[Federal Register Volume 89, Number 152 (Wednesday, August 7, 2024)]
[Rules and Regulations]
[Pages 64538-64580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-16197]



[[Page 64537]]

Vol. 89

Wednesday,

No. 152

August 7, 2024

Part II





Department of the Treasury





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Office of the Comptroller of the Currency





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Federal Reserve System





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Federal Deposit Insurance Corporation





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National Credit Union Administration





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Consumer Financial Protection Bureau





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Federal Housing Finance Agency





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12 CFR Parts 34, 225, 323, et al.





Quality Control Standards for Automated Valuation Models; Final Rule

  Federal Register / Vol. 89 , No. 152 / Wednesday, August 7, 2024 / 
Rules and Regulations  

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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: Final rule.

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SUMMARY: The OCC, Board, FDIC, NCUA, CFPB, and FHFA (collectively, the 
agencies) are adopting a final 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 final rule, institutions that engage in 
certain credit decisions or securitization determinations must 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: This final rule is effective October 1, 2025.

FOR FURTHER INFORMATION CONTACT: 
    OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 
649-7152; Mitchell Plave, Special Counsel, Joanne Phillips, Counsel, or 
Marta Stewart-Bates, Counsel, Chief Counsel's Office, (202) 649-5490; 
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: Andrew Willis, Manager, Policy Development Section, (202) 
912-4323; Matthew McQueeney, Senior Financial Institution Policy 
Analyst, (202) 452-2942; 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, Senior Counsel, (202) 452-3274, David Imhoff, 
Senior 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; Navid K. Choudhury, 
Counsel, Legal Division, (202) 898-6526; Mark Mellon, Counsel, Legal 
Division, (202) 898-3884; Lauren A. Whitaker, Counsel, Legal Division, 
(202) 898-3872; or Stuart Hoff, Senior Policy Analyst, Division of 
Depositor and Consumer Protection, (202) 898-3852; or 
[email protected], 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; 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: George Karithanom, Regulatory Implementation & Guidance 
Program Analyst, Office of Regulations at (202) 435-7700 or at https://reginquiries.consumerfinance.gov/. If you require this document in an 
alternative electronic format, please contact 
[email protected].
    FHFA: Julie Giesbrecht, Senior Policy Analyst, Office of Housing 
and Regulatory Policy, (202) 557-9866, [email protected]; or 
Karen Heidel, Assistant General Counsel, Office of General Counsel, 
(202) 738-7753, [email protected]. 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 
(FIRREA or title XI) \1\ to add a new section 1125 relating to quality 
control standards for AVMs used in valuing real estate collateral 
securing mortgage loans (section 1125).\2\ In June 2023, the agencies 
invited comment on a notice of proposed rulemaking (proposal or 
proposed rule) to implement these quality control standards.\3\ The 
agencies received approximately 50 comments concerning the proposed 
rule.
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    \1\ 12 U.S.C. 3331 et seq.
    \2\ Public Law 111-203, 124 Stat. 1376, 2198 (2010), codified at 
12 U.S.C. 3354.
    \3\ 88 FR 40638 (June 21, 2023).
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    The term ``automated valuation model'' is commonly used to describe 
computer programs that estimate a property's value and are used for a 
variety of purposes, including loan underwriting and portfolio 
monitoring.\4\ Section 1125 defines an AVM as ``any computerized model 
used by mortgage

[[Page 64539]]

originators and secondary market issuers to determine the collateral 
worth of a mortgage secured by a consumer's principal dwelling.'' \5\
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    \4\ See Interagency Appraisal and Evaluation Guidelines, 75 FR 
77450, 77468 (Dec. 10, 2010).
    \5\ 12 U.S.C. 3354(d). This preamble uses the terms ``worth'' 
and ``value'' interchangeably when discussing mortgage collateral.
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    Section 1125 directs the agencies to promulgate regulations to 
implement quality control standards regarding AVMs.\6\ 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 automated valuation models; (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.'' \7\ As required by section 1125, the agencies 
consulted with the staff of the Appraisal Subcommittee and the 
Appraisal Standards Board of the Appraisal Foundation as part of 
promulgating this rule.\8\
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    \6\ 12 U.S.C. 3354(b).
    \7\ 12 U.S.C. 3354(a).
    \8\ See 12 U.S.C. 3354(b).
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    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 Government Sponsored Enterprises or 
GSEs) 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 shorten turnaround times in 
the performance of property valuations, it is important that 
institutions using such tools take appropriate steps, as required by 
section 1125, to ensure the credibility and integrity of the valuations 
produced by AVMs.

Existing Guidance Relating to the Use of AVMs and Enforcement of the 
Final Rule

    Since 2010, the OCC, Board, FDIC, and NCUA have provided 
supervisory guidance on the use of AVMs by the institutions they 
regulate in Appendix B to the Interagency Appraisal and Evaluation 
Guidelines (Appraisal Guidelines).\9\ The Appraisal 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 Appraisal 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.\10\
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    \9\ See supra note 4. The Appraisal Guidelines were adopted 
after notice and comment.
    \10\ Id.
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    In addition to Appendix B of the Appraisal Guidelines, the OCC, 
Board, and FDIC have issued guidance on model risk management practices 
(Model Risk Management Guidance) that provides comprehensive 
supervisory guidance on validation and testing of models.\11\ While the 
NCUA is not a party to the Model Risk Management Guidance, the NCUA 
monitors the model risk management efforts of federally insured credit 
unions through its supervisory approach by confirming that the 
governance and controls over AVMs are appropriate based on the size and 
complexity of the transactions, the risk the transactions pose to the 
credit union, and the capabilities and resources of the credit union.
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    \11\ See Comptroller's Handbook, Model Risk Management, OCC 
Bulletin 2021-39 (Aug. 18, 2021); Supervisory Guidance on Model Risk 
Management, OCC Bulletin 2011-12 (Apr. 4, 2011); Guidance on Model 
Risk Management, Federal Reserve Board SR Letter 11-7 (Apr. 4, 
2011); and Adoption of Supervisory Guidance on Model Risk 
Management, FDIC FIL-22-2017 (June 7, 2017).
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    The CFPB and FHFA are also not parties to the Appraisal 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.\12\
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    \12\ See Supplement Guidance to Advisory Bulletin 2013-07--Model 
Risk Management Guidance 2013-07, FHFA Advisory Bulletin 2022-03 
(Dec. 21, 2022) and Model Risk Management Guidance, FHFA Advisory 
Bulletin 2013-07 (Nov. 20, 2013).
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    The OCC, Board, FDIC, NCUA, CFPB, and FHFA 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.\13\ For example, under the guidance issued by the Federal 
banking agencies, regardless of whether activities are performed 
internally or using a third party, banking organizations are required 
to operate in a safe and sound manner and in compliance with applicable 
laws and regulations. A banking organization's use of third parties 
does not diminish its responsibility to meet these requirements to the 
same extent as if its activities were performed by the banking 
organization in-house. To operate in a safe and sound manner, a banking 
organization establishes risk management practices to effectively 
manage the risks arising from its activities, including from third-
party relationships. These guidance documents address the 
characteristics, governance, and operational effectiveness of a banking 
organization's risk management program for outsourced activities.
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    \13\ See Third-Party Relationships: Interagency Guidance on Risk 
Management, OCC Bulletin 2023-17 (June 6, 2023); Interagency 
Guidance on Third-Party Relationships: Risk Management, Federal 
Reserve Board SR Letter 23-4 (June 7, 2023); Interagency Guidance on 
Third-Party Relationships: Risk Management, FDIC FIL 29-2023 (June 
6, 2023); Guidance on Managing Outsourcing Risk, Federal Reserve 
Board SR Letter 13-9 (Dec. 3, 2013); Evaluating Third Party 
Relationships, NCUA Supervisory Letter 07-01 (Oct. 2007); Due 
Diligence Over Third Party Service Providers, NCUA Letter 01-CU-20 
(Nov. 2001); Oversight of Third-Party Provider Relationships, FHFA 
Advisory Bulletin 2018-08 (Sept. 28, 2018); CFPB, Compliance 
Bulletin and Policy Guidance; 2016-02, Service Providers (Oct. 31, 
2016); and CFPB, Examination Procedures--Compliance Management 
Review (Aug. 2017). See also, Third-Party Relationships: A Guide for 
Community Banks, OCC Bulletin 2024-11 (May 3, 2024); Third-Party 
Risk Management: A Guide for Community Banks, Federal Reserve Board 
SR Letter 24-2 (May 7, 2024); Third-Party Risk Management, A Guide 
for Community Banks, FDIC FIL-29-2024 (May 3, 2024).
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    Institutions that are not regulated by the agency or agencies 
providing the guidance may still look to the guidance for assistance 
with compliance. The OCC, FDIC, Federal Reserve, NCUA, CFPB, FHFA, FTC, 
and State attorneys general each have an important role in enforcing 
this rule as to their respective regulated entities or covered market 
participants.\14\
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    \14\ See 12 U.S.C. 3354(c); 12 U.S.C. 4631(a)(1).
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II. Brief Summary of the Proposed Rule, Comments, and the Final Rule

    The proposed rule would have required 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 (as defined below) 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) avoid conflicts of interest; (4) require 
random sample testing and reviews; and (5) comply with applicable 
nondiscrimination laws. The proposed rule would not have set specific 
requirements for how institutions are to structure these policies, 
practices, procedures, and

