On February 23, the CFPB outlined a proposal for upcoming joint rulemaking to prevent algorithmic bias in automated home valuation models (AVMs).  Here, the CFPB is specifically focused on the potential for AVMs to pose fair lending risks to homebuyers and homeowners.  The CFPB issued the outline pursuant to a requirement under the Small Business Regulatory Enforcement Fairness Act that includes “collecting small entities’ advice and recommendations on the potential impacts of the proposals under consideration and feedback on regulatory alternatives to minimize these impacts.”

Dodd-Frank Act amended the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to instruct the CFPB, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to jointly develop regulations requiring AVMs to meet the following five quality control standards:  (i) ensure a high level of confidence in the estimates, (ii) protect against the manipulation of data, (iii) avoid conflicts of interest, (iv) require random sample testing and reviews, and (v) account for any other such factor that the agencies determine to be appropriate.

Pursuant to the fifth quality control factor above, the CFPB is considering requiring “nondiscrimination quality control criteria” as an additional standard.  Noting the concern that  algorithmic systems may reflect bias in design and function that may introduce potential fair lending risk, the CFPB seeks feedback on whether to require that covered institutions to establish policies, practices, procedures, and control systems to ensure that their AVMs comply with applicable nondiscrimination laws.

The CFPB welcomes written feedback from small entity representatives and other stakeholders on this outline.  The CFPB requests written feedback from small entity representatives by April 8, 2022 in order to be considered and incorporated into the Small Business Review Panel Report. The CFPB requests that other stakeholders wanting to provide written feedback do so no later than May 13, 2022.   

Putting it into Practice

There is no way to ascertain with certainty what the CFPB’s final rule on AVMs will say.  However, we do know that if the final rule discourages creditors from using AVMs, it may come into direct conflict with the preferences of Fannie Mae, Freddie Mac, and mortgage industry investors.  In the current sky-high housing market, lenders are turning to AVMs due to lower costs, shorter turnaround times, and wider acceptance by Fannie Mae and Freddie Mac. Since 2016, Fannie has provided relief from liability, known as “Day 1 Certainty,” to lenders using its Collateral Underwriter automated appraisal tool, which has hastened the adoption of AVMs.  An AVM typically costs from $25 to $100, compared generally with $500 to $1,000 for an in-person appraisal. AVMs also are available immediately compared to an average two-week wait time for an appraisal.