Quality Control Standards for Automated Valuation Models

Federal RegisterJun 21, 2023

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. OCC-2023-0002]

RIN 1557-AD87

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Docket No. R-1807]

RIN 7100-AG60

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 323

RIN 3064-AE68

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 722 and 741

[Docket No. NCUA-2023-0019]

RIN 3133-AE23

CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1026

[Docket No. CFPB-2023-0025]

RIN 3170-AA57

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1222

RIN 2590-AA62

Quality Control Standards for Automated Valuation Models

AGENCY:

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).

ACTION:

Notice of proposed rulemaking and request for comment.

SUMMARY:

The OCC, Board, FDIC, NCUA, CFPB, and FHFA (collectively, the agencies) invite comment on a proposed rule to implement the quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer's principal dwelling. Under the proposal, the agencies would require institutions that engage in certain credit decisions or securitization determinations to adopt policies, practices, procedures, and control systems to ensure that AVMs used in these transactions to determine the value of mortgage collateral adhere to quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs; protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and comply with applicable nondiscrimination laws.

DATES:

Comments must be received by August 21, 2023.

ADDRESSES:

Interested parties are encouraged to submit written comments jointly to all of the agencies. Commenters should use the title “Quality Control Standards for Automated Valuation Models” to facilitate the organization and distribution of comments among the agencies. The agencies invite interested parties to submit written comments to:

OCC:

Commenters are encouraged to submit comments through the Federal eRulemaking Portal. Please use the title “Quality Control Standards for Automated Valuation Models” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—Regulations.gov:

Go to

https://regulations.gov/.

Enter “Docket ID OCC-2023-0002” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments, please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email

regulationshelpdesk@gsa.gov.

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2023-0002” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this action by the following method:

•

Viewing Comments Electronically—Regulations.gov:

Go to

https://regulations.gov/.

Enter “Docket ID OCC-2023-0002” in the Search Box and click “Search.” Click on the “Dockets” tab and then the document's title. After clicking the document's title, click the “Browse All Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Comments Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Browse Documents” tab. Click on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen checking the “Supporting & Related Material” checkbox. For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email

regulationshelpdesk@gsa.gov.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Board:

You may submit comments, identified by Docket No. R-1807 and RIN No. 7100 AG60, by any of the following methods:

•

Agency Website: http://www.federalreserve.gov.

Follow the instructions for submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Email: regs.comments@federalreserve.gov.

Include the docket number in the subject line of the message.

•

Fax:

(202) 452-3819 or (202) 452-3102.

•

Mail:

Ann Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

In general, all public comments will be made available on the Board's website at

www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm

as submitted, and will not be modified to remove confidential, contact or any identifiable information. Public comments may also be viewed electronically or in paper in Room M-4365A, 2001 C St. NW, Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during Federal business weekdays. Please call (202) 452-3684 to make an appointment to visit the Board and inspect comments.

FDIC:

The FDIC encourages interested parties to submit written comments. Please include your name, affiliation, address, email address, and telephone number(s) in your comment. You may submit comments to FDIC, identified by RIN 3064-AE68, by any of the following methods:

•

FDIC Website: https://www.fdic.gov/resources/regulations/federal-register-publications/.

Follow the instructions for submitting comments on the FDIC's website.

•

Mail:

James P. Sheesley, Assistant Executive Secretary, Attention: Comments/Legal OES (RIN 3064-AE68), Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

•

Hand Delivery/Courier:

Comments may be hand delivered to the guard station at the rear of the 550 17th Street NW building (located on F Street NW) on business days between 7:00 a.m. and 5:00 p.m.

•

Email: comments@fdic.gov.

Comments submitted must include “RIN 3064-AE68” in the subject line of the message.

Public Inspection:

Comments received, including any personal information provided, may be posted without change to

https://www.fdic.gov/resources/regulations/federal-register-publications/.

Commenters should submit only information that the commenter wishes to make available publicly. The FDIC may review, redact, or refrain from posting all or any portion of any comment that it may deem to be inappropriate for publication, such as irrelevant or obscene material. The FDIC may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. All comments that have been redacted, as well as those that have not been posted, that contain comments on the merits of this notice will be retained in the public comment file and will be considered as required under all applicable laws. All comments may be accessible under the Freedom of Information Act.

NCUA:

You may submit written comments, identified by RIN 3133-AE23, by any of the following methods (Please send comments by one method only):

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments for Docket Number NCUA-2023-0019.

•

Mail:

Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

You may view all public comments on the Federal eRulemaking Portal at

http://www.regulations.gov

as submitted, except for those we cannot post for technical reasons. The NCUA will not edit or remove any identifying or contact information from the public comments submitted. If you are unable to access public comments on the internet, you may contact NCUA for alternative access by calling (703) 518-6540 or emailing

OGCMail@ncua.gov.

CFPB:

You may submit comments, identified by Docket No. CFPB-2023-0025 by any of the following methods:

•

Federal eRulemaking Portal: https://www.regulations.gov.

Follow the instructions for submitting comments.

•

Email: 2023AVMQualityControl@cfpb.gov.

Include Docket No. CFPB-2023-0025 in the subject line of the message.

•

Mail/Hand Delivery/Courier:

Comment Intake—CFPB-2023-0025, Consumer Financial Protection Bureau, c/o Legal Division Docket Manager, 1700 G Street NW, Washington, DC 20552.

Instructions:

The CFPB encourages the early submission of comments. All submissions should include the agency name and docket number for this rulemaking. Because paper mail in the Washington, DC, area and at the CFPB is subject to delay commenters are encouraged to submit comments electronically. In general, the CFPB will post all comments received without change to

https://www.regulations.gov.

The CFPB will make all comments, including attachments and other supporting materials, part of the public record and subject to public disclosure. You should not include proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals. The CFPB will not edit comments to remove any identifying or contact information.

FHFA:

You may submit your comments, identified by regulatory identification number (RIN) 2590-AA62, by any of the following methods:

•

Agency website: www.fhfa.gov/open-for-comment-or-input.

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by email to FHFA at

RegComments@fhfa.gov

to ensure timely receipt by the agency. Please include “RIN 2590-AA62” in the subject line of the message.

•

Hand Delivered/Courier:

The hand delivery address is: Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AA62, Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC 20219. Deliver the package to the Seventh Street entrance Guard's Desk, First Floor, on business days between 9 a.m. and 5 p.m.

•

U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service:

The mailing address for comments is: Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AA62, Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC 20219. Please note that all mail sent to FHFA via U.S. Mail is routed through a national irradiation facility, a process that may delay delivery by approximately two weeks.

FHFA invites comment on all aspects of the proposed amendments and will take all comments into consideration before adopting amendments through a final rule. FHFA will post copies of all comments received without change on the FHFA website at

http://www.fhfa.gov,

and will include any personal information you provide, such as your name, address, email address, and telephone number. In addition, the FHFA will make copies of all comments received available for examination by the public through the electronic rulemaking docket for this proposed rule also located on the FHFA website.

FOR FURTHER INFORMATION CONTACT:

OCC:

G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152; Mitchell Plave, Special Counsel, (202) 649-5490; or Joanne Phillips, Counsel; or Marta Stewart-Bates, Counsel, Chief Counsel's Office, (202) 649-5500; Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

Board:

Anna Lee Hewko, Associate Director, (202) 530-6260; Andrew Willis, Manager, Policy Development

Section, (202) 912-4323; Carmen Holly, Lead Financial Institution Policy Analyst, (202) 973-6122; Devyn Jeffereis, Senior Financial Institution Policy Analyst, (202) 365-2467, Division of Supervision and Regulation; Jay Schwarz, Assistant General Counsel, (202) 452-2970; Matthew Suntag, Senior Counsel, (202) 452-3694; Derald Seid, Senior Counsel, (202) 452-2246; Trevor Feigleson, Counsel, (202) 452-3274, David Imhoff, Attorney (202) 452-2249, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For users of telephone systems via text telephone (TTY) or any TTY-based Telecommunications Relay Services, please call 711 from any telephone, anywhere in the United States.

FDIC:

Patrick J. Mancoske, Senior Examination Specialist, Division of Risk Management Supervision, (202) 898-7032; Lauren A. Whitaker, Counsel, Legal Division, (202) 898-3872; Navid K. Choudhury, Counsel, Legal Division, (202) 898-6526,

nchoudhury@fdic.gov;

Mark Mellon, Counsel, Legal Division, (202) 898-3884; Mark T. Heil, Senior Financial Economist, Division of Insurance and Research, (202) 898-7232; or Stuart Hoff, Senior Policy Analyst, Division of Depositor and Consumer Protection, (202) 898-3852, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing impaired only, TDD users may contact (202) 925-4618.

NCUA: Policy and Accounting:

Victoria Nahrwold, Associate Director; Naghi H. Khaled, Director of Credit Markets; or Simon Hermann, Senior Credit Specialist; Office of Examination and Insurance at (703) 518-6360; National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314,

Legal:

Ian Marenna, Associate General Counsel for Regulations and Legislation; John H. Brolin, Senior Staff Attorney; or Ariel Pereira, Senior Staff Attorney; Office of General Counsel, at (703) 518-6540; National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314.

CFPB:

Shaakira Gold-Ramirez, Counsel; Pedro De Oliveira, Joseph Devlin, Thomas Dowell, Joan Kayagil, or Melissa Stegman, Senior Counsels, Office of Regulations, at 202-435-7700. If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

FHFA:

Julie Giesbrecht, Senior Policy Analyst, Office of Housing and Regulatory Policy, (202) 557-9866,

Julie.Giesbrecht@fhfa.gov;

Karen Heidel, Assistant General Counsel, Office of General Counsel, (202) 649-3073; or

Karen.Heidel@fhfa.gov.

For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected to any of the contact numbers above.

SUPPLEMENTARY INFORMATION:

I. Background

Section 1473(q) of the Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (title XI)

to add a new section 1125 relating to the use of automated valuation models (AVMs) in valuing real estate collateral securing mortgage loans (section 1125).

The term “automated valuation model” is commonly used to describe computerized real estate valuation models used for a variety of purposes, including loan underwriting and portfolio monitoring.

Section 1125 defines an AVM 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.”

The quality control standards proposed in this rule are applicable only to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage (covered AVMs), as defined in this proposed rule.

12 U.S.C. 3331

et seq.

Public Law 111-203, 124 Stat. 1376, 2198 (2010),

codified at

12 U.S.C. 3354.

See Interagency Appraisal and Evaluation Guidelines,

75 FR 77450, 77468 (Dec. 10, 2010).

12 U.S.C. 3354(d).

Section 1125 directs the agencies to promulgate regulations to implement quality control standards regarding AVMs.

Section 1125 requires that AVMs, as defined in the statute, adhere to quality control standards designed to “(1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate.”

As required by section 1125, the agencies consulted with the staff of the Appraisal Subcommittee (ASC) and the Appraisal Standards Board of the Appraisal Foundation (ASB) as part of promulgating this rule.

12 U.S.C. 3354(b).

12 U.S.C. 3354(a).

Driven in part by advances in database and modeling technology and the availability of larger property datasets, the mortgage industry has begun to use AVMs with increasing frequency as part of the real estate valuation process. For example, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs) may use proprietary AVMs in their collateral valuation processes. 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.

See, e.g.,

U.S. Department of the Treasury,

A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation

103-107 (July 2018),

available at https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf.