[[Page 64540]]

control systems. The proposed rule stated that this approach would 
provide institutions with the flexibility to set quality controls for 
AVMs as appropriate based on the size, complexity, and risk profile of 
the institution and the transactions for which they would use AVMs 
covered by the proposed rule. The proposed rule further stated that, as 
modeling technology continues to evolve, this flexible approach would 
allow institutions to refine their policies, practices, procedures, and 
control systems as appropriate and that the agencies' existing guidance 
related to AVMs would remain applicable.
    The agencies received approximately 50 comments on the proposed 
rule to implement the quality control standards for AVMs in title XI, 
including comments from financial institutions, financial institution 
trade associations, real estate trade associations, mortgage insurance 
trade associations, appraiser trade associations, nonprofit advocacy 
organizations, AVM developers, and appraisers. Most commenters 
recognized that quality control standards for AVMs are required by 
title XI and are important to the safety and soundness of mortgage 
lending and securitizations involving mortgages. Most commenters also 
expressed support for the flexibility in the proposed rule for 
institutions to set quality controls for AVMs as appropriate based on 
the size, complexity, and risk profile of the institution and the 
transactions for which they would use AVMs covered by the proposed 
rule.
    While most commenters recognized the importance of ensuring that 
AVMs used by mortgage originators and secondary market issuers do not 
violate fair lending laws, some commenters expressed concern about how 
to implement the proposed quality control standards, particularly the 
fifth quality control factor on nondiscrimination, and suggested that 
additional guidance from the agencies may be needed in the future. Some 
commenters suggested that the rule should apply to AVM developers and 
vendors, rather than lending institutions, given that mortgage 
originators have no control over how AVMs are created. A number of 
commenters recommended that the agencies work with the private sector 
to develop a standard setting organization (SSO) for AVMs and an 
independent third-party entity responsible for testing AVMs for 
compliance with the proposed quality control standards.
    The agencies are finalizing the proposed rule largely as proposed. 
The agencies are also making clarifying edits to the definition of the 
term ``mortgage originator,'' adding a definition of ``person'' in 
response to comments received, and inserting the words ``seek to'' into 
the third quality control factor in order to match the language of 
section 1125, as discussed in the preamble to the proposed rule. The 
flexible approach to implementing the quality control standards 
provided by the final rule will allow the implementation of the 
standards to evolve along with changes in AVM technology and minimize 
compliance costs. Regarding the fifth quality control factor, the 
agencies note that existing nondiscrimination laws apply to appraisals 
and AVMs and that institutions have a preexisting obligation to comply 
with all Federal laws, including Federal nondiscrimination laws. 
Institutions will have flexibility to adopt approaches to implement 
this quality control factor in ways that reflect the risks and 
complexities of their individual business models. In addition, there is 
existing guidance on fair lending considerations to inform compliance 
with the nondiscrimination factor.\15\
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    \15\ See, e.g., Interagency Task Force on Fair Lending, Policy 
Statement on Discrimination in Lending, 59 FR 18266 (Apr. 15, 1994), 
available at https://www.govinfo.gov/content/pkg/FR-1994-04-15/html/94-9214.htm; Interagency Fair Lending Examination Procedures (Aug. 
2009), available at https://www.ffiec.gov/PDF/fairlend.pdf; CFPB, 
Examination Procedures--ECOA (Oct. 2015), available at https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf; Federal Housing Finance Agency, Policy Statement 
on Fair Lending, 86 FR 36199 (July 9, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-07-09/pdf/2021-14438.pdf.
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    Regarding commenters' suggestion to apply the rule to AVM 
developers and vendors, the agencies note that, while section 1125 
applies to mortgage originators and secondary market issuers, financial 
institutions should be able to work with AVM developers and vendors to 
assist them with their compliance obligations under the rule, as they 
do with other third-party vendors in order to comply with relevant 
regulatory requirements. The agencies recognize that one or more SSOs 
and third-party AVM testing entities could be beneficial to effective 
compliance with the AVM rule. As long as financial institutions meet 
the obligations provided in the final rule, they are free to work with 
third parties to assist them with their compliance obligations.

III. Discussion of the Proposed Rule, Comments Received, and the Final 
Rule

    The following is a detailed discussion of the proposed rule, the 
comments the agencies received, the responses to the comments, and the 
final rule.

A. Scope of the Rule

1. AVMs Used in Connection With Making Credit Decisions
    The proposed rule would have applied to AVMs used in connection 
with making a credit decision. The proposed rule would have defined 
``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 proposed rule would have expressly excluded 
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 have been a credit decision 
under the proposed rule because the lending institution has already 
made the credit decision. The scope of the proposed rule included, for 
example, decisions regarding originating a mortgage; modifying the 
terms of an existing loan; and renewing, increasing, or terminating a 
home equity line of credit (HELOC). The proposed rule used the term 
``credit decision'' to help clarify that the proposed rule would have 
covered these various types of decisions.
    The proposal to limit the scope of the rule to credit decisions 
(or, as discussed below, covered securitization determinations) 
reflected 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.'' \16\ The proposed rule distinguished 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 have covered a computerized 
tax assessment model used to verify the valuation made during the 
origination process).\17\ The proposed rule focused on those aspects of 
mortgage and securitization transactions where the value of collateral 
is typically determined.
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    \16\ 12 U.S.C. 3354(d) (emphasis added).
    \17\ 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 
43.34(a)(8) (OCC); 12 CFR 225.63(a)(8) (Board); 12 CFR 323.3(a)(8) 
(FDIC); 12 CFR 722.3(a)(5) (NCUA).
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    Most commenters expressed support for limiting the scope of the 
rule to AVMs used in connection with making credit decisions (or, as 
discussed below,

[[Page 64541]]

covered securitization determinations) and excluding use of AVMs for 
portfolio monitoring, which does not involve credit decision-making. 
The commenters also stated that excluding portfolio monitoring would 
reduce some burdens and costs that may otherwise be passed on to 
borrowers. One commenter stated that these exclusions would permit 
lenders more certainty in using AVMs for purposes such as portfolio 
monitoring.
    Some commenters argued that the rule should apply to the use of 
AVMs to value a consumer's principal dwelling for any purpose. For 
example, one commenter argued that the statutory definition of 
``automated valuation model'' at section 1125 does not limit 
applicability only to AVMs used during underwriting.
    The final rule limits the scope of the rule to credit decisions 
and, as discussed below, covered securitization determinations. This 
scope is consistent with the statutory language in section 1125, which 
focuses on determinations of value. The focus on determinations of 
value made in connection with credit decisions or covered 
securitization determinations, and the exclusion of AVM use for 
portfolio monitoring, will also reduce the compliance costs associated 
with a broader application of the quality control standards.
    Loan modifications and other changes to existing loans. The 
proposed rule would have defined a credit decision broadly to include, 
among other things, a decision regarding whether and under what 
circumstances to modify or to make other changes to a mortgage. As a 
result, the proposed rule would have covered AVMs used to determine the 
value of an existing mortgage secured by a consumer's principal 
dwelling in conjunction with a decision to modify or change the terms 
of that mortgage when such decision is made by a ``mortgage 
originator,'' ``secondary market issuer,'' or servicer working on 
behalf of a mortgage originator or secondary market issuer. For 
example, the proposed rule would have covered AVMs used by a ``mortgage 
originator'' or ``secondary market issuer,'' or servicer working on 
behalf of a mortgage originator or secondary market issuer to deny a 
loan modification or to confirm the value of collateral in response to 
a request to change or release collateral.
    The agencies received several comments on this topic. Two 
commenters asked the agencies to clarify how the rule would apply to 
certain credit decisions. The first of these commenters expressed 
support for treating a decision to modify a loan as a credit decision 
because, like an initial credit decision, when a mortgage originator 
assesses collateral value for a loan modification, the mortgage 
originator is assessing whether the value of the collateral is 
sufficient to support the decision to engage in the transaction. 
However, the commenter asked the agencies to strike the reference to 
``other changes'' from the definition of ``credit decision.'' The 
commenter believed that this change would reduce ambiguity regarding 
the type of conduct covered by the definition of credit decision. The 
other commenter suggested that the agencies make clear that assumptions 
are a credit event and would fall under the rule. This commenter added 
that the use of assumptions may rise in the future, so the market would 
benefit from that clarity.
    As discussed further below, the agencies have considered these two 
comments, but do not find it necessary to provide any additional 
clarification regarding how the rule applies to credit decisions. 
Section 1125 of FIRREA 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.'' \18\ As explained in the proposed rule, the agencies 
interpret the scope of section 1125 as covering the use of an AVM to 
make a credit decision, but not the use of an AVM to monitor, to 
verify, or to validate a prior determination of value. The proposed 
rule further provided that a ``credit decision'' is ``a decision 
regarding whether and under what terms to originate, modify, terminate, 
or make other changes to a mortgage, including a decision on whether to 
extend new or additional credit or change the credit limit on a line of 
credit.'' Striking the reference to ``other changes'' from the 
definition of credit decision, as suggested by the first commenter, 
would be inconsistent with the agencies' interpretation of the scope of 
section 1125 because it would narrow the scope of the rule to apply 
only to origination, modification, and termination decisions. The 
agencies also find it unnecessary to clarify that assumptions are 
credit events that fall under the rule, as suggested by the second 
commenter, because the proposed definition of ``credit decision'' is 
broad enough to cover assumptions.
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    \18\ 12 U.S.C. 3354(d) (emphasis added).
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    Several other commenters disagreed with applying the rule to AVMs 
used to modify or change the terms of an existing loan. One of these 
commenters suggested that covering loan modifications would present 
operational challenges and is unsupported by an articulated benefit to 
consumers. Another commenter stated that covering modifications could 
discourage the use of AVMs and push lenders to use appraisals for 
modifications, which are more costly and time-consuming. Two other 
commenters expressed concern that covering loan modifications could 
increase costs for borrowers already facing financial distress. One of 
these commenters further noted that covering loan modifications also 
could make the loss mitigation process take longer. Finally, another 
commenter stated that the proposal to include loan modifications should 
have minimal, if any, impact on the market because the majority of loan 
modifications do not require a valuation of the property. However, the 
commenter recommended that the rule align with the traditional practice 
described in the Truth in lending Act (TILA) of distinguishing the role 
of servicers from that of originators in cases where there is no new 
extension of credit. The commenter argued that, unless this rule's 
definition of credit decision excludes loan modifications that are not 
a new extension of credit, the regulatory framework for this rule could 
be misapplied to other regulations.
    The agencies have considered these comments and are adopting the 
final rule as proposed. AVMs are often used to determine the value of 
collateral in connection with loan modifications and other changes to 
mortgages. Further, the agencies continue to view quality control 
standards for AVMs used to make credit decisions relating to loan 
modifications and other changes to mortgages as important both to 
safety and soundness and to consumer protection. As discussed below, 
many institutions have already set up quality control systems for AVMs 
and have third-party risk management programs in place. For those 
institutions, existing quality control systems and third-party risk 
management programs should mitigate the burden of implementing 
additional quality control standards for AVMs used to modify or to 
change the terms of existing loans as well as any related costs passed 
on to consumers. In addition, the flexibility the rule provides to 
institutions to design policies, practices, procedures, and control 
systems to implement the quality control standards should reduce the 
burden of implementing additional quality control standards for AVMs 
used to modify or to change the terms of existing loans. This 
flexibility should

