MBA and CBA Warn of Unintended Consequences in New AVM Quality Control Standards
In a recent letter to regulators, the Mortgage Bankers Association (MBA) and the Consumer Bankers Association (CBA) expressed concerns about the potential unintended consequences of new quality control standards for automated valuation models (AVMs). These standards, proposed by six federal agencies, aim to ensure the credibility and integrity of AVMs used in real estate valuations.
According to the MBA and CBA, AVMs have the potential to address appraiser shortages, reduce transaction costs, and prevent appraisal bias. However, they emphasized the importance of a strong regulatory framework to achieve these benefits. They also highlighted the need to consider the practicalities of model risk management and its potential unintended effects.
One specific concern raised by the trade groups is the inclusion of Fannie Mae and Freddie Mac in the proposed rule. While this creates a level playing field in the market, MBA and CBA worry about the impact on alternative valuation methods used by the Government-Sponsored Enterprises (GSEs) during times of high demand. They suggested that the agencies consult with the GSEs to avoid adverse effects on the availability of these alternative valuation methods.
The associations also stressed the importance of balanced market effects and consistent interpretations of the legal framework. They pointed out the lack of established methodologies for examining systemic bias in the United States and urged regulators to consider this when implementing AVM regulations.
To reduce the burden on smaller institutions, the proposed rules require each institution using AVMs to adopt and maintain their own practices and control systems. However, the MBA and CBA requested an exemption for small lenders and servicers, who are more likely to rely on larger outside service providers subject to thorough regulatory reviews.
In addition, the trade groups suggested that the Consumer Financial Protection Bureau (CFPB) expand its Compliance Bulletin to outline expectations and oversight for third-party providers of AVM services. They also disagreed with the agencies’ interpretation of the Fair Housing Act, arguing that creditors should not be held liable for violating nondiscrimination laws when relying on third-party AVMs.
The MBA and CBA recommended a timeline of at least 12 months for the implementation of the new AVM quality control standards.
The proposed rule aligns with the goals set by the White House to address racial bias in homeownership and wealth gaps. Vice President Kamala Harris highlighted the rule and its objective to ensure that appraisal algorithms do not produce biased valuations, particularly for homes owned by people of color.
The National Association of Mortgage Brokers (NAMB) also expressed support for the new federal regulatory proposals governing the use of AVMs. NAMB President Ernest Jones acknowledged the need to address underlying issues in the current systems and structures to prevent outcomes that disenfranchise certain groups.
In conclusion, while AVMs have the potential to alleviate appraiser shortages, reduce costs, and prevent bias in home valuations, the MBA and CBA highlight the need for a robust regulatory framework and consideration of potential unintended consequences. They urge the agencies to collaborate with the GSEs, ensure balanced market effects, and provide clarity on expectations for third-party providers. With a focus on addressing racial bias, these proposed rules aim to create a fairer and more inclusive real estate valuation process.