A. Existing Guidance Relating to the Use of AVMs

Since 2010, the OCC, Board, FDIC, and NCUA have provided supervisory guidance on the use of AVMs by their regulated institutions in Appendix B to the Interagency Appraisal and Evaluation Guidelines (Guidelines).

The Guidelines recognize that an institution may use a variety of analytical methods and technological tools in developing real estate valuations, provided the institution can demonstrate that the valuation method is consistent with safe and sound banking practices. The Guidelines recognize that the establishment of policies and procedures governing the selection, use, and validation of AVMs, including steps to ensure the accuracy, reliability, and independence of an AVM, is a sound banking practice.

In addition to Appendix B of the Guidelines, the OCC, Board, and FDIC have issued guidance on model risk management practices (Model Risk Management Guidance) that provides supervisory guidance on validation and testing of models.

See supra,

note 3. The Guidelines were adopted after notice and comment.

Id.

See Supervisory Guidance on Model Risk Management,

OCC Bulletin 2011-12 (Apr. 4, 2011); Federal Reserve Board SR Letter 11-7 (Apr. 4, 2011); and

Guidance on Model Risk Management,

FDIC FIL-22-2017 (June 7, 2017).

The NCUA is not a party to the Model Risk Management Guidance. The NCUA monitors the model risk efforts of federally insured credit unions through its supervisory approach by confirming that the governance and controls for an AVM are appropriate based on the size and complexity of the transaction; the risk the transaction poses to the credit union; and the capabilities and resources of the credit union.

The CFPB and FHFA are not parties to the Guidelines or the Model Risk Management Guidance. The FHFA has separately issued model risk management guidance that provides the FHFA's supervisory expectations for its regulated entities in the development, validation, and use of models.

See Model Risk Management Guidance,

FHFA Advisory Bulletin 2013-07 (Nov. 20, 2013).

The agencies have also provided guidance on managing the risk inherent in the use of third-party service providers, such as outside entities that provide AVMs and AVM services.

Institutions that make use of third parties are reminded that they remain responsible for ensuring that third parties, in performing their activities, comply with applicable laws and regulations, including the safety and soundness requirements established by the OCC, Board, FDIC, and NCUA. These guidance documents address the characteristics, governance, and operational effectiveness of a financial institution's risk management program for outsourced activities.

See Third-Party Relationships: Risk Management Guidance,

OCC Bulletin 2013-29 (Oct. 31, 2013);

Third-Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 2013-29,

OCC Bulletin 2020-10 (March 5, 2020);

Guidance on Managing Outsourcing Risk,

Federal Reserve Board SR Letter 13-9 (Dec. 3, 2013);

Third-Party Risk Guidance for Managing Third-Party Risk,

FDIC FIL-44-2008 (June 6, 2008);

Evaluating Third Party Relationships,

NCUA Supervisory Letter 07-01 (Oct. 2007);

Oversight of Third-Party Provider Relationships,

Advisory Bulletin 2018-08 (Sept. 28, 2018); and CFPB,

Compliance Bulletin and Policy Guidance; 2016-02, Service Providers

(Oct. 31, 2016).

II. The Proposed Rule

The agencies are inviting comment on a proposed rule to implement quality control standards for the use of AVMs that are covered by this proposal. The agencies' proposed rule would require that mortgage originators and secondary market issuers adopt policies, practices, procedures, and control systems to ensure that AVMs used in certain credit decisions or covered securitization determinations adhere to quality control standards designed to meet specific quality control factors. The proposed rule would not set specific requirements for how institutions are to structure these policies, practices, procedures, and control systems. This approach would provide institutions the flexibility to set quality controls for AVMs as appropriate based on the size of the institution and the risk and complexity of transactions for which they will use AVMs covered by this proposed rule. As modeling technology continues to evolve, this flexible approach would allow institutions to refine their policies, practices, procedures, and control systems as appropriate. The agencies' existing guidance related to AVMs would remain applicable.

A. Scope of the Proposed Rule

The quality control standards in section 1125 of title XI apply to AVMs “used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling.”

The proposed rule would implement the statute by applying the quality control standards when an AVM is being used to make a determination of collateral value, as opposed to other uses such as monitoring value over time or validating an already completed valuation. Determinations of collateral value are generally made in connection with credit decisions or covered securitization determinations as defined in this proposed rulemaking, for example when determining a new value before originating a purchase-money mortgage or placing a loan in a securitization pool.

12 U.S.C. 3354(d).

Other uses of AVMs, such as for portfolio monitoring, do not involve making a determination of collateral value, and thus are not within the scope of the proposed rule. The agencies are further proposing that the rule would not cover the use of AVMs in the development of an appraisal by a certified or licensed appraiser, nor in the review of the quality of already completed determinations of collateral value (completed determinations). The proposed rule would cover the use of AVMs in preparing evaluations required for certain real estate transactions that are exempt from the appraisal requirements under the appraisal regulations issued by the OCC, Board, FDIC, and NCUA, such as transactions that have a value below the exemption thresholds in the appraisal regulations.

See

12 CFR 34.43(b) (OCC); 12 CFR 225.62(c) (Board); 12 CFR 323.3(b) (FDIC); and 12 CFR 722.3(d) (NCUA). Under the NCUA's rule, an “evaluation” is described as a “written estimate.” 12 CFR 722.3(d).

Section 1125(c)(1) provides that compliance with regulations issued under section 1125 shall be enforced by, “with respect to a financial institution, or subsidiary owned and controlled by a financial institution and regulated by a Federal financial institution regulatory agency, the Federal financial institution regulatory agency that acts as the primary Federal supervisor of such financial institution or subsidiary.”

Section 1125(c)(1) applies to a subsidiary of a financial institution only if the subsidiary is (1) owned and controlled by a financial institution, and (2) regulated by a Federal financial institution regulatory agency. Section 1125(c)(2) provides that compliance with regulations issued under section 1125 shall be enforced by, “with respect to other participants in the market for appraisals of 1-to-4 unit single family residential real estate, the Federal Trade Commission, the Bureau of Consumer Financial Protection, and a State attorney general.”

12 U.S.C. 3354(c)(1) (emphasis added). The term “Federal financial institutions regulatory agencies” means the Board, the FDIC, the OCC, the former OTS, and the NCUA. 12 U.S.C. 3350(6). Title III of the Dodd-Frank Act provides that the OCC is now the Federal financial institutions regulatory agency for Federal savings associations. Title III of the Dodd-Frank Act also provides that the FDIC is the Federal financial institutions regulatory agency for State savings associations. Finally, the Dodd-Frank Act provides that the Board is responsible for regulation of savings and loan holding companies. The term “financial institution” means an insured depository institution as defined in 12 U.S.C. 1813 or an insured credit union as defined in 12 U.S.C. 1752.

See

12 U.S.C. 3350(7).

12 U.S.C. 3354(c)(2).

The NCUA has long acknowledged that subsidiaries of federally insured credit unions—also referred to as credit union service organizations (CUSOs)—and their employees are not subject to regulation by the NCUA as contemplated by Congress under statutory provisions similar to section 1125(c).

This proposal would not alter that position. 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.

Rather, the NCUA's regulations only indirectly affect CUSOs. For example, part 712 and § 741.222 of the NCUA's regulations permit federally insured credit unions to invest only in CUSOs that conform to

certain specified requirements.

Given that the authority under section 1125(c)(1), in the context of federally insured credit unions, applies to subsidiaries owned and controlled by a federally insured credit union

and regulated by the NCUA,

the NCUA would not take action to enforce the requirements of this rule under section 1125(c)(1), if the rule is made final, with respect to CUSOs. Rather, under section 1125(c)(2), the Federal Trade Commission, the CFPB, and State attorneys general would have enforcement authority over CUSOs, whether owned by a State or federally chartered credit union, in connection with a final AVM rule.

Accordingly, the second sentence in proposed § 722.201(b)(1) would provide that subpart B of part 722 of the NCUA's regulations applies to credit unions insured by the NCUA that are mortgage originators or secondary market issuers.

See Registration of Mortgage Loan Originators,

75 FR 51623, 51626 (Aug. 23, 2010) (applying similar reasoning to the licensing of mortgage loan originators who were employees of CUSOs under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008); and

Minimum Requirements for Appraisal Management Companies,

80 FR 32657, 32665 (Aug. 10, 2015) (applying similar reasoning to the registration and regulation of appraisal management company CUSOs under 12 U.S.C. 3353).

See, e.g.,

Bank Service Company Act, 12 U.S.C. 1861-1867; NCUA, Third-Party Vendor Authority 7-10 (March 2022)

available at https://ncua.gov/files/publications/regulation-supervision/third-party-vendor-authority.pdf;

and Financial Stability Oversight Council, 2021 Annual Report 125 (2021)

available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.

12 CFR part 712.

The term “financial institution” means an insured depository institution as defined in 12 U.S.C. 1813 or an insured credit union as defined in 12 U.S.C. 1752.

See

12 U.S.C. 3350(7).

12 U.S.C. 3354(c)(1).

12 U.S.C. 3354(c)(2).

The NCUA is also proposing to amend § 741.203(b) to clearly include the proposed AVM regulations in the NCUA's list of regulatory provisions applicable to federally insured, state-chartered credit unions. Accordingly, proposed § 741.203(b) would provide that insured credit unions must adhere to the requirements stated in part 722 of this chapter.

1. AVMs Used in Connection With Making Credit Decisions

The proposed rule would apply to AVMs used in connection with making a credit decision. The proposed rule would define “credit decision,” in part, to include a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage. The scope provision of the proposed regulatory text would expressly exclude the use of AVMs in monitoring the quality or performance of mortgages or mortgage-backed securities. The use of AVMs solely to monitor a creditor's mortgage portfolio would not be a credit decision under the proposed rule because the lending institution has already made the credit decision. The scope of the proposed rule would include, for example, decisions regarding originating a mortgage, modifying the terms of an existing loan, or renewing, increasing, or terminating a line of credit. The proposed rule uses the term “credit decision” to help clarify that the proposed rule would cover these various types of decisions.

The proposal to limit the scope of the rule to credit decisions and covered securitization determinations reflects the statutory definition of AVM, which focuses on the use of an AVM “by mortgage originators and secondary market issuers to

determine

the collateral worth of a mortgage secured by a consumer's principal dwelling.”

The proposed rule would distinguish between using AVMs to determine the value of collateral securing a mortgage and using AVMs to monitor, verify, or validate a previous determination of value (

e.g.,

the proposed rule would not cover a computerized tax assessment used to verify the valuation made during the origination process).

The proposed rule focuses on those aspects of mortgage and securitization transactions where the value of collateral is typically determined.

12 U.S.C. 3354(d) (emphasis added).

Many secondary market transactions by regulated entities require an appraisal unless an appraisal consistent with regulatory standards was obtained at the time of origination.

See

12 CFR 43.43(a)(8) (OCC); 12 CFR 225.63(a)(8) (Board); 12 CFR 323.3(a)(8) (FDIC); 12 CFR 722.3(a)(5) (NCUA).

Loan modifications and other changes to existing loans.

