Final Rule on AVM Use Issued

Today six federal regulatory agencies, including the NCUA, issued a final rule related to the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers. The rule sets out to implement quality control standards around the use of AVMs. While we saw the text of this final rule in June, it wasn’t until today that it was officially issued by the agencies involved.

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.

Let's take a look at some of the key elements of the final rule and how they might impact your credit union.

What is an AVM?

The term “automated valuation model” is commonly used to describe computer programs that estimate a property’s value. The statute (codified at 12 U.S.C. 3354) 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.”

How are AVMs and their use by credit unions currently regulated?

Since 2010, the NCUA has provided supervisory guidance on the use of AVMs by credit unions in Appendix B to the Interagency Appraisal and Evaluation Guidelines. These guidleines recognize that credit unions may use different methods and tools for real estate valuation and recommend that they establish policies, practices, and procedures related to their selection, use and validation, including steps to ensure the accuracy, reliability, and independence of an AVM.

The NCUA and the other regulators 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.

What policies and procedures does the final rule require?

Under the final rule, credit unions that use AVM in credit decisions must 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.

What qualifies as a "credit decision"?

The rule defines "credit decision" as "a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit."

One important note is that modifications to existing loans, including HELOC reductions, suspensions, or increases, are considered credit decisions under this rule. Therefore, if a credit union is using an AVM as part of these processes, it would have to develop the required policies and procedures. 

Using AVMs for portfolio monitoring would not be considered a credit decision under this rule. The use of AVMs by appraisers also falls outside the scope of this rule. 

What kind of quality control standards must be adhered to?

The final rule gives credit unions some flexibility to set their quality control standards for AVMs as appropriate based on the size, complexity, and risk profile of the credit union and the transactions for which they use AVMs. In the final rule, the agencies write that "different policies, practices, procedures, and control systems may be appropriate for institutions of different sizes with different business models and risk profiles."

The first four quality control standard elements - to ensure a high level of confidence in the estimates produced by AVMs; to protect against the manipulation of data; to seek to avoid conflicts of interest; and to require random sample testing and reviews - are expressly set in the 2010 statute (link: https://www.law.cornell.edu/uscode/text/12/3354) that authorizes this rulemaking. The statute also allows for the regulatory agencies to require quality control standard to "account for any other such factor that the agencies… determine to be appropriate." The fifth quality control standard element chosen by the agencies in the final rule is to "comply with applicable nondiscrimination laws."

When will the final rule be effective?

The final rule will become effective on the first day of the calendar quarter following 12 months after publication in the Federal Register.

What resources can the League provide to help?

A terrific resource for our member credit unions is CUPolicyPro, which maintains a vast library of model policies for credit unions. Their library contains a model policy and appendices for real estate appraisal. The CUPolicyPro team also updates their library to stay consistent with changing regulations as rules get finalized and implemented. You can sign up for and access CUPolicyPro through the League website.