CFPB Approves New Rule Regulating Use of AI in Mortgage Appraisals
Written By: Joel Palmer, Op-Ed Writer
The Consumer Financial Protection Bureau (CFPB) has approved a new rule to address the use of algorithms and artificial intelligence (AI) for real estate valuations and appraisals.
The rule uses the term automated valuation models (AVMs) to describe the use of AI models for appraisals. It said the rule applies to mortgage originators and secondary market issuers. It does not cover the use of an AVM by a certified or licensed appraiser, who are already subject to quality control standards.
“While these computer models can provide critical insight for buyers, sellers, and lenders, they cannot be inaccurate or discriminatory,” bureau executives wrote in a blog post last month. “It can be tempting to think that computer models can take bias out of the equation, but they can’t.”
In partnership with other agencies, CFPB proposed the rule in June 2023 and allowed the mandatory 60 days for public comment.
The new AVM rule will take effect approximately one year after all agencies provide their final approval. CFPB stated in the rule document that “the agencies are finalizing the proposed rule largely as proposed.”
The other agencies involved include the Federal Housing Finance Agency (FHFA), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).
The new rule “requires companies that use these algorithmic appraisal tools to put safeguards into place to ensure a high level of confidence in the home value estimates, protect against the manipulation of data, avoid conflicts of interest, and comply with applicable nondiscrimination laws.” It also requires random sample testing and reviews.
CFPB noted that this rule serves to implement the quality control standards spelled out in Section 1473(q) of the Dodd-Frank Act regarding the use of AVMs used in valuing real estate collateral securing mortgage loans (section 1125).
The bureau also noted that there currently exists a number of guidelines governing AVM use that the new rule can help consolidate.
For example, the OCC, Federal Reserve Board, FDIC, and NCUA have provided supervisory guidance on the use of AVMs in the Interagency Appraisal and Evaluation Guidelines. In addition, three of the above agencies have issued guidance on model risk management practices on validation and testing of models. The CFPB and FHFA are also not parties to the Appraisal Guidelines or the Model Risk Management Guidance, but have separate guidelines. A number of agencies have also issued risk management guidance for the use of third party service providers.
The bureau said it received 50 comments on the proposal. Most commenters recognized the need for the quality control standards. The industry also supported the flexibility in the proposed rule for institutions to set quality controls for AVMs as appropriate based on the size, complexity, and risk profile of the institution and the transactions for which they would use AVMs covered by the proposed rule.
Concern was raised about implementation, especially related to compliance with nondiscrimination laws. Others wanted the rule to apply to AI developers and vendors, instead of mortgage institutions that have no control over how AVMs are created. A number of commenters recommended that the agencies work with the private sector to develop a standard setting organization for AVMs.
“The new rule is part of our efforts to ensure that the appraisal system is fair, nondiscriminatory, and free of conflicts of interest,” CFPB executives wrote. Others efforts the bureau listed include enabling consumers to challenge potentially inaccurate appraisals, fix "serious problems" at The Appraisal Foundation, and providing states with more tools to combat discriminatory appraisals.
“We are also examining the growing power that appraisal management companies can wield over individual appraisal professionals,” the bureau wrote.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