The proposed rule would cover the use of AVMs in deciding whether to change the terms of an existing mortgage even if the change does not result in a new mortgage origination, as long as a “mortgage originator” or “secondary market issuer,” or servicers that work on the originator's or secondary market issuer's behalf, uses the AVM to determine the value of a mortgage secured by a consumer's principal dwelling. For example, the proposed rule would cover AVMs used in making decisions to deny a loan modification or to confirm collateral values, such as when there is a request to change or release collateral. In relevant part, section 1125 provides that an AVM is “any computerized model used by mortgage originators and secondary market issuers

to determine the collateral worth

of a mortgage. . . . ”

The agencies' view is that the phrase “determine the collateral worth” broadly covers instances where mortgage originators and secondary market issuers use AVMs in connection with making credit decisions. Under the proposal, the agencies consider mortgage originators and secondary market issuers or servicers that work on their behalf to be using AVMs in connection with making a credit decision when they use AVMs to modify or to change the terms of existing loans.

12 U.S.C. 3354(d) (emphasis added).

Question 1. How, if at all, could the agencies' proposal to cover loan modifications and other changes to existing loans be made clearer?

Home equity line of credit (HELOC) reductions or suspensions.

The proposed rule would cover AVMs used in deciding whether or to what extent to reduce or suspend a HELOC. The proposed rule would apply to AVMs used in connection with making credit decisions. The agencies consider mortgage originators and secondary market issuers to be using AVMs in connection with making a credit decision when they use AVMs to decide whether or to what extent to reduce or suspend a HELOC.

Question 2. Part II.B of this

SUPPLEMENTARY INFORMATION

discusses the proposed definitions of mortgage originator and secondary market issuer. To what extent do financial institutions purchase or service HELOCs without engaging in mortgage originator or secondary market issuer activities as defined by the proposed rule?

Question 3. How might a rule covering only AVM usage by mortgage originators and secondary market issuers disadvantage those entities vis-à-vis their competitors?

2. AVMs Used by Secondary Market Issuers

The language of section 1125 includes not only mortgage originators, but also secondary market issuers. Given that the statute refers to secondary market issuers and the primary business of secondary market issuers is to securitize mortgage loans and to sell those mortgage-backed securities to investors, the proposed rule would cover AVMs used in securitization determinations. In addition, covering AVMs used in securitizations could potentially protect the safety and soundness of institutions and protect consumers and investors by reducing the risk that secondary market issuers will misvalue homes. For example, misvaluation by secondary market issuers could in turn incentivize mortgage originators to originate misvalued loans when making lending decisions.

Such misvaluations could

pose a risk of insufficient collateral for financial institutions and secondary market participants and could limit consumers' refinancing and selling opportunities.

For example, the 2008 financial crisis was precipitated in part by secondary market issuers that “lowered the credit quality standards of the mortgages they securitized” and mortgage originators that “took advantage of these lower credit quality securitization standards . . . to relax the underwriting discipline in the loans they issued” because, “[a]s long as they could resell a mortgage to the secondary market, they didn't care about its quality.” Financial Crisis Inquiry Commission,

The Financial Crisis Inquiry Report,

at 425 (2011),

available at https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.

See, e.g., Appraisals for Higher-Priced Mortgage Loans,

78 FR 10367, 10418 (Feb. 13, 2013).

Appraisal waivers.

The proposed rule would define “covered securitization determination” to include determinations regarding, among other things, whether to waive an appraisal requirement for a mortgage origination (appraisal waiver decisions).

Under the proposal, a secondary market issuer that uses AVMs in connection with making appraisal waiver decisions would be required to have policies, practices, procedures, and control systems in place to ensure that the AVM supporting those appraisal waiver decisions adheres to the rule's quality control standards. In contrast, a mortgage originator that requests an appraisal waiver decision from a secondary market issuer would not need to ensure that the AVM used to support the waiver meets the rule's quality control standards because the secondary market issuer would be using the AVM to make the appraisal waiver decision in this context, not the mortgage originator.

On March 1, 2023, Fannie Mae began a transition in terminology away from “appraisal waivers” and to “value acceptance.” As stated in the March 1 announcement, “value acceptance is being used in conjunction with the term `appraisal waiver' to better reflect the actual process of using data and technology to accept the lender-provided value. We are moving away from implying that an appraisal is a default requirement.”

See Fannie Mae Provides Updates Regarding Valuation Modernization | Fannie Mae.

For example, both GSEs have appraisal waiver programs and are the predominant issuers of appraisal waivers in the current mortgage market.

To determine whether a loan qualifies for an appraisal waiver under either GSE program, a mortgage originator submits the loan casefile to the GSE's automated underwriting system with an estimated value of the property (for a refinance transaction) or the contract price (for a purchase transaction). The GSE then processes that information through its internal model, which may include use of an AVM, to determine the acceptability of the estimated value or the contract price for the property. If the GSE's analysis determines, among other eligibility parameters, that the estimated value or contract price meets its risk thresholds, the GSE offers the lender an appraisal waiver.

See

Fannie Mae,

Appraisal Waivers, available at https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers

(last visited January 26, 2023); Freddie

Mac, Automated Collateral Evaluation

(ACE),

available at https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation.

See

Fannie Mae,

Appraisal Waivers, available at https://singlefamily.fanniemae.com/originating-underwriting/appraisal-waivers;

Freddie Mac,

Automated Collateral Evaluation (ACE), available at https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/ace-automated-collateral-evaluation.

In this example, when the GSEs use AVMs to determine whether the mortgage originator's estimated collateral value or the contract price meets acceptable thresholds for issuing an appraisal waiver offer, the GSEs would be making a “covered securitization determination” under the proposed rule. As a result, the proposed rule would require the GSEs, as secondary market issuers, to maintain policies, practices, procedures, and control systems designed to ensure that their use of such AVMs adheres to the rule's quality control standards. On the other hand, when a mortgage originator submits a loan to determine whether a GSE will offer an appraisal waiver, the mortgage originator would not be making a “covered securitization determination” under the proposed rule because the GSE would be using its AVM to make the appraisal waiver decision in this context. As a result, the mortgage originator would not be responsible for ensuring that the GSEs' AVMs comply with the proposed rule's quality control standards.

Question 4. To what extent do secondary market issuers other than the GSEs issue appraisal waivers?

Question 5. Please address the feasibility of mortgage originators performing quality control reviews of the AVMs that secondary market issuers use to evaluate appraisal waiver requests. What, if any, consequences would such an approach have for mortgage originators' use of appraisal waiver programs?

Other uses by secondary market issuers.

The proposed rule would define “covered securitization determination” to include determinations regarding, among other things, structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.

Monitoring collateral value in mortgage-backed securitizations after the securities have already been issued would not be a covered securitization determination.

See, e.g., Asset Backed Securities,

70 FR 1505, 1544 (Jan. 7, 2005) (examples of asset characteristics that are “material” include LTV ratios);

Appraisals for Higher-Priced Mortgage Loans,

78 FR 78519, 78533 (Dec. 26, 2013) (“[t]he credit risk holder of the existing obligation might obtain a valuation . . . to estimate LTV for determining the appropriate securitization pool for the loan.”).

The proposed rule would cover AVM usage if and when a secondary market issuer uses an AVM as part of a new or revised value determination in connection with covered securitization determinations. For example, the GSEs use the origination appraised value or the estimated value in appraisal waivers when issuing mortgage-backed securities. Hence, AVMs are not used by the GSEs to make a new or revised value determination in connection with MBS issuances. However, because the GSEs provide guarantees of timely payment of principal and interest on loans that are included in an MBS, they are obligated to purchase loans that are in default from MBS loan pools. The GSEs may modify such loans and subsequently re-securitize them as new MBS offerings. In these instances, the GSEs may use an AVM to estimate collateral value for investor transparency and disclosure. AVMs used in this manner by the GSEs would be considered covered securitization determinations because there are new or revised value determinations.

As discussed in part II.A.3 of this

SUPPLEMENTARY INFORMATION

, the proposed rule distinguishes between secondary market issuers using AVMs to determine the value of collateral securing a mortgage versus using AVMs solely to review completed value determinations. For example, AVMs used solely to review appraisals obtained during mortgage origination would not be covered by the proposed rule.

Question 6. The agencies are proposing to include securitizations within the scope of the proposed rule where the AVM is being used to determine collateral value for loans being considered for inclusion in pools collateralizing mortgage-backed securities. To what extent do secondary market issuers use AVMs to determine collateral value in securitizations?

Question 7. Would covering uses of AVMs for securitizations hinder small entities' access to secondary market liquidity and, if so, how might such impacts be mitigated?

Question 8. What would be the advantages and disadvantages of exempting federally backed securitizations from the AVM quality control standards?

Question 9. Are the compliance obligations of lenders and securitizers clear under this proposed rule?

3. AVM Uses Not Covered by the Proposed Rule

Uses of AVMs by appraisers.

The proposed rule would not cover use of an AVM by a certified or licensed appraiser

in developing an appraisal.

This approach reflects the fact that, while appraisers may use AVMs in preparing appraisals, they must achieve credible results in preparing an appraisal under the Uniform Standards of Professional Appraisal Practice (USPAP) and its interpreting opinions.

As such, an appraiser must make a valuation conclusion that is supportable independently and does not rely on an AVM to determine the value of the underlying collateral. The agencies also note that it may be impractical for mortgage originators and secondary market issuers to adopt policies, procedures, practices, and control systems to ensure quality controls for AVMs used by the numerous independent appraisers with which they work.

The appraisal regulations issued by the OCC, Board, FDIC, and NCUA set forth, among other requirements, minimum standards for the performance of real estate appraisals in connection with federally related transactions.

See

12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E, and 12 CFR part 225, subpart G (Board); 12 CFR part 323 (FDIC); and 12 CFR part 722 (NCUA). The CFPB proposes to codify the AVM requirements in Regulation Z, 12 CFR part 1026, and to cross-reference Regulation Z § 1026.35(c)(1)(i), which defines “certified or licensed appraiser” as a person who is certified or licensed by the State agency in the State in which the property that secures the transaction is located, and who performs the appraisal in conformity with USPAP and the requirements applicable to appraisers in title XI, and any implementing regulations in effect at the time the appraiser signs the appraiser's certification.

See

USPAP STANDARDS RULE 1-1, GENERAL DEVELOPMENT REQUIREMENTS (“In developing a real property appraisal, an appraiser must . . . be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal”);

See also

Federal Financial Institutions Examination Council (FFIEC),

Notice and Final Guidance, Uniform Interagency Consumer Compliance Rating System,

81 FR 79473 (Nov. 14, 2016),

available at https://www.ffiec.gov/press/PDF/FFIEC_CCR_SystemFR_Notice.pdf

(“in developing the revised CC Rating System, the Agencies believed it was also important for the new rating system to establish incentives for institutions to promote consumer protection by preventing, self-identifying, and addressing compliance issues in a proactive manner. Therefore, the revised rating system recognizes institutions that consistently adopt these compliance strategies.”).

CFPB,

ECOA Baseline Review Module

2, 6 (Apr. 2019),

available at https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_ecoa-baseline-exam-procedures_2019-04.pdf).

The agencies propose that institutions would have the flexibility to design fair lending policies, procedures, practices, and control systems that are in compliance with fair lending laws and take into account their business models, as discussed in part II.C.1 of this

SUPPLEMENTARY INFORMATION

regarding the first four quality control factors.

