Federal financial agencies[1] have issued a new final interagency rule to implement quality control standards for Automated Valuation Models (“AVMs”) used by mortgage originators and secondary market issuers (the “AVM Rule”).[2] In addition to mortgage originators, the AVM Rule applies to secondary market issuers including the GSEs and “any other party that creates, structures, or organizes a mortgage-backed securities transaction.” Notably, the requirements apply to use of AVMs in both credit decisions and certain securitization determinations.

Among other requirements, the policies and procedures for the use of AVMs in certain covered credit decisions or securitization determinations must address: (1) maintaining the integrity of AVM valuations, (2) protecting against data manipulation, (3) avoiding conflicts of interest, (4) conducting random sample testing and reviews, and (5) compliance with applicable nondiscrimination laws.

What is an AVM?

An AVM is defined 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.”

Who must adopt policies and procedures?

Mortgage originators, GSEs and any other secondary market issuers that make covered credit decisions or securitization determinations using AVMs must adopt policies and procedures.

Note that the party that makes the covered decision or determination is the covered party. Therefore, if a secondary market issuer (such as the GSEs) uses an AVM to “determine whether the mortgage originator’s estimated collateral value or the contract price meets acceptable thresholds for issuing an appraisal waiver offer” then the secondary market issuer—as the party making the covered determination—must comply with the quality control standards.

Mortgage originators and secondary market issuers must ensure that their use of AVMs “adhere to the [] quality control standards” whether using their own AVMs or third-party AVMs.

What types of credit transactions are covered?

The requirements cover consumer or business-purpose loans and open or closed-end credit when secured by a consumer’s principal dwelling.

The AVM Rule does not include definitions of “mortgage-backed securities transaction,” “securitizations” and “mortgage-backed securitizations.” Moreover, the Agencies declined to define those terms as the terms are used elsewhere in Title XI without definition and have “commonly understood meanings.”

Does the AVM Rule apply to all uses of AVMs?

No. The AVM Rule quality control procedures apply to the use of AVMs in credit or covered securitization determinations (as defined below). The requirements are inapplicable to use of AVMs for ongoing portfolio monitoring or to “verify or validate a previous determination of value.”

“Covered securitization determinations” include determinations regarding:

• whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; and
• structuring, preparing disclosures for or marketing initial offerings of mortgage-backed securitizations.

When is the AVM Rule effective?

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

Secondary market issuers should be prepared to adopt quality control programs for the use of AVMs. Participants in covered securitizations should be aware of the parties that are required to implement such programs and confirm that such parties have compliant policies and procedures in place.

We’re here to help

We understand that many of our clients’ needs and transaction structures may require deeper analysis regarding which party is responsible for maintaining an AVM quality control policy and the specific requirements of a compliant policy/program. We can assist you in understanding when the use of an AVM requires quality control policies and procedures in mortgage securitization transactions and confirming compliance with the new regulatory framework.

[1] Office of the Comptroller of the Currency (OCC), Treasury; Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Consumer Financial Protection Bureau (CFPB), and Federal Housing Finance Agency (FHFA) (collectively, the “Agencies”).

[2] Quality Control Standards for Automated Valuation Models, Docket No. CFPB 2023-0025 (June 20, 2024), available here.