[[Page 64542]]

reduce any related costs passed on to consumers.
    Finally, the agencies considered the comment recommending that the 
rule align with the traditional practice described in TILA of 
distinguishing the role of servicers from that of mortgage originators 
in cases where there is no new extension of credit. However, the 
agencies decline to adopt changes to the proposed rule based on the 
comment. Although, as discussed in detail in part III.C.7 of this 
SUPPLEMENTARY INFORMATION, the rule defines mortgage originator by 
adopting the full text of the TILA definition of the term with 
technical revisions, this rulemaking is being conducted pursuant to 
FIRREA and it is consistent with FIRREA for valuation requirements to 
apply to both new and existing extensions of credit. For example, under 
the appraisal regulations of the Federal banking agencies and NCUA, 
loan modifications that are real estate-related financial transactions 
must, in general, comply with appraisal requirements or obtain an 
evaluation (for entities regulated by the banking agencies) or a 
written estimate of market value (for credit unions) that is consistent 
with safe and sound banking practices. Therefore, it is consistent with 
the regulatory framework of FIRREA for the agencies to apply AVM 
requirements to transactions involving both new and existing credit.
    Home equity line of credit (HELOC) reductions or suspensions. The 
proposed rule would have covered AVMs used in deciding whether or to 
what extent to reduce or suspend a HELOC. In the proposal, the agencies 
considered 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.
    The agencies received several comments on this topic. Two 
commenters generally supported applying the rule to HELOCs, while two 
commenters opposed this application. These commenters expressed the 
concern that the burden and expense of compliance would outweigh the 
consumer protection and safety and soundness benefits. Another 
commenter requested further clarification regarding how the rule would 
apply when AVMs are used to make credit decisions relating to HELOC 
reductions and suspensions.
    The agencies have considered these comments and are adopting the 
final rule as proposed. The agencies have determined that AVMs used to 
make credit decisions relating to HELOC reductions and suspensions are 
important both to safety and soundness and to consumer protection. As 
discussed below, many institutions have already set up quality control 
systems for AVMs and have third-party risk management programs in 
place. These existing quality control systems and third-party risk 
management programs should mitigate the burden and expense of 
implementing additional quality control standards for AVMs used to make 
credit decisions relating to HELOC reductions and suspensions as well 
as any related costs passed on to consumers. In addition, the 
flexibility provided to institutions under the final rule to design 
policies, practices, procedures, and control systems to implement the 
quality control standards should also reduce both the burden of 
implementing additional quality controls standards for AVMs used to 
make credit decisions relating to HELOC reductions and suspensions and 
any related costs passed on to consumers.
2. AVMs Used by Secondary Market Issuers
    The language of section 1125 includes not only mortgage 
originators, but also secondary market issuers.\19\ For this reason, 
the proposed rule would have extended to certain securitization 
activities, defined as ``covered securitization determinations.''
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 3354(d).
---------------------------------------------------------------------------

    Appraisal waivers by secondary market issuers. The proposed rule 
defined ``covered securitization determination'' to include 
determinations regarding, among other things, whether to waive an 
appraisal requirement for a mortgage origination (appraisal waiver 
decisions).\20\ Under the proposed rule, a secondary market issuer that 
uses AVMs in connection with making appraisal waiver decisions would 
have been 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 have needed to ensure 
that the AVM used to support the waiver meets the rule's quality 
control standards. This treatment is because the secondary market 
issuer would be using the AVM to make the appraisal waiver decision in 
this context, not the mortgage originator. The proposal noted that when 
mortgage originators submit loans to GSEs for appraisal waiver 
decisions, the mortgage originators offer an estimated value of the 
property, but do not make a determination of value.
---------------------------------------------------------------------------

    \20\ 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 
[verbar] Fannie Mae.
---------------------------------------------------------------------------

    Both GSEs have appraisal waiver programs and are the predominant 
issuers of appraisal waivers in the current mortgage market.\21\ To 
determine whether a loan qualifies for an appraisal waiver under any 
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 this information through 
its internal model(s), 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.\22\
---------------------------------------------------------------------------

    \21\ 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.
    \22\ Id.
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    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 have required 
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, the mortgage originator in this context 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. 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.
    Most commenters agreed that the GSEs make the valuation decision in 
connection with appraisal waivers and should be covered by the quality 
control

[[Page 64543]]

standards in the appraisal waiver context. One commenter requested 
clarification in cases where AVMs are used to determine eligibility for 
appraisal waivers and recommended that the proposed regulatory text 
align with the description in the preamble. Another commenter supported 
an exception for AVMs used to determine whether a loan may be eligible 
for an appraisal waiver. Another commenter stated that the Equal Credit 
Opportunity Act (ECOA) requires creditors to provide consumers with a 
copy of any estimate of the value of a dwelling developed in connection 
with a creditor's decision to provide credit, including those values 
developed pursuant to a policy of a GSE or by an AVM, a broker price 
opinion, or other methodology or mechanism. The commenter further 
stated that the GSEs should be obligated to provide a consumer with any 
valuation on which the waiver is based.
    Many commenters stated that it would be very difficult for lenders 
to conduct quality control of the GSEs' AVMs for reasons including that 
the GSEs have treated their data, analytics, and testing as proprietary 
and have not shared information with the industry. Commenters also 
suggested that requiring lenders to conduct quality control of 
secondary market issuers' AVMs would be redundant because the secondary 
market issuers are already covered by the proposed rule and are better 
positioned to implement quality controls on their AVMs.
    The agencies have determined that secondary market issuers are best 
positioned to conduct quality control for the AVMs they use in 
appraisal waiver decisions. This is because the secondary market issuer 
would be using the AVM to make the appraisal waiver decision in this 
context, not the mortgage originator. For this reason and after 
considering the comments, the final rule adopts the proposal to require 
the secondary market issuers, rather than mortgage originators, to 
implement the final rule for such AVM use.
    Regarding providing to consumers copies of valuations used in 
connection with appraisal waiver decisions, the comment is on a matter 
outside the scope of this rulemaking. The agencies also note that the 
CFPB's rules in Regulation B implementing ECOA generally require 
creditors to provide applicants for first-lien loans on a dwelling with 
copies of written valuations developed in connection with an 
application.\23\ ``While some AVMs may use proprietary methods, the 
[2013 ECOA Valuations Final Rule] does not require the disclosure of 
these methods per se; rather, the [2013 ECOA Valuations Final Rule] 
requires disclosure of the written valuations developed by the AVMs 
which are provided to the creditors.'' \24\
---------------------------------------------------------------------------

    \23\ See 12 CFR 1002.14; 78 FR 7216 (Jan. 31, 2013) (2013 ECOA 
Valuations Final Rule).
    \24\ 78 FR at 7239. The 2013 ECOA Valuations Final Rule ``does 
not apply to persons who are not creditors within the meaning of 
Regulation B, Sec.  1002.2(l), and thus does not impose any 
obligation on a creditor to compel a third-party to provide a copy 
of such documentation to the applicant.'' Id. at 7239 n.89.
---------------------------------------------------------------------------

    Other uses by secondary market issuers. As noted earlier, the 
language of section 1125 includes not only mortgage originators, but 
also secondary market issuers. Given that section 1125 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 have covered 
AVMs used in securitization determinations. In the proposal, the 
agencies stated that covering AVMs used in securitizations could 
potentially protect the safety and soundness of institutions and could 
protect consumers and investors by reducing the risk that secondary 
market issuers would misvalue homes. For example, misvaluation by 
secondary market issuers could, in turn, incentivize mortgage 
originators to originate misvalued loans when making lending 
decisions.\25\ Such misvaluations could pose a risk of insufficient 
collateral for financial institutions and secondary market participants 
and could limit consumers' refinancing and selling opportunities.\26\
---------------------------------------------------------------------------

    \25\ 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.
    \26\ See, e.g., Appraisals for Higher-Priced Mortgage Loans, 78 
FR 10367, 10418 (Feb. 13, 2013).
---------------------------------------------------------------------------

    The proposed rule would have covered AVM usage when a secondary 
market issuer uses an AVM as part of a new or revised value 
determination in connection with a covered securitization 
determination. For example, the GSEs currently use the origination 
appraised value or the estimated value in appraisal waivers when 
issuing mortgage-backed securities (MBS). 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 have been 
considered covered securitization determinations because there are new 
or revised value determinations. As discussed below, the proposed rule 
would have distinguished 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 have been covered by the proposed rule.
    Most commenters supported the proposal to cover AVMs used by 
secondary market issuers in connection with covered securitization 
determinations. One commenter expressed general support for covering 
securitizations, stating that transparency in how AVMs are tested, 
measured, and applied would allow for better valuations and more 
informed risk decision-making. Another commenter expressed support for 
consistent requirements across all activities by institutions, 
including secondary market issuers, stating that covering 
securitizations would alleviate the risk of an inconsistent approach to 
the development of quality control standards. Another commenter stated 
that it is important for the GSEs to be covered by the proposed rule 
because the GSEs (1) finance more than half of all purchase 
originations, and (2) the internalization of valuation risk by the GSEs 
poses a systemic threat to the housing finance system that could 
undermine investor confidence if questioned, especially if they exit 
conservatorship without an explicit Federal backstop.
    One commenter echoed this point, stating that it is important to 
cover secondary market issuers because the issuers significantly 
influence how mortgage originators perform their underwriting. 
Similarly, another commenter stated it is important to cover the GSEs 
because they are two of the largest users and managers of AVMs in the 
market. The commenter stated further that there is additional potential 
for increased taxpayer risk if an AVM

