On February 23, 2022, the Consumer Financial Protection Bureau (CFPB) issued an outline of proposals and alternatives (outline) under consideration for eventual rulemaking to ensure that automated valuation models (AVMs) used to help determine home valuations are accurate, unbiased, and fair. The CFPB announced that the outline will now be reviewed by a Small Business Advisory Review Panel (SBRP) who will collect information to determine the potential impact of the proposals and alternatives under consideration on small businesses.

This CFPB action was expressly noted in its Fall 2021 regulatory agenda as an ongoing, interagency rulemaking (see Legal Update, CFPB Publishes its Fall 2021 Semiannual Regulatory Agenda) and joins other recent federal agency and congressional committee initiatives to combat broader issues of bias and discrimination in home valuations (see Legal Update, Consumer Finance Roundup for February 2022: CFPB Warns of Appraisal Discrimination).

The Dodd-Frank Act (Dodd-Frank) defines AVMs 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." Dodd-Frank, which added section 1125 to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), requires that the CFPB, the Board of Governors of the Federal Reserve System (Board), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA) (collectively, the federal agencies) develop regulations to implement quality control standards for AVMs that are designed to:

The final AVM regulations will be enforced by the FDIC, the Board, the NCUA, and the OCC with respect to insured banks, savings associations and credit unions, as well as federally regulated subsidiaries they own and control. The CFPB, the Federal Trade Commission (FTC) and State attorneys general will have enforcement authority with respect to other non-depository participants in the market.

In announcing the outline, the CFPB noted that appraisals generated by algorithmic computer models such as AVMs, as well as traditional in-person appraisals, are susceptible to bias and inaccuracy, absent appropriate safeguards. The CFPB noted that obtaining an accurate estimate of a home's worth is one of the most important steps in the mortgage process for homebuyers. Inaccurate valuations, both too high and too low, can pose risks to consumers including:

Citing recent findings published by the FHFA (Reducing Valuation Bias by Addressing Appraiser and Property Commentary), Fannie Mae (Appraising the Appraisal), and Freddie Mac (Racial and Ethnic Valuation Gaps in Home Purchase Appraisals), the CFPB stated that it is particularly concerned that without proper safeguards, flawed versions of these models could digitally redline certain neighborhoods and further embed and perpetuate historical lending, wealth, and home value disparities.

Before issuing a proposed rule on AVM quality control standards, Dodd-Frank requires the CFPB to organize a Small Business Advisory Review Panel (SBRP), to seek input from small entity representatives (SERs) that are likely to be subject to the AVM rulemaking under consideration.

At an SBRP outreach meeting, SERs will provide the panel with advice and recommendations on the potential impacts of the regulatory proposals and alternatives on small entities. Within 60 days of convening the SBRP, the panel is required to complete a report on the input received from the SERs.

SER feedback is due April 8, 2022 in order for the feedback to be considered and incorporated into the SBRP report. Other stakeholder input is due by May 13, 2022.

To comply with the required SBRP process, the outline seeks input from SERs on questions regarding various proposals and alternatives under consideration for the AVM rulemaking, including:

The CFPB has also identified certain types of small entities that may be subject to the AVM rule options under consideration and regulated by the CFPB. Specifically, the CFPB has identified five categories of non-depository institutions whose use of AVMs may be covered under the revenue criteria established by the Small Business Administration:

For additional information, see Practice Note, Summary of the Dodd-Frank Act: Mortgage Reform and Anti-Predatory Lending.