The agencies seek comment on the proposal to specify a nondiscrimination quality control factor, including ways they could facilitate compliance for smaller financial institutions and whether additional clarity should be provided to assist institutions in complying with the proposed fifth factor.

Question 32. What are the advantages and disadvantages of specifying a fifth quality control factor on nondiscrimination? What, if any, alternative approaches should the agencies consider?

Question 33. To what extent is compliance with nondiscrimination laws with respect to covered AVMs already encompassed by the statutory quality control factors requiring a high level of confidence in the estimates produced by covered AVMs, protection against the manipulation of data, and random sampling and reviews? Should the agencies incorporate nondiscrimination into those factors rather than adopt the fifth factor as proposed? Would specifying a nondiscrimination quality control factor in the rule be useful in preventing market-distorting discrimination in the use of AVMs?

Question 34. What are the advantages and disadvantages of a flexible versus prescriptive approach to the nondiscrimination quality control factor?

Question 35. Are lenders' existing compliance management systems and fair lending monitoring programs able to assess whether a covered AVM, including the AVM's underlying artificial intelligence or machine learning, applies different standards or produces disparate valuations on a prohibited basis? If not, what additional guidance or resources would be useful or necessary for compliance?

Question 36. What, if any, other approaches should the agencies consider for incorporating nondiscrimination requirements in this proposed rule?

D. Request for Comments

The agencies invite comments on all other aspects of the proposed rulemaking.

E. Proposed Implementation Period

The agencies propose an effective date of the first day of a calendar quarter following the 12 months after publication in the

Federal Register

of any final rule based on this proposal. This extended effective date would give institutions time to come into compliance with the rule. The agencies seek comment on this extended implementation period.

Question 37. In addition to providing time for implementation, in what other ways should the agencies facilitate implementation for small entities?

III. CFPB Small Business Review Panel

While Federal agencies generally must consider the impact that their proposed rules could have on small entities, the Regulatory Flexibility Act (RFA),

as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)

and the Dodd-Frank Act, imposes on the CFPB additional requirements with respect to small entities.

5 U.S.C. 601

et seq.

Public Law 104-121, 110 Stat. 857 (1996) (5 U.S.C. 609) (amended by Dodd-Frank Act section 1100G).

Specifically, the CFPB must convene and chair a Small Business Review Panel (Panel) whenever it is considering a proposed rule that could have a significant economic impact on a substantial number of small entities.

This Panel must consist of the Chief Counsel for Advocacy of the Small Business Administration (Advocacy)

and full-time employees from both the CFPB and the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB).

Additionally, the Panel must collect feedback regarding the proposed rule under consideration from a group of small entity representatives (SERs) that the rule likely would cover if it were implemented.

Within 60 days of convening, the Panel must issue a report that documents the SERs' feedback and presents the Panel's recommendations.

5 U.S.C. 609(b).

Advocacy is an independent office within the U.S. Small Business Administration (SBA), so the views expressed by Advocacy do not necessarily reflect the views of the SBA.

5 U.S.C. 609(b)(3).

5 U.S.C. 609(b)(4).

5 U.S.C. 609(b)(5).

In preparation for convening a Panel for this rulemaking and to help facilitate the Panel's outreach to SERs, the CFPB issued an Outline of Proposals and Alternatives under Consideration (SBREFA Outline) on February 23, 2022.

The CFPB then convened a Panel for this rulemaking on March 14, 2022, and held two Panel outreach meetings during March 15-16, 2022, conducted online via video conference.

Sixteen SERs participated in this process through written and/or oral feedback. The SERs included representatives from community banks, credit unions, non-depository mortgage lenders, and mortgage brokers.

CFPB,

Small Business Advisory Review Panel For Automated Valuation Model (AVM) Rulemaking—Outline of Proposals and Alternatives Under Consideration

(Feb. 23, 2022),

available at https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf.

In advance of the Panel outreach meetings, the CFPB, Advocacy, and OIRA also held six online conferences with the SERs to describe the small business review process, obtain important background information about each SER's current business practices, and familiarize the SERs with selected portions of the SBREFA Outline.

On May 13, 2022, the CFPB released the Final Report of the Panel on the CFPB's Proposals and Alternatives Under Consideration for the AVM Rulemaking (SBREFA Panel Report).

The SBREFA Panel Report includes the following:

CFPB,

Final Report of the Small Business Review Panel on the CFPB's Proposals and Alternatives Under Consideration for the Automated Valuation Model (AVM) Rulemaking

(May 13, 2022),

available at https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf.

The CFPB's SBREFA Outline and related materials, as well as the CFPB's presentation slides framing the discussion during the Panel outreach meetings, are appended to the SBREFA Panel Report.

See

SBREFA Panel Report at app. D through F.

• A description of the proposals that are being considered by the CFPB and that were reviewed by the Panel;

• Background information on small entities that would likely be subject to those proposals and on the particular SERs selected to advise the Panel;

• A discussion of the feedback from and recommendations made by the SERs;

and

In addition to oral feedback, ten of the 16 SERs provided written feedback, which is appended to the SBREFA Panel Report at Appendix B.

• A discussion of the findings and recommendations of the Panel.

As required by the RFA, the CFPB considers the Panel's findings in its initial regulatory flexibility analysis, as set out in part V of this

SUPPLEMENTARY INFORMATION

The CFPB also invited other stakeholders to submit feedback on the SBREFA Outline. Feedback from these other stakeholders on the SBREFA Outline was not considered by the Panel and is not reflected in the SBREFA Panel Report but will be placed on the public docket for this notice. The CFPB received 11 submissions from a variety of other stakeholders, including trade associations, a coalition of consumer and civil rights groups, AVM developers and testers, a research center, and a not-for-profit corporation responsible for setting appraiser standards and qualifications.

As it prepared this proposed rule with the other agencies, the CFPB considered the feedback it received from SERs and other stakeholders (collectively, SBREFA feedback) and the findings and recommendations of the Panel. The CFPB has summarized the feedback, findings, and recommendations that it received during the SBREFA process in part III.A of this

SUPPLEMENTARY INFORMATION

The SBREFA Panel Report provides a more complete summary of feedback from the SERs and the findings and recommendations of the Panel. The CFPB's documents and content from its SBREFA process for this rulemaking should not be construed to represent the views or recommendations of the Board, OCC, FDIC, NCUA, or FHFA.

A. Summary of SBREFA Feedback and Panel Findings and Recommendations

In their feedback on the SBREFA Outline, SERs and other stakeholders (collectively, SBREFA commenters) generally expressed support for the rulemaking's goal of ensuring AVM accuracy. Many SBREFA commenters noted that AVMs potentially save time and money but also cautioned that they would need to have greater confidence in AVMs before broadly expanding their usage of them. While acknowledging that AVM developers are entitled to maintain trade secrets and protect their intellectual property rights, several SBREFA commenters expressed concern that AVM developers do not provide sufficient transparency regarding how they calculate AVM values.

SBREFA commenters expressed some support for greater standardization of AVM testing and reporting but cautioned that prescriptive regulations could threaten innovation and increase costs. The SBREFA Panel recommended that the CFPB continue to explore ways to minimize the burden to small entities of the AVM rule in light of SERs' concerns about compliance costs generally and their feedback regarding the potential additional costs and delays that could result if the industry substituted current AVM usage with appraisals.

While acknowledging that Congress has required the rulemaking agencies to issue a rule, SBREFA commenters generally expressed a preference for the less prescriptive, principles-based option presented in the SBREFA Outline, along with nonbinding guidance to aid in compliance with that rule. The not-for-profit corporation responsible for setting appraiser standards and qualifications recommended its USPAP as a starting point for flexible AVM regulations. A coalition of consumer and civil rights groups also provided various examples for a principles-based framework in an appendix to their submission.

SBREFA commenters generally supported aligning definitions in the AVM rule with definitions in existing financial regulations to simplify compliance. Some SERs and a trade association recommended that the AVM rule incorporate a transaction-based exemption threshold, such as not covering portfolio loans under $400,000. Other SERs asked the CFPB to consider an asset-size threshold to exempt small entities from the rule. However, a coalition of consumer and civil rights groups advocated for the rule's coverage to be as broad as possible.

Several SBREFA commenters stated that it would be beneficial to have a governmental or not-for-profit accrediting body for AVMs, so that AVM users could rely on such accreditation for complying with the AVM rule. Several SERs and other stakeholders also advocated for greater information sharing regarding the GSEs' AVMs.

1. Defining “Consumer's Principal Dwelling”

The section 1125 definition of AVM refers to a mortgage secured by a

consumer's principal dwelling. The terms “consumer,” “dwelling,” and “principal dwelling” are not defined in title XI, although the Dodd-Frank Act also added the phrase “consumer's principal dwelling” into provisions of title XI that address appraisal management company requirements and broker price opinions.

During the SBREFA process, the CFPB presented to the SERs an approach that would base the scope of “consumer's principal dwelling” on how that phrase is used in the Regulation Z § 1026.42 provisions on valuation independence.

See

Dodd-Frank Act section 1473(f)(4), adding section 1121(11) to title XI, codified at 12 U.S.C. 3350(11)): and Dodd-Frank Act section 1473(r), adding section 1126(a) to title XI, codified at 12 U.S.C. 3355(a), respectively.

The appraisal management company provisions in title XI include a requirement that appraisal management companies apply valuation independence standards established under TILA. 12 U.S.C. 3353(a)(4). TILA is implemented in the CFPB's Regulation Z, 12 CFR part 1026 (Regulation Z). The CFPB implemented the valuation independence standards in Regulation Z § 1026.42 and is proposing to also implement its AVM standards in § 1026.42.

Coverage of “consumers.”

For most purposes Regulation Z defines “consumer” as a natural person to whom consumer credit is offered or extended.

The SBREFA Outline noted that, for certain purposes, the scope of the Regulation Z term “consumer” may apply to additional persons.

The SBREFA Outline noted further that, unlike TILA, section 1125 does not limit its coverage to credit transactions that are primarily for personal, family, or household purposes.

Therefore, the SBREFA Outline advised the SERs that the CFPB was considering proposing language to clarify that its implementation of AVM standards in Regulation Z does not exclude from section 1125 coverage any mortgage for which the proceeds are used for other purposes, as long as the mortgage is secured by a consumer's principal dwelling.

See

12 CFR 1026.2(a)(11).

To see how the CFPB has interpreted and applied the definition of “consumer” in Regulation Z,

see

comments 2(a)(11)-1 through 4 and comment 3(a)-10 in Regulation Z, Supplement I.

See

12 CFR 1026.2(a)(12) (definition of “consumer credit”).

The terms “dwelling” and “principal dwelling” are discussed separately in this section.

The SERs provided a variety of observations about extending the AVM requirements to business-purpose loans and defining the term “consumer” to include persons other than a natural person. In addition to addressing the scope of coverage generally and consistency with existing definitions, the SERs discussed valuation costs, processing times, and business practices.

The SBREFA Panel recommended that the CFPB leverage existing definitions in Regulation Z but consider whether adjustments should be made to apply the AVM standards to business-purpose loans and loans to trusts and limited liability companies.

See

SBREFA Panel Report at section 8.13.

Coverage of “dwelling” and limiting coverage to “principal” dwelling.