[[Page 64544]]

produces a property valuation that misprices or eliminates loan-level 
private mortgage insurance credit protection.
    One commenter also suggested that, because AVMs are developed using 
data and models that reflect past and ongoing discrimination, the 
agencies should seek broad coverage of AVMs, including those used by 
the GSEs. Another commenter suggested that covering AVMs used by 
secondary market issuers also would promote financial stability. A 
number of commenters stated that Federal governmental support for the 
GSEs and the Government National Mortgage Association provides an 
additional reason to apply quality control standards to AVMs used by 
these entities.
    As stated in the proposal, covering secondary market issuers is 
consistent with the plain language of the statute and provides quality 
control for AVMs used in an expansive and crucial segment of the 
mortgage lending market. For these reasons and after considering the 
comments, the agencies are adopting the proposal to cover secondary 
market issuers' use of AVMs in covered securitization determinations.
3. AVM Uses Not Covered by the Rule
    Use of AVMs by appraisers. The proposed rule would not have covered 
the use of an AVM by a certified or licensed appraiser in developing an 
appraisal.\27\ This approach reflects the fact that, while appraisers 
may use AVMs in preparing appraisals, they must achieve credible 
results in preparing an appraisal under USPAP and its interpreting 
opinions.\28\ 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 proposal stated 
that it also 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 whom they work.
---------------------------------------------------------------------------

    \27\ 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 
proposed to codify the AVM requirements in Regulation Z, 12 CFR part 
1026, and to cross-reference Regulation Z Sec.  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 the Uniform Standards of 
Professional Appraisal Practice (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.
    \28\ 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 Advisory Opinion 37 (AO-
37) on Computer Assisted Valuation Tools.
---------------------------------------------------------------------------

    Under the appraisal regulations issued by the OCC, Board, FDIC, and 
NCUA, lenders regulated by those agencies are required to obtain 
``evaluations,'' or ``written estimates of market value'' under the 
NCUA's regulations, for certain transactions that fall within 
exceptions specified in the appraisal regulations.\29\ Such evaluations 
must be consistent with safe and sound banking practices.
---------------------------------------------------------------------------

    \29\ 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) (requiring that written 
estimates of market value be performed for transactions not 
requiring an appraisal and providing differing requirements for such 
estimates). See also Appraisal Guidelines, 75 FR at 77460 
(discussing transactions that require evaluations under the 
appraisal rules and providing recommendations for evaluation 
development).
---------------------------------------------------------------------------

    The proposed rule would have covered AVMs used in the process of 
preparing evaluations. This distinction between application of the rule 
to appraisals versus evaluations reflects the fact that USPAP standards 
and appraiser credentialing are not required for individuals who 
prepare evaluations. The proposed rule's coverage of AVMs used in the 
process of preparing evaluations also reflected the more extensive use 
of, and reliance on, AVMs within the evaluation function.
    Most commenters agreed with the proposed exclusion of appraisals 
performed by licensed or certified appraisers from the scope of the 
rule. The commenters noted that appraisers are already subject to 
quality control standards and that exempting appraisers would avoid 
duplicative and burdensome regulation in an area where banks are 
already encountering shortages of appraisers. One commenter stated that 
the proposal's excluded uses do not involve credit decision making and 
suggested that excluding these uses will reduce burden and costs that 
may otherwise be passed on to consumers.
    One commenter stated that, while appraisers often use an AVM or 
other tools to provide support and understanding for their opinions, 
appraisers are experts designated by Congress to protect public trust 
and they dedicate their lives to studying real estate data. Another 
commenter observed that appraisers do not use ``lending grade'' AVMs to 
develop full, traditional appraisals. The commenter stated that some 
appraisers may use AVMs to gauge a starting point for appraisals, but 
that appraisers have limited access to lending-grade AVMs. Another 
commenter noted that under USPAP, an AVM is a tool that appraisers may 
use for their work (such as for internal checks and balances), but not 
for the completion of an appraisal in determining the appraiser's 
opinion of value. The commenter expressed agreement with the statement 
in the preamble that 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. One commenter stated that AVM 
use by appraisers is low and infrequent and noted that higher quality 
AVMs are often cost prohibitive for appraisers to use. The commenter 
suggested that imposing compliance costs on use of AVMs by appraisers 
would discourage the use of AVMs as a check for obvious errors.
    A small number of commenters argued that the quality control 
standards should be broadly applicable and advocated for removing the 
exclusions for development of appraisals by appraisers. For example, 
one commenter suggested that allowing appraisers to use AVMs that are 
not subject to quality control would create institutional and consumer 
confusion and a heightened risk of misapplication of AVM results. The 
commenter noted that USPAP provides that an appraiser may only use an 
AVM as part of the valuation process if the appraiser has a basic 
understanding of how the AVM works.
    As discussed earlier, while appraisers may use AVMs in preparing 
appraisals, they must achieve credible results in preparing an 
appraisal under 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. In addition, it may be impractical for mortgage 
originators and secondary market issuers to adopt policies, practices, 
procedures, and control systems to ensure quality controls for AVMs 
used by the numerous independent appraisers with whom they work. For 
these reasons and after considering the comments, the final rule 
excludes from coverage the use of AVMs by a certified or licensed 
appraiser in developing an appraisal, consistent with the proposal. The 
agencies did not receive specific comments on covering evaluations. For

[[Page 64545]]

the reasons stated above, the final rule covers AVMs used in 
preparation of evaluations.
    Reviews of completed collateral valuation determinations. The 
proposed rule would not have covered AVMs used in reviews of completed 
collateral value determinations (completed determinations), given that 
the underlying appraisal or evaluation determines the value of the 
collateral, rather than the review of the appraisal or evaluation. The 
appraisal or evaluation review, including those where an AVM is used in 
the review, serves as a separate and independent quality control 
function.\30\
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    \30\ Appraisals are subject to appropriate review under the 
appraisal regulations. See 12 CFR 34.44(c) (OCC); 12 CFR 225.64(c) 
(Board); 12 CFR 323.4(c) (FDIC); 12 CFR 722.4(c) (NCUA). While these 
reviews are independent of, and subsequent to, the underlying 
appraisals and evaluations, the reviews generally take place before 
the final approval of a mortgage loan.
---------------------------------------------------------------------------

    Many commenters expressed support for not covering the use of AVMs 
for reviews of completed determinations in the rule. The commenters 
stated such exclusion would reduce some burdens and costs that may 
otherwise be passed on to borrowers. One commenter stated that an 
institution may, but is not required to, use an AVM to test the 
reasonableness of an appraisal or evaluation. The commenter recommended 
that the rule cover such AVM use. Other commenters suggested that AVMs 
used for appraisal review should be covered to avoid inconsistent 
standards, to ensure that discriminatory valuations are identified, or 
because all AVMs used in housing finance should be subject to quality 
control standards.
    As discussed earlier, the agencies continue to view the focus on 
value determinations as consistent with section 1125. For this reason 
and those stated above, after considering the comments, the agencies 
are adopting the proposal to exclude reviews of completed 
determinations from the scope of the rule. The agencies note that the 
rule does not make distinctions based on the amount of time between the 
completed determination and the subsequent review; if an AVM is being 
used solely to review the completed determination, the AVM use is not 
covered by the rule regardless of when the AVM is used after that 
determination.

A. Quality Control Standards

1. Proposed Requirements for the First Four Quality Control Factors
    The proposed rule would have required 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 certain quality control standards. The 
proposed rule would have required those quality control standards be 
designed to 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. These four 
quality control factors would have implemented the minimum standards 
required by the statute. The proposal would have allowed mortgage 
originators and secondary market issuers covered by the proposal the 
flexibility to set their quality control standards for covered AVMs as 
appropriate based on the size, complexity, and risk profile of the 
institution and the transactions for which they would use AVMs covered 
by the proposed rule.
    Most commenters supported the proposed flexibility for implementing 
the statutory quality control standards. These commenters agreed that 
mortgage originators and secondary market issuers should have the 
flexibility to adopt policies, practices, procedures, and control 
systems to implement the quality control standards based on size, 
complexity, and risk profile of the institution and the transactions 
for which they would use AVMs covered by the rule. One commenter stated 
that AVM models will continue to grow and evolve, making the flexible 
approach appropriate in order to allow institutions to make refinements 
as technology changes. The commenter also stated that the flexible 
approach would reduce regulatory burden and that a prescriptive 
approach could constrain meaningful use of AVMs. Another commenter 
stated that a more prescriptive rule might not adjust to changing 
industry developments.
    One commenter stated that the principles-based approach of the rule 
would give credit unions flexibility to narrowly tailor their quality 
control standards to their unique circumstances. Another commenter 
stated that a prescriptive rule could present an undue burden on small 
institutions. Another commenter indicated that a principles-based 
option could mitigate compliance costs and foster innovation in the AVM 
space but suggested that there is a need for uniformity and consistency 
when determinations of relevancy and confidence levels are required. 
The commenter suggested that the rule specifically cite those 
determinations of relevance and confidence levels.
    One commenter who supported the flexible approach stated that banks 
already adhere to supervisory guidance on model risk management, 
appraisals, and third-party risk management, making prescriptive 
regulation unnecessary. This commenter also suggested that a ``one size 
fits all'' approach would not work well, given the variety of mortgage 
originators and their business models. The commenter also argued that 
prescriptive AVM standards would impede technical innovation but 
suggested that it would be helpful for the agencies to provide guidance 
on the types of issues the agencies have identified with AVMs, as well 
as potential remedies of those issues, with narratives, analytical and 
quantitative examples, and case studies to inform stakeholders. Another 
commenter stated that flexible, transparent, principles-based 
approaches to AVM standards are relatively inexpensive and not time-
consuming to incorporate and apply and that AVM testing and individual 
AVM model performance detail may be readily available through a firm's 
internal testing group or numerous third-party, independent testing 
organizations.
    One commenter stated that principles-based quality control 
standards would help foster innovation that will ultimately benefit 
consumers and the housing market. The commenter stated that as AVM 
technology continues to develop, a prescriptive approach to regulation 
would likely become outdated and ineffective quickly, impeding 
innovation and limiting regulators' ability to protect consumers as 
technology evolves. The commenter suggested, however, that focused 
guidance is warranted to address issues such as testing of AVMs and 
consideration of whether the use of pricing information in AVM models 
is appropriate.
    One commenter stated that the proposed quality control standards 
would not hinder competition among AVM developers, AVM users, or future 
innovation. The commenter stated further that the standards would 
empower AVM users to utilize risk management practices consistent with 
the Appraisal Guidelines.
    Another commenter who expressed support for the nonprescriptive 
approach suggested that the wide variety of AVMs and the vast diversity 
in lender, investor, guarantor, and related stakeholder uses of AVMs 
would make a prescriptive approach difficult

