CFPB SBREFA Group Outline on AVM Rulemaking Addresses Potential for Algorithmic Bias in Home Valuations | Ballard Spahr LLP

The CFPB recently published an overview titled Small Business Advisory Review Panel for Automated Valuation Model (AVM) Rulemaking. While the plan discusses upcoming joint regulation to implement quality control requirements for AVMs, the CFPB specifically focuses on the potential of AVMs to pose fair lending risks for buyers and owners. . The CFPB released the draft pursuant to a requirement under the Small Business Regulatory Enforcement Fairness Act that it seek advice and recommendations from small entities on the potential impacts on small entities of the proposals under consideration and comments on regulatory alternatives to minimize these impacts.

The Dodd-Frank Act amended the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to provide joint regulation to require AVMs to meet quality control standards designed to: (1) ensure a high level of confidence in estimates produced by automated valuation models, (2) protect against data manipulation, (3) seek to avoid conflicts of interest, (4) require random sample testing and examination, and ( 5) take into account any other factors that the agencies deem to be appropriate. Other than the CFPB, other agencies required to participate in rulemaking are the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve Board, and the National Credit Union Administration. The CFPB’s version of the common rule will apply to non-custodial institutions.

In broad outline, the CFPB indicates that it is considering proposing, in accordance with the fifth quality control factor mentioned above, a requirement that institutions establish policies, practices, procedures and monitoring to ensure that their AVMs comply with applicable non-discrimination laws. In announcing the broad outline, the CFPB said overvaluing homes can jeopardize family wealth, create resale problems and lead to higher foreclosure rates. The CFPB also stated that “[l]Low appraisals can jeopardize home sales and prevent homeowners from refinancing, making it harder to build assets or make repairs. Systematically low valuations induced by biased appraisers can exacerbate existing disparities in the housing market. Focusing on AVMs, the CFPB said “[c]Computer models and algorithms are additional tools for mortgage lenders and appraisers to improve appraisal accuracy. However, automated valuation models can present fair lending risks for buyers and homeowners. The CFPB is particularly concerned that without proper safeguards, flawed versions of these models could digitally delineate certain neighborhoods and further entrench and perpetuate historic disparities in lending, wealth and home values.

Regarding the adoption of a specific quality control factor addressing discrimination issues, the CFPB is interested in whether it should adopt an approach that would give covered entities the flexibility to design policies, practices, procedures and fair loan control systems appropriate to their business. model, or take an approach that would be more prescriptive and include specific requirements. The CFPB is also seeking comments on whether the adoption of a specific non-discrimination factor is not necessary, as compliance with applicable non-discrimination laws with respect to AVMs is already encompassed in three of the first four statutory quality control factors mentioned above that require a high level of confidence in the estimates produced by AVMs, protection against data manipulation, and random sample testing and examination.

The CFPB must receive written comments from the Small Entity Representatives by April 8, 2022 in order for the comments to be considered and incorporated into the Small Business Review Panel report. The CFPB asks other stakeholders wishing to provide written comments to do so no later than May 13, 2022.

[View source.]