NCUA, Banking Regulators Propose Standards for Automated Valuation Models

Rule cited by Biden Administration as latest step toward eliminating bias from home appraisals and valuations.

Federal financial regulators, including the NCUA and CFPB, late last week issued a proposed rule intended to ensure that mortgage originators using Automated Valuation Models (AVMs) adopt policies to ensure the “credibility and integrity” of those models.

“While advances in AVM technology and data availability have the potential to contribute to lower costs and shorter turnaround times in the performance of property valuations, it is important that institutions using such tools take appropriate steps to ensure the credibility and integrity of the valuations produced by AVMs,” the agencies stated.

Context

Biden Administration officials cited the rule as their latest move in ensuring that home appraisals and valuations are not biased.

“Today, as we build on our leadership, many lenders have agreed to rely on algorithms to supplement or fully replace in-person appraisals,” Vice President Harris said, in outlining the administration’s latest efforts. “These algorithms have the potential to reduce bias in the home appraisal process. But if algorithms are used and built on biased data, then of course there is a real risk they could produce biased valuations.”

What Does the Rule Entail?

The proposed standards are designed to ensure that there is a high level of confidence in the estimates produced by AVMs, help protect against manipulation of data, seek to avoid conflicts of interest, require random sample testing and reviews, and promote compliance with non-discrimination laws.

The proposed rule would not, however, set specific requirements for how institutions structure those efforts.

Impact on the NCUA and Credit Unions

The proposed rule specifically notes that the NCUA has constraints the other regulators do not have.

“The NCUA, unlike the Federal banking agencies that do have supervisory and regulatory authority over subsidiaries of their regulated institutions, does not have authority to supervise or examine subsidiaries owned and controlled by federally insured credit unions,” the agencies said.

As a result, the NCUA would not be able to take action against CUSOs using one section of the rule.

Rather, the rule states that the Federal Trade Commission, the CFPB and state attorneys general would have enforcement authority over CUSOs.

The NCUA noted that since the rule would largely make explicit standards that have been communicated through less formal means for many years, the compliance costs for small credit unions would be minimal.

What Comes Next?

Separately, Biden Administration officials said last week that federal banking regulators are working on proposed guidance for “reconsiderations of value” through which real estate owners may appeal appraisals or valuations.

The Biden Administration’s Task Force on Property Appraisal and Value Equity also has said the appraisal industry lacks diversity and that there may be barriers blocking aspiring appraisers from entering the industry. As a result, there may be widespread bias among appraisers.

Task force officials last week announced the development of a dashboard that provides details about which states have imposed more stringent requirements than those established by the Appraisal Foundation.

Some Republicans have questioned how widespread appraiser bias is. For instance, in March 2022, then-Senate Banking Committee ranking Republican Sen. Pat Toomey of Pennsylvania criticized efforts he said amounted to “micromanaging” the appraisal industry.