[[Page 64546]]

to fashion. This commenter expressed concerns about the unintended 
consequences of a prescriptive approach. Further, this commenter stated 
that different stakeholders across the U.S. housing finance industry 
will (and should) have different strategies, processes, and risk 
tolerances for the use of AVMs. The commenter also argued that a 
prescriptive approach would be ill-advised as technology is 
continuously evolving at an increasing pace, citing artificial 
intelligence as an example.
    Another commenter stated that the proposed principles-based 
approach is appropriate because AVMs are constantly evolving and model 
development techniques, model deployment processes, data types, and 
data sources will change, AVMs will evolve, and risk mitigation, 
testing, and quality control will have to adapt.
    Another commenter stated that the techniques used to train models, 
including AVMs, that rely on artificial intelligence and machine 
learning are developing rapidly, and that it would be imprudent to take 
an overly specific approach that may be incompatible with--or even 
deter the adoption of--advancements in AVM techniques that are likely 
to be forthcoming. The commenter stated further that a flexible and 
principles-based approach, on the other hand, will remain applicable 
regardless of changes in AVM methodologies, quality control best 
practices, and data availability. The commenter stated that this is 
especially true for the proposed nondiscrimination quality control 
factor, given that techniques for mitigating disparate impact, 
debiasing models, and searching for less discriminatory alternatives 
continue to develop. The commenter argued that a flexible, principles-
based approach will encourage and enable entities to adopt the latest, 
most effective techniques for mitigating discrimination risk.
    A minority of commenters preferred a more prescriptive approach to 
implementing the quality control standards. One commenter argued that 
the flexible approach would not likely help community banks that may 
prefer or require clear and simple instructions on how to comply with 
the quality control standards. Another commenter suggested that a 
prescriptive approach would create uniformity in the use of AVMs in the 
marketplace, provide broader consumer protection, and create a 
consistent level of safety and soundness when institutions rely on AVM 
conclusions.
    One commenter suggested that the final rule include prescriptive 
standards for AVM testing, validation, and confidence needed to assess 
whether an AVM was appropriate to use for a particular transaction. Two 
commenters suggested that the agencies use a blended approach to 
quality control measures for AVMs, with some standardized reporting and 
testing requirements, while also allowing covered entities to develop 
tailored policies, practices, procedures, and control systems. One 
commenter suggested that AVMs need standardized confidence scores and 
standardized reporting formats to enable broader use and basic 
statistics on the temporality, proximity, and homogeneity of the data.
    Another commenter stated that the rule should provide specific 
guidelines to explain how institutions are to structure policies, 
practices, procedures, and control systems, and should add specific 
minimum standards for the quality control standards in the final rule. 
The commenter stated that consumers deserve the same level of 
protection whether they are obtaining a loan from a larger or smaller 
originator and recommended that the agencies adopt the Appraisal 
Guidelines as a rule to make the Appraisal Guidelines stronger and more 
effective.
    Two commenters noted that there was an inconsistency in the 
proposed rule concerning the third quality control factor relating to 
avoiding conflicts of interest. The commenters noted that the preamble 
referred to the third factor as ``seek to avoid conflicts of interest'' 
while the regulatory text used ``avoid conflicts of interest.'' These 
commenters stated that the use of ``seek'' would be consistent with the 
statutory language in section 1125. As discussed in more detail below, 
some commenters also suggested that AVMs should be tested or certified 
by a third-party tester instead of, or as a supplement to, the approach 
taken in the proposed rule.
    After considering the comments, the agencies have determined that 
the proposed method was appropriate, and that a flexible approach to 
implementing the quality control standards would allow the 
implementation of the standards to evolve along with AVM technology and 
reduce compliance costs. Different policies, practices, procedures, and 
control systems may be appropriate for institutions of different sizes 
with different business models and risk profiles, and a more 
prescriptive rule could unduly restrict institutions' efforts to set 
their risk management practices accordingly. As modeling technology 
continues to evolve, this flexible approach will allow institutions to 
refine their implementation of the rule as appropriate. The proposed 
and now adopted approach will allow mortgage originators and secondary 
market issuers the flexibility to set their quality control standards 
for covered AVMs as appropriate based on the size, complexity, and risk 
profile of their institution and the transactions for which they would 
use AVMs covered by the rule.
    In regard to the suggestion by some commenters that fostering 
uniformity in the AVM market would benefit consumers and stakeholders, 
such uniformity could interfere with the appropriate current and future 
use of AVMs. In addition, the agencies determined that prescriptive 
rules would pose a challenge due to the inherent complexity of AVMs and 
their use cases and the differing size and activities of the 
institutions that use AVMs. The quality control standards adopted are 
clear and simple and a more prescriptive rule would become unmanageable 
over time due to rapidly evolving technology.
    Moreover, the quality control standards are also consistent with 
practices that many participants in the mortgage lending market already 
follow and with the guidance described above that applies to many 
regulated institutions that will be subject to the final rule. For 
example, the Model Risk Management Guidance provides comprehensive 
suggestions for assessing and monitoring model risk, including on 
appropriate governance, policies, and procedures for model risk 
management. In addition, Appendix B of the Appraisal Guidelines 
contains detailed guidance for institutions seeking to establish 
policies, practices, procedures, and control systems to ensure the 
accuracy, reliability, and independence of AVMs. The requirement for 
quality control standards is also consistent with third-party risk 
guidance, as discussed earlier. Furthermore, in line with the agencies' 
service provider guidance, regardless of whether mortgage originators 
and secondary market issuers use their own AVMs or third-party AVMs, 
the final rule requires mortgage originators and secondary market 
issuers to adopt and maintain policies, practices, procedures, and 
control systems to ensure that AVMs adhere to the rule's requisite 
quality control standards.
    Regarding one commenter's suggestion that existing agency guidance 
be adopted as part of the rule, the agencies determined that doing so 
is not necessary at this time and could make it more difficult to adapt 
the guidance as new issues arise. As previously discussed, many of the 
institutions that

[[Page 64547]]

will be covered by the final rule already consider existing guidance 
for assistance in structuring their quality control standards for AVM 
use. Furthermore, the agencies note that institutions that are not 
regulated by the agency or agencies providing the guidance may still 
look to the guidance for assistance with compliance. In addition, the 
statute does not require the agencies to set prescriptive standards for 
AVMs. For these reasons and those explained above, and after 
considering the comments, the agencies have concluded that a rule 
requiring institutions to develop policies, practices, procedures, and 
control systems designed to satisfy the requirement for quality control 
standards will more effectively carry out the purposes of section 1125 
than a more prescriptive rule.\31\ Therefore, the agencies are adopting 
the four quality control factors from the statute. The agencies are 
also making a technical correction to the regulatory text to match the 
factors with those in section 1125. The omission of ``seek to'' in 
regulatory text, as pointed out by two commenters, was inadvertent and 
has been added to the final text.
---------------------------------------------------------------------------

    \31\ The agencies have, in other contexts, allowed institutions 
to adjust their compliance programs in a way that reflects 
institution-specific factors, such as an institution's size and 
complexity and the nature and scope of its lending activities. See, 
e.g., Interagency Guidelines Establishing Standards for Safety and 
Soundness, 12 CFR part 30, Appendix A (OCC); 12 CFR part 208, 
Appendix D-1 (Board); 12 CFR part 364, Appendix A (FDIC) (requiring 
institutions to have internal controls and information systems for 
implementing operational and managerial standards that are 
appropriate to their size and the nature, scope and risk of their 
activities); 12 CFR 34.62 (OCC); 12 CFR 208.51 (Board); 12 CFR 365.2 
(FDIC) (requiring institutions to adopt policies that establish 
appropriate limits and standards for extensions of credit that are 
secured by liens on or interests in real estate): Interagency 
Guidelines Establishing Information Security Standards,12 CFR part 
30, Appendix B (OCC); 12 CFR part 208, Appendix D-2 (Board); 12 CFR 
part 364, Appendix B (FDIC); 12 CFR part 748, Appendix A (NCUA) 
(providing guidelines on federally insured credit unions' 
requirement to implement a comprehensive written information 
security program that is appropriate to the size and complexity of 
the institution and the nature and scope of its activities); and 12 
CFR 41.90 (OCC); 12 CFR 222.90 (Board); 12 CFR 334.90 (FDIC) 
(requiring that banks establish policies and procedures for the 
detection, prevention, and mitigation of identity theft). See also 
Guidelines Establishing Standards for Residential Mortgage Lending 
Practices,12 CFR part 30, Appendix C (OCC) (providing that 
residential mortgage lending activities should reflect standards and 
practices appropriate for the size and complexity of the bank and 
the nature and scope of its lending activities); 12 CFR 1007.104 
(CFPB) (requiring policies and procedures regarding the registration 
of mortgage loan originators that are appropriate to the nature, 
size, complexity, and scope of the financial institution's mortgage 
lending activities); and 12 CFR 1026.36(j) (CFPB) (requiring 
policies and procedures regarding mortgage loan origination that are 
appropriate to the nature, size, complexity, and scope of the 
mortgage lending activities of the depository institution and its 
subsidiaries).
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2. Specifying a Nondiscrimination Quality Control Factor
    Section 1125 provides the agencies with the authority to ``account 
for any other such factor'' that the agencies ``determine to be 
appropriate.'' \32\ Based on this authority, the agencies proposed to 
include a fifth quality control factor that would require mortgage 
originators and secondary market issuers to adopt policies, practices, 
procedures, and control systems to ensure that AVMs used in connection 
with making credit decisions or covered securitization determinations 
adhere to quality control standards designed to comply with applicable 
nondiscrimination laws. The agencies proposed that institutions would 
have the flexibility to design policies, procedures, practices, and 
control systems for AVMs that are in compliance with fair lending laws 
and take into account their business models, as discussed above 
regarding the first four quality control factors.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 3354(a)(5).
---------------------------------------------------------------------------

