NCUA and Other Agencies Issue Final Rule on QC Standards for AVMs

The National Credit Union Administration (NCUA), Office of the Comptroller of the Currency, Treasury (OCC), Board of Governors of the Federal Reserve System (Fed), Federal Deposit Insurance Corporation (FDIC), Consumer Financial Protection Bureau (CFPB), and Federal Housing Finance Agency (FHFA) (collectively, the agencies) have adopted 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.

The rule was published in the Federal Register on June 20, 2024.  However, the final rule will not take effect until one year after all the agencies have provided their final approval.

The term “automated valuation model” describes 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.

The quality control standards in this final rule apply only to AVMs used in connection with making certain credit decisions or securitization determinations regarding a mortgage (covered AVMs). Under the final rule, a mortgage includes a home equity line of credit, secured by a consumer’s principal dwelling, even if the mortgage were primarily for business, commercial, agricultural, or organizational purposes.  The final rule defines “credit decision” to mean a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, and would include a decision whether to extend new or additional credit or change the credit limit on a line of credit.

Other uses of AVMs, such as for portfolio monitoring, do not involve making a determination of collateral value, and thus would not be within the scope of the final rule.  Additionally, the rule would not cover AVMs used to develop an appraisal by a certified or licensed appraiser, nor in the review of the quality of already completed determinations of collateral value.

Since 2010, the FDIC, OCC, Fed, and NCUA have provided supervisory guidance on the use of AVMs by their regulated institutions in Appendix B to the Interagency Appraisal and Evaluation Guidelines (Guidelines).  The Guidelines recommend that institutions establish policies, practices, and procedures governing the selection, use, and validation of AVMs, including steps to ensure the accuracy, reliability, and independence of an AVM.

In addition to Appendix B of the Guidelines, the FDIC, OCC, and Fed have issued guidance on model risk management practices (Model Risk Management Guidance) that provides supervisory guidance on validation and testing of computer-based financial models.  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.

As long as institutions adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs adhere to the rule’s requisite quality control standards— and consistent with the flexibility to set their quality control standards as appropriate based on the size, complexity, and risk profile of the institution and the transactions for which they would use AVMs—institutions should be able to work with AVM providers to assist them with their compliance obligations under the final rule.

The agencies believe that additional guidance is not needed at this time and recommend that institutions review and apply existing guidance in establishing and implementing appropriate polices, practices, procedures, and control systems for AVM quality control.

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