The section 1125 definition of AVM refers to determining the collateral worth of a mortgage secured by a consumer's principal dwelling. During the SBREFA process, the CFPB indicated it was considering definitions of dwelling and principal dwelling that are very similar to their treatment in the proposed rule, but the CFPB also addressed the possibility of limiting the definitions' scope to transactions in which the mortgage is secured by a lien on real property. The SBREFA Outline cited to the CFPB's appraisal independence requirements in Regulation Z § 1026.42 as an approach under consideration for clarifying whether second and vacation homes and new construction would be considered principal dwellings.

Regarding the definition of “dwelling,” SERs discussed considerations relevant to limiting application of the AVM quality control standards to mortgages secured by real property, including alternative valuation guides and sampling challenges.

A coalition of consumer and civil rights groups urged adoption of a broad definition of dwelling and suggested considering adopting the Fair Housing Act definition of dwelling.

See

SBREFA Panel Report at section 8.13.

See

42 U.S.C. 3602(b) (“ `Dwelling' means any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land which is offered for sale or lease for the construction or location thereon of any such building, structure, or portion thereof.”).

Regarding what would be a “principal” dwelling, the SERs discussed considerations for applying the AVM standards to second homes, vacation homes, and new construction.

One SER commented on the importance of considering how coverage might apply to active military personnel who are purchasing a home for their future permanent residence while assigned temporarily to a different duty station. One trade association supported leveraging existing definitions for key terms in the AVM rule, including dwelling and consumer's principal dwelling. The SBREFA Panel recommended that the CFPB (i) consider whether limiting coverage to dwellings secured by liens on real property, and extending coverage to second homes and vacation homes, would be consistent with the purposes of section 1125; and (ii) clarify whether mortgages secured by undeveloped land, manufactured homes, and other structures used as dwellings would be covered by the quality control standards. The SBREFA Panel also recommended that the CFPB assess whether any adjustment or clarification of the AVM rule would be appropriate to accommodate the special circumstances of active-duty military personnel. Finally, the SBREFA Panel recommended that the CFPB seek comment on whether coverage of the AVM rule should vary from the definition of principal dwelling used in other statutes and CFPB regulations, including as applied to new construction.

See

SBREFA Panel Report at section 8.13.

2. Defining “Mortgage”

Section 1125 defines an AVM by reference to determining “the collateral worth of a mortgage,”

but does not define the term “mortgage.” In the SBREFA process, the CFPB was considering proposing two alternative definitions of “mortgage.” The first alternative would define “mortgage” as an extension of credit secured by a dwelling. The second alternative would define it as a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in a dwelling.

12 U.S.C. 3354(d). Section 1125 focuses on mortgages “secured by a consumer's principal dwelling.”

Id.

Most SERs did not express a preference for one definition over the other, but some did request further clarity on what types of transactions would be covered, and others asked that the definition be coordinated with existing regulatory definitions. Two SERs preferred the first mortgage definition. One of those SERs suggested that the first definition of mortgage was easier to understand, and the other SER preferred the first definition because it did not appear to include installment sales contracts, which it said could be understood to include consumer purchases for improvements to a home (for example, financing an HVAC system).

The CFPB notes that the second definition, which the agencies are proposing today, limits the “installment sales contract” reference to “purchase money” transactions.

A coalition of consumer and civil rights groups commenting on the definition of mortgage preferred the second definition because it was

broader and would protect consumers using installment sales contracts, who the stakeholder said are often Black homebuyers. A trade association did not think that installment land contracts should be included.

The SBREFA Panel recommended that the CFPB attempt to coordinate a definition of “mortgage” with preexisting regulations, to the extent feasible.

3. Defining “Mortgage Originator”

Section 1125 covers AVMs used by “mortgage originators,” but does not define the term.

In the SBREFA Outline, the CFPB indicated that it was considering a definition of “mortgage originator” that potentially could cover persons who are loan originators, creditors, and/or, under limited circumstances, servicers for purposes of Regulation Z.

Four SERs, a trade association, and a coalition of consumer and civil right groups expressed support for a definition of “mortgage originator” that relies on definitions from existing consumer financial laws because they believe that would simplify implementation of any future final rule and/or minimize the compliance burden on small businesses. The SBREFA Panel also endorsed this approach in its recommendations.

12 U.S.C. 3354(d).

Small Business Advisory Review Panel for Automated Valuation Model (AVM) Rulemaking, Outline of Proposals and Alternatives under Consideration

14-15 (Feb. 23, 2022),

available at https://files.consumerfinance.gov/f/documents/cfpb_avm_outline-of-proposals_2022-02.pdf.

Final Report of Small Business Review Panel on the CFPB's Proposals and Alternatives under Consideration for the Automated Valuation Model (AVM) Rulemaking

39 (May 13, 2022),

available at https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf.

Although there was support among SERs and other stakeholders for defining “mortgage originator” based on definitions in existing consumer financial laws, six SERs and a coalition of consumer and civil rights groups indicated that the CFPB should consider alternative existing definitions for the term. These alternative definitions included defining “mortgage originator” (i) by reference to the term's use in other consumer financial laws, such as SAFE Act, Regulation G, or Regulation X, (ii) by reference to a person's current licensure status, or (iii) by reference to a person's function, such as covering lenders but not mortgage brokers or servicers. One SER in particular expressed concern that the definition of “mortgage originator” should not apply to mortgage brokers because, even though mortgage brokers commonly are considered “loan originators,” they rarely use AVMs and have no control over the valuation methods or vendors used in mortgage transactions.

In addition to receiving requests from SERs asking it to consider alternative definitions for the term “mortgage originator,” the CFPB also received comments from three SERs regarding the scope of the definition of the term “mortgage originator.” Two SERs asked the CFPB to consider applying a transaction-based or asset-based threshold that would exclude small entities from the scope of the definition of the term “mortgage originator.” Another SER asked the CFPB to ensure that any definition of the term “mortgage originator” it ultimately adopts will apply equally to both traditional market participants and financial technology firms.

4. Defining “Secondary Market Issuer”

Section 1125 uses, but does not define, the term “secondary market issuers”; specifically, the statute defines an AVM by reference to computerized models “used by mortgage originators and secondary market issuers to determine the collateral worth” of certain mortgages.

In the SBREFA Outline, the CFPB discussed two alternative definitions of the term “secondary market issuer.” The first alternative would define the term to include only entities that issue asset-backed securities collateralized by mortgages (mortgage securities). The second alternative would define the term more broadly to mean an issuer, guarantor, insurer, or underwriter of mortgage securities. Most SERs and other stakeholders providing feedback on the SBREFA Outline did not express specific views regarding these alternatives, but a coalition of consumer and civil rights groups as well as one SER supported the broader definition. The SBREFA Panel recommended that the CFPB continue to explore the extent to which a broader or narrower definition of “secondary market issuer” would further the statutory purposes of section 1125, along with the benefits and costs of such approach.

12 U.S.C. 3354(d). Section 1125 focuses on mortgages “secured by a consumer's principal dwelling.”

Id.

5. Types of AVM Uses

Section 1125 defines an AVM as any computerized model “used by mortgage originators and secondary market issuers to determine the collateral worth” of certain mortgages.

In the SBREFA Outline, the CFPB noted that, depending on how that phrase in the statute is implemented, the rule's quality control requirements might cover a variety of AVM uses by mortgage originators and secondary market issuers.

12 U.S.C. 3354(d). Section 1125 focuses on mortgages “secured by a consumer's principal dwelling.”

Id.

Underwriting versus non-underwriting AVM uses.

Section 1125 focuses on AVMs used to “determine” the collateral worth. In the SBREFA Outline, the CFPB discussed focusing the rule on AVMs used in making underwriting decisions. Some SERs and trade associations providing feedback on the SBREFA Outline supported that approach. However, a coalition of consumer and civil rights groups advocated for the rule to broadly cover uses of AVMs to produce any valuation estimate whatsoever. The SBREFA Panel recommended that the CFPB continue to explore the extent to which limiting the rule's coverage to uses of AVMs for underwriting decisions would sufficiently further the statutory purposes of section 1125, along with the benefits and costs of such an approach. The SBREFA Panel also recommended that the CFPB consider clarifying whether, and to what extent, the proposed rule distinguishes between AVMs used before and after the origination of a mortgage.

Loan modifications and other changes to existing loans.

Section 1125 focuses on AVMs used to “determine” the collateral worth. Among specific types of AVM uses, the CFPB's SBREFA Outline explored whether the rule should apply in instances where a mortgage originator, secondary market issuer, or service provider for a mortgage originator or secondary market issuer uses an AVM to determine the value of collateral in order to support a decision to modify or to change the terms of an existing loan. Specifically, the SBREFA Outline presented two alternatives. Under the first alternative, the rule would cover AVMs used in transactions that result in a consumer receiving a new mortgage origination. Under this alternative, the rule would cover a transaction like a refinancing, but not a transaction like a loan modification that would not result in a new mortgage origination. Under the second alternative, the rule would cover any AVM used to decide whether to change the terms of an existing mortgage even if the change does not result in a new mortgage origination, so long as a “mortgage originator” or “secondary market issuer,” or a service provider acting on behalf of a mortgage originator or a secondary market issuer, uses the AVM to determine the collateral worth of a mortgage secured by a consumer's principal dwelling.

With respect to the two alternatives, SERs generally expressed a preference for the CFPB's first alternative over the second. One SER stated that they preferred a rule that did not cover loan modifications and other changes to existing loans, even if it ultimately covered refinancing transactions, because such a rule would have lower implementation costs. That SER further explained that consolidating the AVM quality control processes in their institution's origination functions (including refinancings) would be less burdensome than building processes for multiple use cases. Several SERs expressed concern that the second alternative could negatively impact consumers who are pursuing loss mitigation options. Specifically, those SERs stated that AVMs are quicker and less costly than appraisals, but that the second alternative could discourage use of AVMs in favor of appraisals during the loss mitigation process, which, in turn, would harm consumers by increasing both property valuation costs and application processing times. One SER also asked the CFPB to clarify whether the first alternative would apply to transactions that are withdrawn or denied in addition to transactions that are consummated.

The CFPB also received feedback on these alternatives from a trade association. That trade association stated that their members supported the first alternative because they wanted to exclude AVMs used in loan modifications from the scope of the rule. The trade association further stated that their members did not support the second alternative presented in the SBREFA Outline because, in their view, it both was inconsistent with title XI's directive to apply quality control standards to mortgage originators and would place additional burdens on the processing of loan workouts for distressed borrowers.

Credit line reductions or suspensions.

Section 1125 focuses on AVMs used to “determine” the collateral worth of a mortgage secured by a consumer's principal dwelling. Among specific types of AVM uses, in the SBREFA Outline, the CFPB was considering whether or not the rule would cover AVMs used in deciding whether or to what extent to reduce or suspend a home equity line of credit. SERs discussed balancing the consumer protections of covering credit line reductions or suspensions against the burdens of such regulation. One SER noted that AVMs used in determining credit line reductions or suspensions ought to be covered from a consumer protection standpoint. Another SER noted that such decisions occur only a couple times a year at their institution, and the burden of additional regulations could cause servicers like them to abandon the use of AVMs for such purposes. The SBREFA Panel recommended that the CFPB continue to explore the extent to which a rule not covering uses of AVMs for credit line reductions and suspensions would sufficiently further the statutory purposes of section 1125, along with the benefits and costs of such approach. The Panel also recommended that the CFPB consider whether covering such uses only for mortgage originators and secondary market issuers disadvantages entities vis-à-vis competitors that acquire mortgages but are not mortgage originators or secondary market issuers.