    Many commenters expressed support for the fifth factor, agreeing 
that it is important to assess whether AVMs are consistent with fair 
lending laws and that existing law requires this step. Many commenters 
endorsed the proposal to add this fifth factor on nondiscrimination to 
highlight this element of existing laws and create an independent legal 
requirement for institutions to adopt policies, practices, procedures, 
and control systems for AVMs that comply with applicable 
nondiscrimination laws.
    Many commenters stated that discrimination is an issue in 
valuations, including in AVMs, and that specifying a nondiscrimination 
factor would be useful for reinforcing the applicability of 
nondiscrimination laws to AVMs. Several commenters asserted that AVMs 
risk reproducing bias and perpetuating discrimination if they are not 
adequately examined and tested. These commenters stated that the 
information used to develop and train AVMs is often drawn from existing 
data sets that may reflect human biases and historical prejudices. One 
commenter stated that inclusion of the nondiscrimination factor for AVM 
models serves as an important reminder to AVM developers and users 
about the necessity of fair lending and fair housing to a functional 
marketplace, while another commenter stated that it would help ensure a 
level playing field. Some commenters asserted that the 
nondiscrimination factor would work in parallel and reinforce the other 
quality control factors. One commenter noted that nondiscrimination is 
implicitly included in the first four factors. This commenter stated 
further that the nondiscrimination quality control factor does not 
introduce a new requirement, but rather emphasizes the applicability of 
nondiscrimination laws to AVMs and is consistent with current law and 
existing fair lending guidance.
    One commenter stated that nondiscrimination should be understood as 
a dimension of model performance and a required aspect of quality 
control. The commenter further asserted that discrimination should be 
understood as a safety and soundness risk. One commenter stated that 
banks fully support fair lending laws and currently implement fair 
lending requirements. The commenter stated further that they are aware 
of the unique considerations that AVMs present and that banks in their 
State rely on current fair lending requirements and underwriting and 
appraisal management guidance to guide their use of AVMs, for example 
through current model risk management guidance. Another commenter 
stated that the advantages of specifying the fifth factor are that it 
will emphasize the safe and effective use of AVMs and encourage 
expanded use of AVMs as a valuation tool in the industry, both on a 
stand-alone and independent basis where appropriate, as well as in 
concert with, and as additional support for, traditional, hybrid, and 
alternative approaches to value.
    A number of commenters suggested that AVM use has the potential to 
reduce bias in valuations, given that AVMs do not take into account the 
race of the participants to a particular transaction. One commenter 
suggested that use of nondiscriminatory AVMs has the potential to 
provide significant benefits to industry and consumers. The commenter 
stated that, since AVMs do not know the racial composition of the 
borrower or neighborhood, an AVM may help provide a fair and unbiased 
estimate of value. The commenter stated further that the fifth quality 
control factor would encourage expanded use of AVMs as a valuation tool 
in the industry. The commenter also stated that specifying a 
nondiscrimination quality control factor in the rule would be useful in 
emphasizing the importance of providing support for nondiscrimination 
or analysis of the potential disparate impact in the use of AVMs.
    Similar to the first four quality control factors, most commenters 
supported a nonprescriptive approach to the

[[Page 64548]]

nondiscrimination factor. One commenter explained that a flexible 
approach would assist in the process of adapting existing policies into 
the framework of quality control standards. One commenter suggested 
that a principles-based approach would enable innovation while building 
a sustainable framework to reduce discrimination, advance fair lending 
and fair housing, and ensure accuracy in home valuation processes by 
requiring entities to align their policies and procedures with 
promulgated principles. Another commenter stated that a nonprescriptive 
approach would prevent interference with the industry developing 
innovative solutions to address discrimination. A few commenters stated 
that the principles-based approach would allow lenders to take into 
account changes in AVM technology. One commenter noted that there is a 
lack of consensus among stakeholders concerning how AVMs should be 
evaluated with respect to fair lending and suggested that the proposed 
flexible approach is best because it would account for the current 
level of uncertainty.
    One commenter stated that agency guidance would be the appropriate 
venue to address the more nuanced issues of compliance, such as how to 
conduct particular types of testing, including outcomes-based testing 
for disparate impact, and how to evaluate potential less discriminatory 
alternatives to an AVM that results in disparate outcomes. The 
commenter suggested that the final rule should articulate baseline 
standards for nondiscrimination from applicable statutes and 
regulations, specifically the ECOA and Fair Housing Act's prohibitions 
on disparate treatment and disparate impact. The commenter also 
suggested that compliance with applicable antidiscrimination laws calls 
for more than simply avoiding the use of prohibited bases as predictive 
variables in an AVM and that a proper compliance program involves other 
forms of antidiscrimination testing, such as disparate impact and bias 
testing.
    One commenter stated that existing compliance management systems 
and fair lending monitoring programs should be able to assess whether 
an AVM applies different standards or produces disparate valuations on 
a prohibited basis. A few commenters supported a more prescriptive 
approach and expressed a need for bias testing standards.
    Commenters made additional recommendations, including that the 
agencies release loan-level data from the Uniform Appraisal Dataset to 
provide a robust data set to evaluate AVMs and identify less 
discriminatory alternatives. One commenter also suggested that the 
agencies organize and encourage private sector activities, such as 
conferences and research, to inform ongoing guidance on compliance with 
the quality controls standards. Other commenters suggested that the 
agencies issue guidance on how to implement the fifth quality control 
factor.
    In contrast, several commenters opposed including the fifth factor. 
Commenters expressed various concerns, including that the factor would 
impose a significant compliance burden, lender systems are not able to 
assess whether an AVM discriminates, the factor is not required by 
statute, and the addition of the factor is unnecessary and duplicates 
existing law and the other quality control factors. Two commenters 
suggested that documented instances of bias in AVMs are not prevalent, 
and one of these commenters stated that it would be a mistake to 
attempt to eradicate through regulation the speculative possibility of 
bias in AVMs, which could reduce AVM use, when the use of this 
technology can remove the type of subjective, personal bias that 
traditional appraisals bring to the valuation process. In addition, 
some commenters stated that the agencies should use other tools to 
address AVM bias concerns and the onus should be on AVM vendors to 
ensure models comply with nondiscrimination laws. A few commenters 
stated that adding this factor may have unintended effects, such as 
increased loan costs for consumers and small institutions deciding to 
stop using AVMs altogether in mortgage origination due to uncertainty 
and the cost of compliance.
    One commenter stated that banks support fair lending laws, dedicate 
considerable resources to comply with them, and are regularly examined 
for compliance with those laws. The commenter stated, however, that 
adding a fifth factor on nondiscrimination is not necessary. This 
commenter noted that long-standing fair lending laws have and will 
continue to apply to mortgage transactions and the agencies regularly 
assess banks' compliance management systems. According to this 
commenter, the agencies can ensure through their examinations that 
policies, procedures, and controls are in place to address fair lending 
risk in AVM use. The commenter stated that the agencies can heighten 
the awareness of fair lending risks without regulation through 
bulletins and policy guidance. The commenter also expressed concern 
that codifying the rule in Regulation Z could result in plaintiffs 
challenging originators with the private right of action and statutory 
damages set forth in the TILA, which could increase costs for banks and 
their customers. The commenter stated that Congress clearly did not 
intend such a result, given that it added the quality control 
requirements in FIRREA, not TILA.
    Several commenters expressed concerns about the ability of lenders 
to apply quality control standards for fair lending to AVM models. Some 
commenters expressed concern about how small entities can assess fair 
lending issues in AVMs or know that they are violating the law. They 
asserted that existing compliance management systems and fair lending 
monitoring programs are not able to assess whether an AVM applies 
different standards or produces disparate valuations on a prohibited 
basis. They argued that small entities do not have access to an AVM's 
data or methodology, are unable to validate the algorithms that AVM 
providers use, and lack the staff to assess the AVM models results.
    One commenter stated that most community banks lack in-house 
expertise needed to test for disparate impact and will lack the volume 
to yield the number of observations required for testing. The commenter 
stated that even many larger institutions lack sufficient mortgage 
lending activity to engage in testing and to justify the cost of 
disparate impact testing. Another commenter stated that the quality 
control factor for nondiscrimination may force community banks to shift 
to using appraisals because of the compliance challenges and 
uncertainty relating to implementation of the factor. The commenter 
stated that this will likely disincentivize mortgage lending in rural 
areas where AVMs can be utilized as a more cost-effective, efficient, 
and accurate option. The commenter stated that requiring community 
banks to assess and evaluate models for potential fair lending concerns 
would be unreasonable, redundant, and extremely costly. The commenter 
stated further that a community bank is unlikely to retain staff with 
sufficient expertise to determine valuation accuracy and reverse 
engineer the algorithms to assess any fair lending red flags.
    One commenter stated that credit unions' existing systems are not 
able to assess whether AVMs discriminate and that the data and 
resources needed to undertake an analysis of AVMs, including analysis 
for discriminatory bias, would be significant. Another commenter argued 
that the inclusion of the factor may make it difficult for credit 
unions to use AVMs in originating loans. The commenter stated

