Regulators propose quality control rules for automated appraisals

Federal financial regulators are weighing a rule that outlines best practices for the use of computer-generated appraisals on properties used as collateral for loans or other credit considerations.

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, National Credit Union Administration and Federal Housing Finance Agency issued a proposed rule governing the use of automated valuation models, or AVMs, on Thursday afternoon.

The proposed rule was announced along with several other initiatives from regulatory agencies and the White House aimed at curbing discrimination in the home valuation process and smoothing the path to homeownership.

The rule calls for mortgage originators and secondary market issuers to adhere to standards and apply quality control methods in order to use AVMs, which have gained traction in recent years as means for streamlining the home loan process. 

Yet, the technology underpinning these computerized appraisals has drawn skepticism from regulators who believe such systems could be unreliable or swayed by programmed bias. CFPB Director Rohit Chopra has been calling for restrictions around algorithmic valuations since last February.

"It is tempting to think that machines crunching numbers can take bias out of the equation," Chopra said at the time, "but they can't."

Thursday's proposal calls for firms to create their own "policies, practices, procedures, and control systems" for the use of AVMs. Greater expectations will be put on large firms and those that deal in risky and more complex types of lending. 

Such standards would not be applied to AVMs used to monitor real estate portfolios over time or appraisals conducted to validate an already completed valuation.

Also, the proposed quality control requirements would only apply to the use of AVMs in transactions that are exempt from appraisal requirements set by the Fed, OCC, FDIC and NCUA, including those that fall beneath certain value thresholds. Certified or licensed real estate appraisers who use AVMs as part of their valuation process would not be covered by the rule either.

The rule would build upon guidance first issued by bank regulators in 2010 about how banks should go about devising valuation models and managing risks around them. 

The public will have 60 days to comment on the proposal, which will be posted to the Federal Register. 

The proposal stems from the White House's Property Appraisal and Valuation Equity, or PAVE, Task Force, which was launched in 2021 and included all six regulatory agencies as well the Department of Housing and Urban Development and other related agencies. The group was charged with identifying discriminatory practices in the valuation profession and devising strategies for rooting them out.

On Thursday, the White House announced that regulators are also working on a proposed framework for improving the reconsideration of value process, through which homeowners can formally request an appraisal do-over if they feel something was not handled properly.

The Biden Administration also noted that the FHFA is working on transparency measures, including an expansion of its Uniform Appraisal Dataset, which makes public aggregated, anonymized data about home valuations broken down by approximate location. 

Also, the PAVE Task Force will publish an online dashboard breaking down educational and training requirements to enter the appraisal profession to demonstrate which states have the highest and lowest barriers to entry.

A White House statement released Thursday also noted that the task force has continued to pressure the Appraisal Foundation — the private non-profit entity that writes the rules for property appraisal nationally — to "find meaningful solutions to the experience, education, and examination requirements that exceed most industry standards and are not linked to evidence showing how they produce better, more accurate appraisals."