Uses of AVMs by appraisers.

Section 1125 applies to AVMs used by “mortgage originators” and “secondary market issuers,” respectively.

Third-party appraisers generally would not be mortgage originators or secondary market issuers; thus, appraisers themselves generally would not be covered by the eventual rule. But, as discussed in part I.A of this

SUPPLEMENTARY INFORMATION

, regulated entities—including mortgage originators and secondary market issuers—are responsible for managing risk inherent in the use of third-party service providers, such as appraisers.

12 U.S.C. 3354(d).

See supra

note 12.

In the SBREFA Outline, the CFPB indicated that it was considering whether or not the rule would cover an AVM when a mortgage originator (or secondary market issuer) relies on an appraisal developed by a certified or licensed appraiser (appraiser), notwithstanding that the appraiser used the AVM in developing an appraisal. Several SERs and a trade association advocated for not covering such AVMs uses; they explained that mortgage originators and secondary market issuers should not be responsible for appraisers' AVM usage because appraisers are already subject to other Federal and State regulation and supervision. The SERs further stated that, given other Federal laws requiring valuation independence,

mortgage originators have limited ability to oversee appraisers' use of AVMs. A coalition of consumer and civil rights groups urged that the rule should cover AVMs used by appraisers and stated that there are gaps in the training and licensing of appraisers. The SBREFA Panel recommended that the CFPB continue to assess the extent to which a rule not covering appraisers' uses of AVMs would sufficiently further the statutory purposes of section 1125.

For consumer credit transactions secured by a consumer's principal dwelling, TILA section 129E, 15 U.S.C. 1639e, and its implementing regulations require valuation independence by, for example, prohibiting material misrepresentation of property value and conflicts of interest for persons preparing valuations or performing valuation management functions. CFPB: 12 CFR 1026.42; Board: 12 CFR 226.42;

see Truth in Lending,

75 FR 66554 (Oct. 28, 2010) (interim final rule);

see also Truth in Lending,

75 FR 80675 (Dec. 23, 2010) (correction). TILA section 129E(g)(2) directed the Board to issue an interim final rule. 15 U.S.C. 1639e(g)(2).

Securitization.

Section 1125 focuses on AVMs used to “determine” the collateral worth of a mortgage secured by a consumer's principal dwelling. Among specific types of AVM uses, in the SBREFA Outline, the CFPB was considering whether or not the rule would cover a secondary market issuer's use of an AVM in the offer and sale of mortgage securities. Most SERs and other stakeholders providing feedback on the SBREFA Outline did not express specific views regarding whether to cover AVMs used in securitization, but one SER expressly advocated for not covering such uses because, otherwise, the rule would create a cost burden and hinder access to the secondary market, particularly for small mortgage originators. Another SER stated that most small entities do not securitize loans and that they would be discouraged from doing so if the eventual rule covered AVMs used in securitization. A coalition of consumer and civil rights groups advocated for the rule's coverage to be as broad as possible. The not-for-profit corporation responsible for setting appraiser standards and qualifications expressed concern regarding securitization creating moral hazard for mortgage origination because securitizers often provide funding to originators in exchange for loans with weak representations and warranties that may result in originators having little to no incentive for accurate valuations. The SBREFA Panel recommended that the CFPB continue to explore the extent to which a rule not covering uses of AVMs in securitizations would sufficiently further the statutory purposes of section 1125, along with the benefits and costs of such an approach.

Reviews of completed determinations.

appraisal or other completed determination of collateral value (completed determination). Several SERs and a trade association expressly advocated for not covering such AVM uses, including a SER that stated requiring quality control of AVMs when they are, in turn, being used to quality control already completed determinations would be an excessive amount of quality control and would not provide additional benefit—but would increase the cost of credit for consumers. A coalition of consumer and civil rights groups advocated for the rule's coverage to be as broad as possible.

The SBREFA Panel recommended that the CFPB continue to explore the extent to which a rule not covering uses of AVMs for subsequent reviews of completed determinations would sufficiently further the statutory purposes of section 1125, along with the benefits and costs of such an approach. The SBREFA Panel also recommended that the CFPB consider clarifying in the proposed rule whether, and to what extent, the proposed rule makes distinctions based on the amount of time between the completed determination and the subsequent review.

Appraisal waivers.

Section 1125 focuses on AVMs used to “determine” the collateral worth of certain mortgages. In the SBREFA Outline, the CFPB indicated that it was considering a rule that would exclude a mortgage originator's use of AVMs for appraisal waiver programs where the secondary market issuer's use of an AVM is covered instead. Specifically, the CFPB indicated that it was considering two potential options. One option was to exclude the mortgage originator's use of the secondary market issuer's AVM for appraisal waiver programs. The second option was to exclude the mortgage originator's use of any AVM used exclusively to determine whether a loan qualifies for an appraisal waiver program or to generate a value estimate exclusively for an appraisal waiver program. SERs were supportive of a proposed rule not covering a mortgage originator's use of AVMs for appraisal waiver programs where the secondary market issuer's use of an AVM is covered instead. One SER appreciated that such an approach did not increase compliance burden on mortgage originators, while another SER indicated that secondary market issuers, especially the GSEs, were in a better position to perform quality control reviews of their AVMs than the mortgage originators requesting the appraisal waiver evaluations.

6. Options for the First Four Quality Control Standards

Section 1125 requires that AVMs adhere to quality control standards designed to: (1) ensure a high level of confidence in the estimates produced; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate. Section 1125(b) requires the agencies to promulgate regulations to implement these quality control standards.

In the SBREFA process, the CFPB was considering proposing two alternative methods for compliance in regard to the first four AVM quality control factors. In the first alternative (principles-based option), the CFPB was considering proposing to require regulated institutions to adopt and maintain their own policies, practices, procedures, and control systems to ensure that AVMs used for covered transactions adhere to quality control standards designed to meet those factors, but not proposing specific requirements for those policies, practices, procedures, and control systems. For the second alternative regarding the quality control factors (prescriptive option), the CFPB was considering proposing a prescriptive rule with more detailed and specific requirements in regard to the quality control factors.

SERs overwhelmingly expressed support for the first option the CFPB presented, which would require covered entities to develop policies and procedures that would achieve the quality control standards but would not set specific requirements for those policies and procedures. For example, one SER explained that their institution focuses on the risk assessed, especially the dollar amount of the loan, and the first option would allow them to maintain that focus. That SER further stated that a more prescribed approach would increase their costs and affect their ability to offer services that utilize AVMs, and that the CFPB should allow AVM use to evolve rather than shut down useful innovation with specific controls. Another SER said that low-risk home equity loans for relatively small amounts should not have to meet the same requirements as half-million-dollar loans and that, otherwise, the small-dollar mortgages would become unaffordable. One SER stated that a prescriptive rule would result in a complex and expansive regulation because it would need to address risk factors across many aspects of the market, including product type, geographic area, loan purpose and loan size.

The SERs also discussed other topics besides the direct question of whether the CFPB should adopt the policies and procedures or the prescriptive rule options, such as their current policies and procedures and their concerns about lacking the expertise to effectively monitor AVM vendor compliance with the rule.

See

CFPB,

Final Report of the Small Business Review Panel on the CFPB's Proposals and Alternatives Under Consideration for the Automated Valuation Model (AVM) Rulemaking

24-30 (May 13, 2022),

available at https://files.consumerfinance.gov/f/documents/cfpb_avm_final-report_2022-05.pdf.

Almost all other stakeholders who commented on the quality control options in the SBREFA Outline preferred the principles-based approach, largely for the same reasons that the SERs did. Some of these stakeholders, particularly those involved in the appraisal and valuation market, suggested that the CFPB should try to foster standardization in the market, while also allowing flexibility. Several of these commenters suggested that the market would benefit from some form of credential or certification for AVM providers.

The SBREFA Panel recommended that the CFPB consider providing additional clarity in the notice of proposed rulemaking (NPRM) on what the rule would require of small entities in order to comply with the quality control standards and seek comment on improving that clarity. In addition, the Panel recommended that the CFPB consider seeking comment in the NPRM on potential methods to facilitate compliance targeted on small financial institutions. The Panel further suggested that such methods considered could include clear instruction on how a small entity can monitor compliance regarding use of third-party AVM vendors. The CFPB notes that the proposed rule requests comment on the possible use of additional guidance.

7. Specifying a Nondiscrimination Quality Control Standard

Section 1125 provides the agencies the authority to account for any other such factor that the agencies determine to be appropriate.

In the SBREFA process, the CFPB was considering proposing that it exercise its authority under section 1125 to specify a fifth quality control factor designed to ensure that AVMs used for covered transactions comply with applicable nondiscrimination laws. The CFPB was considering proposing two alternative methods—a principles-based option or a prescriptive option—for compliance with the nondiscrimination factor,

consistent with the first four quality control factors.

12 U.S.C. 3354(a)(5).

During the SBREFA process, SERs uniformly voiced concern regarding how they can assess AVM compliance with applicable nondiscrimination law or know that they are in violation of the law. SERs stated that it is impractical for them to assess AVM fair lending performance because they are not equipped to validate the algorithms that AVM providers use. SERs commented that, as small institutions, they do not have the staff, the data, or the scale to assess AVM model results meaningfully. In addition, SERs stated that lenders do not have access to the data or methodology used by the AVM because the data is proprietary.

SERs expressed that it is important to ensure fairness in AVM development and application, including ensuring that AVMs do not rely on data that results in inadvertent discrimination. However, SERs stated that the burden should be on AVM providers to comply with nondiscrimination requirements, and the providers should be regulated.

In addition, SERs expressed that there is sufficient fair lending regulatory infrastructure already in place and that adding a fair lending requirement to the quality control standards for AVMs would be duplicative and, therefore, unnecessary. SERs further stated that the other four quality control standards required by statute already account for fair lending compliance.

A number of other stakeholders, including several trade associations, echoed many of the SERs' concerns about specifying a nondiscrimination quality control standard. A coalition of consumer and civil rights groups stated that while they fully support the addition of nondiscrimination as a fifth quality control standard, the agencies should incorporate nondiscrimination into each of the quality control standards, asserting that fair lending risk should not be separated from safety and soundness risk.

The SBREFA Panel recommended that the CFPB consider providing additional clarity in the NPRM on what the rule would require of institutions in order to comply with a nondiscrimination quality control factor and seek comment on improving that clarity. In addition, the Panel recommended that the CFPB consider seeking comment in the NPRM on potential methods to facilitate compliance targeted on small financial institutions, such as providing clear and simple instructions, allowing some form of safe harbor, or some other method or methods. Such methods considered could include clear instruction on how a small entity can monitor compliance regarding use of third-party AVM vendors.

8. Implementation Period

Title XIV of the Dodd-Frank Act requires an implementation period within 12 months after issuance of the interagency final rule.

Many SERs and an AVM testing company providing feedback on the SBREFA Outline stated that small entities would need more than the statutory 12-month period to comply with the eventual rule. Those stakeholders highlighted the potential nondiscrimination quality control factor as an aspect of the potential rule that would be particularly time consuming to implement. One SER and a trade association stated that the implementation period should be at least 12 months while a research center estimated only six months would be necessary. The SBREFA Panel recommended that the CFPB continue to explore the appropriateness of an implementation period longer than 12 months.

