guidelines-- Disclosure 3,555 1 5 17,775
Disclosure--Ongoing. (Annual).
---------------------------------------------------------------------------------
Total Annual Burden Hours. ................ .............. .............. .............. 212,122
----------------------------------------------------------------------------------------------------------------

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 final 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 Regulatory Flexibility Act (RFA) requires an agency to prepare
a regulatory flexibility analysis describing the impact of the final
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 certify that
the rule will not have a significant economic impact on a substantial
number of small entities.
The OCC has assessed the burden of the final rule and has
determined that the costs associated with the rule will be limited to
reviewing the rule; ensuring that existing policies, 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 reviews the costs associated
with the activities necessary to comply with the final rule. These
include an estimate of the total time required to implement the final
rule and the estimated hourly wage of bank employees who may be
responsible for the tasks associated with achieving compliance with the
rule. The OCC uses a bank employee compensation rate of $128 per
hour.\69\
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\69\ To estimate wages, the OCC reviewed May 2022 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 $128.05 per hour, which is based on the average
of the 90th percentile for six occupations adjusted for inflation
(5.1 percent as of Q1 2023), plus an additional 34.3 percent for
benefits (based on the percent of total compensation allocated to
benefits as of Q4 2022 for NAICS 522: credit intermediation and
related activities).
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The OCC currently supervises approximately 636 small entities.\70\
The

[[Page 64561]]

final rule will impact approximately 590 of these small entities. The
OCC estimates the annual cost for small entities to comply with the
final rule will be approximately $23,040 per bank (180 hours x $128 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. The OCC considers 5 percent or more of OCC-supervised
small entities to be a substantial number. Thus, at present, 32 OCC-
supervised small entities would constitute a substantial number. Based
on these thresholds, the OCC estimates that the final rule will have a
significant economic impact on 24 small entities, which is below our
substantial number threshold. Therefore, the OCC certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities.
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\70\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds, which are $850 million or less in
total assets for commercial banks and savings institutions, and $47
million or less in total assets for trust companies. 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, 2023, 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 U.S.
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

B. Board

An initial regulatory flexibility analysis (IRFA) was included in
the proposal in accordance with section 603(a) of the RFA.\71\ In the
IRFA, the Board requested comment on the effect of the proposed rule on
small entities. The Board did not receive any comments on the IRFA. One
commenter suggested that the Board's initial regulatory flexibility
analysis failed to recognize the web of overlapping and duplicative
laws and rules that apply to mortgage valuations.
---------------------------------------------------------------------------

\71\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

The RFA requires an agency to prepare a final regulatory
flexibility analysis (FRFA) unless the agency certifies that the rule
will not, if promulgated, have a significant economic impact on a
substantial number of small entities. Based on its analysis and for the
reasons stated below, the Board certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
1. Reasons action is being taken 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 final rule serves to implement this statutory
mandate.
2. The objectives of, and legal basis for, the rule.
The final rule implements statutorily mandated quality control
standards for the use of AVMs. The Board is adopting this rule pursuant
to section 1125 of title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989.\72\
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\72\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

3. Estimate of the number of small entities.
The final rule applies to Board-regulated small entities that are
mortgage originators or secondary market issuers. There are
approximately 462 state member banks and approximately 3,281 bank
holding companies and savings and loan holding companies that qualify
as small entities for purposes of the RFA.\73\
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\73\ 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 December 31, 2023. Small entity information for bank
holding companies and savings holding companies is based on average
assets reflected in December 31, 2023 Parent Company Only Financial
Statements for Small Holding Companies (FR Y-9SP) data.
---------------------------------------------------------------------------

4. Description of the compliance requirements of the rule.
The final rule requires 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, seek to 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 or would already be in compliance with the specified
standards or could become compliant with relatively minor modifications
to their current practices.\74\
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\74\ For example, the Board has provided guidance to most such
entities on use of AVMs. See Appraisal Guidelines, 75 FR 77450,
77468.
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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 $116.86.\75\ The
estimated aggregate initial administrative costs of the proposal to
Board-supervised small entities amount to $8,638,291 or $18,697.60 per
bank \76\ and ongoing costs are expected to be small when measured by
small entities' annual expenses. The Board also notes that, while
section 1125 explicitly applies to mortgage originators and secondary
market issuers, not third-party AVM vendors, financial institutions
should be able to work with AVM developers and vendors to assist them
with their compliance obligations under the rule, as they do with other
third-party vendors in order to comply with relevant regulatory
requirements.
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\75\ To estimate wages, the Federal Reserve reviewed May 2023
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 $116.86 per hour, which is based on the average of the
90th percentile for five occupations adjusted for inflation (2
percent as of Q1 2021), plus an additional 34.6 percent for benefits
(based on the percent of total compensation allocated to benefits as
of Q4 2023 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.
\76\ 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, 462, 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.
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5. Consideration of duplicative, overlapping, or conflicting rules
and significant alternatives to the proposal.
Although there are multiple statutes and regulations that apply to
various aspects of real estate lending, the Board has not identified
any Federal statutes or regulations that would duplicate, overlap, or
conflict with the final rule's quality control standards for AVMs. 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.\77\
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\77\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

Therefore, the Board concludes that the final rule will not have a
significant

[[Page 64562]]

economic impact on a substantial number of small entities.

C. FDIC

The RFA generally requires an agency, in connection with a final
rule, to prepare and make available for public comment a FRFA that
describes the impact of the final rule on small entities.\78\ However,
a FRFA is not required if the agency certifies that the final rule will
not 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.\79\ Generally, the FDIC considers a significant economic
impact 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 represent significant economic impacts for FDIC-supervised
institutions. For the reasons described below and under section 605(b)
of the RFA, the FDIC certifies that this rule will not have a
significant economic impact on a substantial number of small entities.
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\78\ 5 U.S.C. 601 et seq.
\79\ 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 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 final rule applies to all FDIC-supervised insured depository
institutions (IDIs) that are mortgage originators or secondary market
issuers. As of the quarter ending December 31, 2023, the FDIC
supervised 2,936 insured depository institutions, of which 2,221 are
considered small entities for the purposes of the RFA. Of these, 2,183
FDIC-supervised small institutions reported a non-zero value for
mortgages on their books.\80\ Therefore, the FDIC estimates that 2,183
small institutions could be subject to the final rule.
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\80\ Based on Call Reports data as of December 31, 2023. The
variable LNRERES represents balances for 1-4 family residential real
estate loans.
---------------------------------------------------------------------------

The FDIC lacks data on the number of small FDIC-supervised
institutions that use AVMs for their mortgage originations. FDIC
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 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.
The final rule generally reflects 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.\81\ The FDIC believes that insti

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