[[Page 64549]]

further that to the extent the quality control standards require fair 
lending testing of AVM values, small credit unions may not have large 
enough data sets to be able to do meaningful, statistically significant 
testing of their AVM results. The commenter stated that credit unions 
lack control over the proprietary inputs and data that feed into AVMs 
and lack bargaining power and resources to examine third-party 
proprietary algorithms that power AVMs.
    Other commenters stated that the agencies should use other tools to 
address AVM bias concerns, including asserting supervisory authority 
over AVM vendors as service providers and utilizing Dodd-Frank Act 
authority to supervise nonbank companies that pose risks to consumers. 
Another commenter argued that fair lending guidelines and mandates 
should remain within the purview of the Interagency Fair Lending 
Examination Procedures, thereby creating clarity for compliance 
management systems and a consistent examiner approach.
    Several commenters stated that the burden of compliance with the 
fifth factor should be placed on the AVM provider. Commenters argued 
that lenders do not have access to proprietary models used by third 
parties to be able to assess fair lending performance. One commenter 
argued that to place the burden on financial institutions would be 
excessive as financial institutions are obligated to comply with 
existing regulatory regimes under the ECOA and the Fair Housing Act. 
One commenter expressed concern regarding lender liability for 
violating nondiscrimination law when relying on third-party AVMs.
    Several commenters requested additional guidance regarding 
compliance with the nondiscrimination factor. One commenter stated that 
the agencies have not provided a clear performance indicator by which a 
lender could discern any inherent bias within a data set. The commenter 
urged the agencies to provide clear guidance on discriminatory red 
flags in AVMs. The commenter stated that different industry players 
have access to varying quality of data, that the agencies should 
account for this in their guidance and recommendations, and that little 
legal clarity exists around practices in the AVM industry that may 
violate the Fair Housing Act.
    As the agencies noted in the proposal, existing nondiscrimination 
laws apply to appraisals and AVMs, and institutions have a preexisting 
obligation to comply with all Federal laws, including Federal 
nondiscrimination laws. For example, the ECOA and its implementing 
Regulation B bar discrimination on a prohibited basis in any aspect of 
a credit transaction.\33\ The agencies have long recognized that this 
prohibition extends to using different standards to evaluate 
collateral,\34\ which includes the design or use of an AVM in any 
aspect of a credit transaction in a way that would treat an applicant 
differently on a prohibited basis or result in unlawful discrimination 
against an applicant on a prohibited basis. Similarly, the Fair Housing 
Act prohibits unlawful discrimination in all aspects of residential 
real estate-related transactions, including appraisals of residential 
real estate.\35\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 1691(a) (prohibiting discrimination on the basis 
of race, color, religion, national origin, sex (including sexual 
orientation and gender identity) or marital status, age (provided 
the applicant has the capacity to contract), because all or part of 
the applicant's income derives from any public assistance program, 
or because the applicant has in good faith exercised any right under 
the Consumer Credit Protection Act); see also 12 CFR part 1002. This 
prohibition includes discrimination on the prohibited basis 
characteristics of ``the neighborhood where the property offered as 
collateral is located.'' 12 CFR part 1002, supp. I, para. 2(z)-1.
    \34\ See Interagency Task Force on Fair Lending, Policy 
Statement on Discrimination in Lending, 59 FR 18266, 18268 (Apr. 15, 
1994) (noting that under both ECOA and the Fair Housing Act, a 
lender may not, because of a prohibited factor, use different 
standards to evaluate collateral).
    \35\ 42 U.S.C. 3605 (prohibiting discrimination because of race, 
color, religion, national origin, sex, handicap, or familial status 
in residential real estate-related transactions); 42 U.S.C. 
3605(b)(2) (defining ``real estate-related transactions'' to include 
the ``selling, brokering, or appraising of residential real 
property.''); see also 24 CFR part 100.
---------------------------------------------------------------------------

    As with models more generally, there are increasing concerns about 
the potential for AVMs to produce property estimates that reflect 
discriminatory bias, such as by replicating systemic inaccuracies and 
historical patterns of discrimination. Models could discriminate 
because of the data used or other aspects of a model's development, 
design, implementation, or use.\36\ Attention to data is particularly 
important to ensure that AVMs do not rely on data that incorporate 
potential bias and create discrimination risks. Because AVMs arguably 
involve less human discretion than appraisals, AVMs have the potential 
to reduce human biases. Yet without adequate attention to ensuring 
compliance with Federal nondiscrimination laws, AVMs also have the 
potential to introduce discrimination risks. Moreover, if models such 
as AVMs are biased, the resulting harm could be widespread because of 
the high volume of valuations that even a single AVM can process. These 
concerns have led to an increased focus by the public and the agencies 
on the connection between nondiscrimination laws and AVMs.
---------------------------------------------------------------------------

    \36\ In other contexts, models and data have the potential to be 
a source of bias and may cause consumer harm if not designed, 
implemented, and used properly. See generally, Federal Trade 
Commission, Big Data: A Tool for Inclusion or Exclusion? 
Understanding the Issues (Jan. 2016), available at https://www.ftc.gov/system/files/documents/reports/big-data-tool-inclusion-or-exclusion-understanding-issues/160106big-data-rpt.pdf; Reva 
Schwartz et al., A Proposal for Identifying and Managing Bias in 
Artificial Intelligence, Nat'l Inst. of Standards & Tech., U.S. 
Department of Commerce (June 2021), available at https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270-draft.pdf. See also Andreas Fuster et al., Predictably Unequal? The 
Effects of Machine Learning on Credit Markets, 77 J. of Fin. 5 (Feb. 
2022), available at https://doi.org/10.1111/jofi.13090; Emily 
Bembeneck, et al., To Stop Algorithmic Bias, We First Have to Define 
It, Brookings Inst. (Oct. 21, 2021), available at http://brookings.edu/research/to-stop-algorithmic-bias-wefirst-have-to-define-it/.
---------------------------------------------------------------------------

    While existing nondiscrimination law applies to an institution's 
use of AVMs, the agencies proposed to include a fifth quality control 
factor relating to nondiscrimination to heighten awareness among 
lenders of the applicability of nondiscrimination laws to AVMs. 
Specifying a fifth factor on nondiscrimination would create an 
independent requirement for institutions to establish policies, 
practices, procedures, and control systems to specifically ensure 
compliance with applicable nondiscrimination laws, thereby further 
mitigating discrimination risk in their use of AVMs. Specifying a 
nondiscrimination factor will increase confidence in AVM estimates and 
support well-functioning AVMs. In addition, specifying a 
nondiscrimination factor will help protect against potential safety and 
soundness risks, such as operational, legal, and compliance risks, 
associated with failure to comply with nondiscrimination laws.
    In proposing to add a fifth quality control factor on 
nondiscrimination, the agencies noted that compliance with applicable 
nondiscrimination laws with respect to AVMs may be indirectly reflected 
within and related to three of the first four statutory quality control 
factors. For example, the first factor requires quality control 
standards designed to ensure a high level of confidence in the 
estimates produced by AVMs. AVMs that reflect discriminatory bias in 
the data or discriminatory assumptions could affect confidence in AVM 
outputs and may also result in a form of data manipulation, 
particularly with respect to model assumptions and in the interactions 
among variables in a

[[Page 64550]]

model, which bears on the second quality control factor in section 
1125. The fourth quality control factor requires random sample testing 
and reviews of AVMs. The proposed fifth factor on nondiscrimination may 
include an array of tests and reviews, including fair lending reviews, 
which would support the general requirement for random sample testing, 
and review in section 1125. The first four factors do not, however, 
expressly address quality control measures relating to compliance with 
nondiscrimination laws.
    The fifth quality control factor is consistent not only with 
current law, but also with well-established fair lending guidance. The 
OCC, Board, FDIC, NCUA, CFPB, and FHFA have issued statements and other 
materials setting forth principles they will consider to identify 
discrimination.\37\ The OCC, Board, FDIC, NCUA, and CFPB have further 
underscored the importance of robust consumer compliance management to 
prevent consumer harm in the Interagency Policy Statement on the Use of 
Alternative Data in Credit Underwriting (Alternative Data Policy 
Statement). In the Alternative Data Policy Statement, the agencies 
emphasized that ``[r]obust compliance management includes appropriate 
testing, monitoring and controls to ensure consumer protection risks 
are understood and addressed.'' \38\ In addition, the CFPB has 
published procedures for CFPB examiners to assess an institution's fair 
lending related risks and controls related to the use of models--
including, potentially, AVMs--in the credit decision process.\39\
---------------------------------------------------------------------------

    \37\ See, e.g., Interagency Task Force on Fair Lending, Policy 
Statement on Discrimination in Lending, 59 FR 18266 (Apr. 15, 1994), 
available at https://www.govinfo.gov/content/pkg/FR-1994-04-15/html/94-9214.htm; Interagency Fair Lending Examination Procedures (Aug. 
2009), available at https://www.ffiec.gov/PDF/fairlend.pdf; CFPB, 
Examination Procedures--ECOA (Oct. 2015), available at https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf; Federal Housing Finance Agency, Policy Statement 
on Fair Lending, 86 FR 36199 (July 9, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-07-09/pdf/2021-14438.pdf.
    \38\ Id. Interagency Statement on the Use of Alternative Data in 
Credit Underwriting, OCC Bulletin 2019-62 (Dec. 3, 2019); Federal 
Reserve CA Letter 19-11 (Dec. 12, 2019); FDIC FIL-82-2019 (Dec. 13, 
2019); NCUA Letter 19-CU-04 (December 2019); CFPB, Federal 
Regulators Issue Joint Statement on the Use of Alternative Data in 
Credit Underwriting (Dec. 3, 2019) available at https://www.consumerfinance.gov/about-us/newsroom/federal-regulators-issue-joint-statement-use-alternative-data-credit-underwriting/ and 
https://files.consumerfinance.gov/f/documents/cfpb_interagency-statement_alternative-data.pdf; CFPB, Supervisory Highlights: Summer 
2013, 5-11 (Aug. 2013), available at https://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf (discussing the pillars of a well-functioning 
CMS). 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.'').
    \39\ 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 have determined that the fifth factor is important to 
the quality control of AVMs and to fair lending. As with the four 
statutory quality control factors, the agencies are aware of the 
concerns expressed by some commenters that implementation hurdles, such 
as access to AVM data and design, could complicate compliance, 
especially for small entities. However, the existing guidance, as 
discussed earlier, already addresses many of the elements of quality 
control for AVMs, including fair lending considerations. In addition, 
institutions will have the flexibility to adopt approaches to implement 
the fifth factor in ways that reflect the risks and complexities of 
institutions' business models.
    Regarding a commenter's concern about lender liability for third-
party AVMs, the agencies remind institutions that make use of third-
party providers that they remain responsible for ensuring that the 
third parties comply with applicable laws and regulations in performing 
their activities, including nondiscrimination laws and the safety and 
soundness requirements established by the OCC, Board, FDIC, and NCUA. 
As discussed earlier, the agencies have already provided guidance on 
implementing policies, practices, procedures, and control systems 
relating to model risk, third-party risk, AVMs, and nondiscrimination. 
Institutions should refer to relevant rules and statutes for the 
specific requirements which may apply. Regarding a commenter's concern 
that the CFPB codifying this rule in Regulation Z could result in 
plaintiffs challenging originators with a private right of action and 
statutory damages for some violations set forth in TILA, the CFPB notes 
that the statutory authority for this AVM rulemaking is FIRREA rather 
than TILA.
    For these reasons and after considering the comments, the agencies 
are adopting the proposed quality control factor on nondiscrimination.