12 U.S.C. 1400(c)(1)(B).

IV. Paperwork Reduction Act

Certain provisions of the proposed rule contain “collection of information” requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995.

In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a current Office of Management and Budget (OMB) control number.

44 U.S.C. 3501-3521.

The proposed rule would establish quality control standards mandated by the Dodd-Frank Act for the use of AVMs by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer's principal dwelling. Section 1473(q) of the Dodd-Frank Act amended title XI to add section 1125 relating to the use of AVMs in valuing real estate collateral securing mortgage loans. Section 1125 directs the agencies to promulgate regulations to implement quality control standards regarding AVMs.

The proposed rule would require supervised mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to:

(a) Ensure a high level of confidence in the estimates produced;

(b) Protect against the manipulation of data;

(d) Require random sample testing and reviews; and

(e) Comply with applicable nondiscrimination laws.

The quality control standards in the proposed rule are applicable only to covered AVMs, which are AVMs as defined in the proposed rule. The proposed rule would require the regulated mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to the specified quality control standards whenever they use covered AVMs while engaging in certain credit decisions or covered securitization determinations.

As a result, the proposed rule creates new recordkeeping requirements. The agencies are revising their current information collections related to real estate appraisals and evaluations. The OMB control number for the OCC is 1557-0190, the Board is 7100-0250, the FDIC is 3064-0103, and the NCUA is 3133-0125. These information collections will be extended for three years, with revision. In addition to accounting for the PRA burden incurred as a result of this proposed rule, the agencies are also updating and aligning their information collections with respect to the hourly burden associated with the Guidelines.

The information collection requirements contained in this proposed rule have been submitted by the OCC, the FDIC, and the NCUA to the OMB for review and approval under section 3507(d) of the PRA

and section 1320.11 of the OMB's implementing regulations.

The Board reviewed the proposed rule under the authority delegated to the Board by OMB.

44 U.S.C. 3507(d).

5 CFR 1320.

Comments are invited on:

(a) Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;

(b) The accuracy of the estimate of the burden of the information collections, including the validity of the methodology and assumptions used;

(d) Ways to minimize the burden of the information collections on

respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

All comments will become a matter of public record. Comments on the collections of information should be sent to the address listed in the

ADDRESSES

section of this document. A copy of the comments may also be submitted to the OMB desk officer by mail to U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503, or by facsimile to 202-395-6974; or email to

oira_submission@omb.eop.gov,

Attention, Federal Banking Agency Desk Officer.

Proposed Information Collection

Title of Information Collection:

Recordkeeping and Disclosure Requirements and Provisions Associated with Real Estate Appraisals and Evaluations.

Frequency of Response:

Annual and event generated.

Affected Public:

Businesses, other for-profit institutions, and other not-for-profit institutions.

Respondents:

OCC:

National banks, Federal savings associations.

Board:

State member banks (SMBs), bank holding companies (BHCs), nonbank subsidiaries of BHCs, savings and loan holding companies (SLHCs), nondepository subsidiaries of SLHCs, Edge and agreement corporations, U.S. branches and agencies of foreign banks, and any nonbank financial company designated by FSOC to be supervised by the Board.

FDIC:

Insured state nonmember banks and state savings associations, insured state branches of foreign banks.

NCUA:

Private Sector: Not-for-profit institutions.

General Description of Report:

For federally related transactions, title XI requires regulated institutions

to obtain appraisals prepared in accordance with USPAP promulgated by the Appraisal Standards Board of the Appraisal Foundation. Generally, these standards include the methods and techniques used to estimate the market value of a property as well as the requirements for reporting such analysis and a market value conclusion in the appraisal. Regulated institutions are expected to maintain records that demonstrate that appraisals used in their real estate-related lending activities comply with these regulatory requirements.

National banks, Federal savings associations, SMBs and nonbank subsidiaries of BHCs, insured state nonmember banks and state savings associations, and insured state branches of foreign banks.

(a) Ensure a high level of confidence in the estimates produced;

(b) Protect against the manipulation of data;

(d) Require random sample testing and reviews; and

(e) Comply with applicable nondiscrimination laws.

Current Action:

The proposed rule creates new recordkeeping requirements in connection with adopting and maintaining policies, practices, procedures, and control systems. The agencies estimate that the new recordkeeping burden associated with the proposed rule would result in an implementation burden of 13.33 hours per respondent and an annual ongoing burden of 5 hours per respondent. In addition to accounting for the PRA burden incurred as a result of this proposed rule, the agencies are also updating and aligning their information collections (IC) with respect to the hourly burden associated with the Guidelines. This would result in an annual ongoing burden of 10 hours per respondent for recordkeeping and an annual ongoing burden of 5 hours per respondent for disclosure.

OCC Burden

Table 1—Summary of Estimated Annual Burden

[OMB No. 1557-0190]

Requirement

Citations

Number of

respondents

Burden hours per

respondent

Total number

of hours

annually

Recordkeeping:

Resolution stating plans for use of property

§ 7.1024(d)

Recordkeeping:

ARM loan documentation must specify indices to which changes in the interest rate will be linked

§ 34.22(a); § 160.35(b)

164

984

Recordkeeping:

Appraisals must be written and contain sufficient information and analysis to support engaging in the transaction

§ 34.44

976

1,465 responses per respondent @5 minutes per response

119,072

Recordkeeping:

Written policies (reviewed annually) for extensions of credit secured by or used to improve real estate

§ 34.62; appendix A to subpart D to part 34; § 160.101; appendix A to § 160.101

1,413

42,390

Recordkeeping:

Real estate evaluation policy to monitor OREO

§ 34.85

Recordkeeping:

New IC 1—AVM Rule—Policies and Procedures (Implementation)

Proposed § 34.222

342

13.33 hours (40 hours divided by 3 years)

4,559

Recordkeeping:

New IC 2—AVM Rule—Policies and Procedures (Ongoing)

Proposed § 34.222

342

1,710

Recordkeeping:

New IC 3—Interagency Appraisal and Evaluation Guidelines—Policies and Procedures

N/A

976

9,760

Reporting:

Procedure to be followed when seeking to use an alternative index

§ 34.22(b); § 160.35(d)(3)

249

1,494

Reporting:

Prior notification of making advances under development or improvement plan for OREO

§ 34.86

Disclosure:

Default notice to debtor at least 30 days before repossession, foreclosure, or acceleration of payments

§ 190.4(h)

Disclosure:

New IC 4—Interagency Appraisal and Evaluation Guidelines

N/A

976

4,880

Total Annual Burden Hours

185,038

Board Burden

Table 2—Summary of Estimated Annual Burden

[FR Y-30; OMB No. 7100-0250]

FR Y-30

Estimated

number of

respondents

Estimated

annual

frequency

Estimated

average

hours per

response

Estimated

annual

burden

hours

Recordkeeping

Sections 225.61-225.67 for SMBs

701

519

5 minutes

30,318

Sections 225.61-225.67 for BHCs and nonbank subsidiaries of BHCs

4,714

5 minutes

9,821

Guidelines

5,415

54,150

Policies and Procedures AVM rule (Initial setup)

2,088

13.3

27,770

Policies and Procedures AVM rule (Ongoing)

2,088

10,440

Disclosure

Guidelines

5,415

27,075

Total Annual Burden Hours

159,574

FDIC Burden

Table 3—Summary of Estimated Annual Burden

[OMB No. 3064-0103]

Information collection

(obligation to respond)

Type of burden

(frequency of

response)

Average

annual

number of

respondents

Number of

responses per

respondent

Time per response

(hours/minutes)

Annual burden

(hours)

Recordkeeping Requirements Associated with Real Estate Appraisals and Evaluations (Mandatory)

Recordkeeping (On Occasion)

3,038

250

5 minutes (0.083)

63,039

New IC 1—AVM Rule—Policies and Procedures—Implementation (Mandatory)

Recordkeeping (Annual)

1,042

13.33 hours (40 hours divided by 3 years)

13,890

New IC 2—AVM Rule—Policies and Procedures—Ongoing (Mandatory)

Recordkeeping (Annual)

1,042

5 hours

5,210

New IC 3—2010 Guidelines—Policies and Procedures—Ongoing (Mandatory)

Recordkeeping (Annual)

3,038

10 hours

30,380

New IC 4—2010 Guidelines—Disclosure—Ongoing (Mandatory)

Disclosure (Annual)

3,038

5 hours

15,190

Total Annual Burden Hours

127,709

NCUA Burden

Table 4—Summary of Estimated Annual Burden

[OMB No. 3133-0125]

Information collection

Type of burden

Average

annual

number of

respondents

Number of

responses per

respondent

Time per

response

(hours)

Annual burden

(hours)

Recordkeeping Requirements Associated with Real Estate Appraisals and Evaluations

Recordkeeping (On Occasion)

3648

618

0.0825

187,872

New IC 1—AVM Rule—Policies and Procedures—Implementation

Recordkeeping (Annual)

365

13.33

4,863

New IC 2—AVM Rule—Policies and Procedures—Ongoing

Recordkeeping (Annual)

365

1,824

New IC 3—2010 Guidelines—Policies and Procedures—Ongoing

Recordkeeping (Annual)

3648

36,480

New IC 4—2010 Guidelines—Disclosure—Ongoing

Disclosure (Annual)

3648

18,240

Total Annual Burden Hours

249,279

The CFPB, in consultation with OMB, and the FHFA do not believe that they have any supervised entities that will incur burden as a result of this proposed rule and therefore will not be making a submission to OMB. Comments are invited on this determination by the CFPB and the FHFA.

V. Regulatory Flexibility Act Analysis

A. OCC

The RFA requires an agency, in connection with a proposed rule, to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total assets of $850 million or less and trust companies with total revenue of $47.5 million or less) or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities.

The OCC has assessed the burden of the proposed rule and has determined that the costs associated with the proposed rule would be limited to reviewing the rule; ensuring that existing practices, procedures, and control systems adequately address the four statutory quality control standards; and adopting policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws. To estimate expenditures, the OCC reviewed the costs associated with the activities necessary to comply with the proposed rule. These include an estimate of the total time required to implement the proposed rule and the estimated hourly wage of bank employees who may be responsible for the tasks associated with achieving compliance with the proposed rule. The OCC used a bank employee compensation rate of $120 per hour.

To estimate wages the OCC reviewed May 2021 data for wages (by industry and occupation) from the U.S. Bureau of Labor Statistics (BLS) for credit intermediation and related activities (NAICS 5220A1). To estimate compensation costs associated with the rule, the OCC uses $119.63 per hour, which is based on the average of the 90th percentile for six occupations adjusted for inflation (6.1 percent as of Q1 2022), plus an additional 32.8 percent for benefits (based on the percent of total compensation allocated to benefits as of Q4 2021 for NAICS 522: credit intermediation and related activities).

The OCC currently supervises approximately 661 small entities.

The proposed rule would impact approximately 614 of these small entities. The OCC estimates the annual cost for small entities to comply with the proposed rule would be approximately $21,600 per bank (180 hours × $120 per hour). In general, the OCC classifies the economic impact on a small entity as significant if the total estimated impact in one year is greater than 5 percent of the small entity's total annual salaries and benefits or greater than 2.5 percent of the small entity's total non-interest expense. Based on these thresholds, the OCC estimates that the proposed rule would have a significant economic impact on 26 small entities, which is not a substantial number. In general, for RFA purposes, the OCC classifies substantial as 5 percent or more of OCC-supervised small entities. Therefore, the OCC concludes that the proposed rule would not have a significant economic impact on a substantial number of small entities.

The OCC bases its estimate of the number of small entities on the SBA's size thresholds for commercial banks and savings institutions, and trust companies, which are $850 million and $47.5 million, respectively. Consistent with the General Principles of Affiliation in 13 CFR 121.103(a), the OCC counts the assets of affiliated financial institutions when determining whether to classify an OCC-supervised institution as a small entity. The OCC uses December 31, 2022, to determine size because a “financial institution's assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.”

See

footnote 8 of the SBA's

Table of Size Standards.

B. Board

The Board is providing an initial regulatory flexibility analysis with respect to this proposal. The RFA requires an agency to consider whether the rules it proposes will have a significant economic impact on a substantial number of small entities. In connection with a proposed rule, the RFA requires an agency to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. An initial regulatory flexibility analysis must contain (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and legal basis for, the proposed rule; (3) a description of, and, where feasible, an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; (5) an identification, to the extent practicable, of all relevant Federal rules

which may duplicate, overlap with, or conflict with the proposed rule; and (6) a description of any significant alternatives to the proposed rule which accomplish its stated objectives.

The Board has considered the potential impact of the proposal on small entities in accordance with the RFA. Based on its analysis and for the reasons stated below, the proposal is not expected to have a significant economic impact on a substantial number of small entities. Nevertheless, the Board is publishing and inviting comment on this initial regulatory flexibility analysis. The Board will consider whether to conduct a final regulatory flexibility analysis after any comments received during the public comment period have been considered.

1. Reasons Why Action Is Being Considered by the Board

As discussed above, the Dodd-Frank Act amended title XI to add a new section governing the use of AVMs in mortgage lending and directing the agencies to promulgate regulations to implement specified quality control standards. The proposal serves to implement this statutory mandate.

2. The Objectives of, and Legal Basis for, the Proposal

The proposed rule would implement statutorily mandated quality control standards for the use of AVMs. The Board would adopt the proposal pursuant to section 1125 of title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

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12 U.S.C. 3354.

3. Estimate of the Number of Small Entities

The proposal would apply to Board-regulated small entities that are mortgage originators or secondary market issuers. There are approximately 472 state member banks and approximately 2,799 bank holding companies and savings and loan holding companies that qualify as small entities for purposes of the RFA.

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Under regulations issued by the SBA, a small entity includes a depository institution, bank holding company, or savings and loan holding company with total assets of $850 million or less.

See Small Business Size Standards: Adjustment of Monetary-Based Size Standards, Disadvantage Thresholds, and 8(a) Eligibility Thresholds for Inflation,

87 FR 69118 (Nov. 17, 2022). Consistent with the General Principles of Affiliation in 13 CFR 121.103, the Board counts the assets of all domestic and foreign affiliates when determining if the Board should classify a Board-supervised institution as a small entity. Small entity information for state member banks is based on Reports of Condition and Income average assets from September 30, 2022. Small entity information for bank holding companies and savings holding companies is based on average assets reflected in June 30, 2022

Parent Company Only Financial Statements for Small Holding Companies

(FR Y-9SP) data.

4. Description of the Compliance Requirements of the Proposal

The proposal would require Board-regulated small entities that are mortgage originators or secondary market issuers to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in credit decisions or covered securitization determinations adhere to specified quality control standards. These quality control standards must ensure a high level of confidence in the estimates produced, protect against the manipulation of data, avoid conflicts of interest, and require random sample testing and reviews and comply with applicable nondiscrimination laws. To the extent that small entities do not already maintain adequate policies, practices, procedures, and control systems, they could incur administrative costs to do so. It is likely that the majority of Board-regulated small entities that are mortgage originators or secondary market issuers either do not use AVMs in credit decisions or covered securitization determinations would already be in compliance with the proposed specified standards or could become compliant with relatively minor modifications to their current practices.

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For example, the Board has provided guidance to most such entities on use of AVMs.

See Interagency Appraisal and Evaluation Guidelines,

75 FR 77450, 77468 (Dec. 10, 2010).

Board staff estimates that impacted Board-supervised small entities would spend 160 hours establishing or modifying policies, practices, procedures, and control systems, at an hourly cost of $99.32.

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The estimated aggregate initial administrative costs of the proposal to Board-supervised small entities amount to $7,500,646 or $15,891.00 per bank

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and ongoing costs are expected to be small when measured by small entities' annual expenses.

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To estimate wages, the Federal Reserve reviewed May 2021 estimates for wages (by industry and occupation) from the BLS for credit intermediation and related activities (NAICS 5220A1). To estimate compensation costs associated with the rule. the Federal Reserve uses $99.32 per hour, which is based on the average of the 90th percentile for six occupations adjusted for inflation (2 percent as of Q1 2021), plus an additional 33.4 percent for benefits (based on the percent of total compensation allocated to benefits as of Q4 2020 for NAICS 522: credit intermediation and related activities). The number of hours, 160, to establish policies, procedures and control systems is an estimate based on supervisory experience.

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This analysis assumes that the majority of credit decision and securitization determinations are performed at depository institutions. Therefore, only the number of State member depository institutions that are small entities, 472, are included in the calculation of administrative costs. The impact on the majority of small bank holding companies and savings and loan holding companies is expected to be minimal.

5. Consideration of Duplicative, Overlapping, or Conflicting Rules and Significant Alternatives to the Proposal

The Board has not identified any Federal statutes or regulations that would duplicate, overlap, or conflict with the proposal. The Board is required by statute to promulgate regulations to implement the quality control standards required under section 1125 of title XI, and thus no significant alternatives are available.

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12 U.S.C. 3354.

Question 38. How frequently do bank holding companies and savings and loan holding companies that meet the definition of small entity use AVMs to engage in making credit decisions or securitization determinations?

Question 39. Is the number of hours estimated to establish policies, procedures and control systems to comply with the rule realistic for small institutions. If not, what number is hours would be more appropriate?

C. FDIC

The RFA generally requires an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities.

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However, an initial regulatory flexibility analysis is not required if the agency certifies that the proposed rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $850 million.

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Generally, the FDIC considers a significant economic impact

to be a quantified effect in excess of 5 percent of total annual salaries and benefits or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of one or more of these thresholds typically represents a significant economic impact for an FDIC-supervised institution.

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5 U.S.C. 601

et seq.

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The SBA defines a small banking organization as having $850 million or less in assets, where an organization's “assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.”

See

13 CFR 121.201 (as amended by the SBA on Nov. 17, 2022,

Small Business Size Standards: Adjustment of Monetary-Based Size Standards, Disadvantage Thresholds, and 8(a) Eligibility Thresholds for Inflation,

published at 87 FR 69118, effective December 19, 2022). In its determination, the “SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.”

See

13 CFR 121.103. Following these regulations, the FDIC uses an insured depository institution's affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the insured depository institution is “small” for the purposes of RFA.

The FDIC does not believe that the proposed rule, if adopted, would have a significant economic effect on a substantial number of small institutions. However, since some expected effects of the proposed rule are difficult to assess or accurately quantify given current information, the FDIC has included an Initial RFA Analysis in this section.

1. Why Action Is Being Considered

This action would fulfill the statutory mandate in the Dodd-Frank Act that the agencies promulgate regulations to implement quality control standards for AVMs used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling.

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The legal basis is described in item (2) below.

2. Policy Objectives of, and Legal Basis for, the Proposed Rule

Policy objectives.

The overarching policy objectives of this proposed rule are to promote credibility and integrity in the use of AVMs for the purpose of residential mortgage lending valuation, thereby supporting safe and sound banking practices as well as helping ensure compliance with applicable nondiscrimination laws. If adopted, the proposed rule would achieve these objectives by, among other things, incorporating the principles stated in existing guidance

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through requiring regulated financial institutions to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs adhere to a set of quality control standards, and by directly linking nondiscrimination law to institutions' AVM policies, practices, procedures, and controls. Further, as discussed above in Section II of the

SUPPLEMENTARY INFORMATION

, the proposal provides institutions the flexibility to tailor their quality control standards for AVMs as appropriate based on the size of the institutions and the risk and complexity of transactions for which they will use covered AVMs.

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The guidance is discussed below. It consists of FDIC guidance on appraisals and evaluation and FDIC guidance on model risk.

Legal basis.

The Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by adding a new section 1125 requiring AVMs to adhere to certain quality control standards. Section 1125 directs the FDIC, OCC, FRB, NCUA, CFPB, and FHFA in consultation with the staff of the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation, to promulgate regulations to implement quality control standards regarding covered AVMs.

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The proposed rule would require institutions that engage in certain credit decisions or securitization determinations to adopt policies, practices, procedures, and control systems designed to ensure that AVMs used in determining the value of mortgage collateral secured by a consumer's principal dwelling to adhere to quality control standards designed to: ensure a high level of confidence in the estimates produced by AVMs; protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and account for any other such factor that the agencies determine to be appropriate. The agencies exercised their statutory authority to propose a fifth quality control standard that would require institutions to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to assure compliance with applicable nondiscrimination laws.

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12 U.S.C. 3354(a) through (b).

3. Initial Regulatory Flexibility Act Analysis

A description and an estimate of the number of small institutions to which the proposed rule will apply.

As of December 31, 2022, there were 3,038 FDIC-supervised institutions, and 2,356 of them were small institutions for the purposes of the RFA.

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Of these, 2,284 FDIC-supervised small institutions reported a non-zero value for mortgagees on their books.

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Therefore, the FDIC estimates that 2,284 small institutions could be subject to the proposed rule. The FDIC lacks data on the number of small FDIC-supervised institutions that use AVMs for their mortgage originations. Subject matter experts believe that up to approximately 10 percent of all FDIC-supervised institutions currently use an AVM for mortgage origination decisions, loan modification decisions, and securitization decisions covered by the proposed rule. However, based on supervisory experience, these experts believe a smaller percentage of small FDIC-supervised institutions use AVMs because they believe AVM use is strongly positively correlated with institution size.

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Based on Call Reports data as of December 31, 2022.

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Based on Call Reports data as of December 31, 2022. The variable LNRERES represents balances for 1-4 family residential real estate loans.

Expected Effects.

The costs and benefits discussed in this section apply to any small FDIC-supervised institution that would be directly subject to the proposed rule, in particular the 2,284 FDIC-supervised small institutions estimated to be affected by the proposed rule.

Costs.

The proposed rule would, if adopted, generally reflect existing Guidelines, supervisory expectations, and statutory obligations regarding the use of AVMs by supervised institutions. As mentioned, since 2010, the FDIC has provided supervisory Guidelines on the use of AVMs by its regulated institutions.

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The FDIC believes the covered institutions

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using AVMs, including small institutions, have considered the Guidelines in developing policies, procedures, practices, and control systems, and therefore should also be consistent with the proposed rule's quality control standards 1 through 4. This belief is supported by a review of ten years of FDIC bank examination reports, which revealed that just 0.2 percent of the examinations flagged shortcomings in AVM management practices.

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This suggests that the labor hours required to implement

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