C. Definitions

1. Automated Valuation Model
    Section 1125 of title XI defines ``automated valuation model'' 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.'' \40\ The agencies proposed that 
the rule define an AVM as ``any computerized model used by mortgage 
originators and secondary market issuers to determine the value of a 
consumer's principal dwelling collateralizing a mortgage.'' The 
proposed definition was substantively identical to the definition in 
section 1125 but reflects common terminology and clarifies that the 
determination of value relates to the dwelling.
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 3354(d).
---------------------------------------------------------------------------

    Most comments supported using the statutory definition of AVM as 
the basis for the definition in the proposed rule. A few commenters 
questioned the need to revise the statutory language for ``plain 
English'' purposes and to reflect current practice. Other commenters 
offered proposals to expand the definition. One commenter stated that 
the agencies should amend the definition to add the components of an 
AVM, such as comparable sales values. Another commenter suggested that 
the proposed definition be modified to clarify that an AVM means a 
model used without alteration of valuation results by a person and that 
the final rule should include the components of an AVM. Some commenters 
suggested that the definition should be drafted more broadly to include 
all market participants using AVMs in mortgage lending and 
securitization determinations, rather than limiting the scope to 
mortgage originators and secondary market issuers. One commenter stated 
that a consumer-facing definition of AVM is needed that discloses the 
significant uncertainty that exists when using AVMs.
    The agencies have concluded that the nonsubstantive changes to the 
statutory definition of AVM make the definition set forth in regulatory 
text clearer and more understandable. Changes suggested by commenters 
(to identify components of an AVM, add usages by other market 
participants, and serve as a consumer-facing disclosure) would 
represent a significant departure from the statutory language. For 
these reasons, and after considering the comments, the agencies are 
adopting the proposed definition of automated valuation model.

[[Page 64551]]

2. Control Systems
    The proposal defined ``control systems'' as the functions (such as 
internal and external audits, risk review, quality control, and quality 
assurance) and information systems that institutions use to measure 
performance, make decisions about risk, and assess the effectiveness of 
processes and personnel, including with respect to compliance with 
statutes and regulations. Under the proposal, the agencies intended for 
institutions to use control systems that are appropriate for the size, 
complexity, and risk profile of the institution and the transactions 
for which they would use AVMs covered by the proposed rule.
    Most commenters expressed support for the proposed definition of 
``control systems.'' One commenter suggested that adding further detail 
to the ``control systems'' definition could contribute to a 
misalignment of controls and complexity, given that the proposed rule 
allows entities to align control systems to the size, complexity, and 
risk profile of the institution and the transactions for which they 
would use covered AVMs. Another commenter stated that the definition 
should address the analytical and statistical nature of control systems 
designed for an AVM. The commenter suggested that the agencies provide 
more guidance to ensure a clear understanding of control expectations. 
Similarly, another commenter asked that the agencies provide more 
information on how the proposed rule relates to existing guidance about 
control systems and model usage. The commenter suggested that the 
agencies issue a compliance guide and frequently asked questions to 
facilitate implementation for small entities. One commenter stated 
that, while a ``policies and procedures'' requirement is the 
established, well-understood compliance implementation framework for 
this type of regulation, the proposed definition of control systems is 
nonstandard and overly defined. The commenter further stated that the 
rule's related but undefined term ``practices'' is nonstandard. Other 
commenters suggested that the final rule include specific control 
standards.
    As discussed earlier, guidance is already in place to assist 
regulated institutions in implementing policies, practices, procedures, 
and control systems relating to model risk, third-party risk, AVMs, and 
nondiscrimination. Institutions that are not regulated by the agency or 
agencies providing the guidance may still look to the guidance for 
assistance with compliance. Regarding the comments concerning the 
inclusion of control systems, the agencies note that policies, 
practices, procedures, and control systems are all part of ensuring 
that AVMs adhere to the rule's requisite quality control standards. In 
addition, many institutions already employ control systems with respect 
to AVM use. These factors, in addition to the rule's flexible approach 
to implementing the statute, should allow institutions to implement 
appropriate control systems and mitigate compliance costs, particularly 
for smaller institutions. For these reasons, and after considering the 
comments, the agencies are adopting the proposed definition of 
``control systems.''
3. Covered Securitization Determination
    The proposed rule defined ``covered securitization determination'' 
to mean a determination regarding (1) whether to waive an appraisal 
requirement for a mortgage origination in connection with its potential 
sale or transfer to a secondary market issuer, or (2) structuring, 
preparing disclosures for, or marketing initial offerings of mortgage-
backed securitizations. Monitoring collateral value in mortgage-backed 
securitizations after they have already been issued would not have been 
a covered securitization determination under the proposed rule. One 
commenter, however, stated that small entities do not securitize loans 
and remarked that the rule could create a cost burden and hinder access 
to the secondary market, particularly for small mortgage originators.
    The agencies received few comments on the proposed definition of 
``covered securitization determination.'' As discussed earlier, 
commenters supported the application of the quality control standards 
to secondary market issuers and in the appraisal waiver context. The 
agencies did not receive comments asking for changes to the proposed 
definition of ``covered securitization determination.''
    As discussed above, covering secondary market issuers' use of AVMs 
in covered securitization determinations--including determinations 
regarding appraisal waivers and structuring, preparing disclosures for, 
or marketing initial offerings of mortgage-backed securitizations--is 
consistent with protecting the safety and soundness of institutions and 
protecting consumers and investors by reducing the risk that secondary 
market issuers would misvalue homes. For these reasons and after 
considering the comments, the agencies are adopting the proposed 
definition of covered securitization determination.
4. Credit Decision
    The proposed rule would have defined the term credit decision to 
mean a decision regarding whether and under what terms to originate, 
modify, terminate, or make other changes to a mortgage, including a 
decision on whether to extend new or additional credit or change the 
limit on a line of credit. Monitoring the value of the underlying real 
estate collateral in loan portfolios would not have been a credit 
decision for the purposes of the proposed rule. This point reflects the 
fact that the collateral worth of a mortgage is generally determined in 
connection with credit decisions or covered securitization 
determinations, rather than when the value of the collateral supporting 
a mortgage is monitored or verified.
    The commenters generally did not offer any suggestions for making 
the proposed definition of ``credit decision'' clearer, but one 
commenter stated that the phrase ``make other changes to a mortgage'' 
is ambiguous and should be excluded from the definition. The phrase 
``make other changes to a mortgage'' in the definition is clarified by 
the context of other words in the definition (i.e., ``modify,'' 
``terminate,'' and ``extend new or additional credit or change the 
credit limit''). Moreover, the phrase ``make other changes to a 
mortgage'' ensures that other types of credit decisions are 
appropriately encompassed within the rule's definition of credit 
decision. For example, one commenter stated that decisions regarding 
assumptions should be covered, and another commenter stated that 
decisions regarding private mortgage insurance and shared equity should 
also be covered. To the extent those are decisions regarding whether 
and under what terms to originate, modify, terminate, or make other 
changes to a mortgage, such decisions are credit decisions under the 
rule. Therefore, mortgage originators and secondary market issuers that 
engage in such decisions themselves, or through or in cooperation with 
a third-party or affiliate, must adopt and maintain policies, 
practices, procedures, and control systems to ensure that AVMs used in 
these credit decisions adhere to the rule's requisite quality control 
standards.
    For these reasons, and for the reasons stated earlier with respect 
to the scope of the rule and after considering the comments, the 
agencies are adopting the proposed definition of ``credit decision.''

[[Page 64552]]

5. Dwelling
    The definition of AVM in section 1125 refers to a mortgage secured 
by a ``consumer's principal dwelling.'' \41\ The OCC, Board, FDIC, 
NCUA, and FHFA proposed to define ``dwelling'' to mean a residential 
structure that contains one to four units, whether or not that 
structure is attached to real property. The term would include, if used 
as a residence, any individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home. The proposed definition of 
``dwelling'' provided that a consumer can have only one principal 
dwelling at a time. Thus, a vacation or other second home would not be 
a principal dwelling. However, if a consumer buys or builds a new 
dwelling that will become the consumer's principal dwelling within a 
year or upon the completion of construction, the new dwelling would be 
considered a principal dwelling for purposes of this rule.\42\
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 3354(d).
    \42\ The NCUA notes that under its regulations, a Federal credit 
union may make a mortgage loan to a member for a maturity of up to 
40 years if the loan is secured by a one-to-four family dwelling 
that is or will be the principal residence of the member-borrower, 
among other requirements. 12 CFR 701.21(g). The use of the term 
``principal residence'' in Sec.  701.21(g) of the NCUA's regulations 
is distinct from the term ``principal dwelling'' used in this final 
rule. The definition of ``dwelling'' and the condition that the 
dwelling is or will be a principal dwelling within one year for 
purposes of this AVM final rule would not change what type of 
dwelling is considered to be a principal residence under the NCUA's 
regulation, Sec.  701.21(g), the parameters of which are drawn 
directly from the Federal Credit Union Act. 12 U.S.C. 1757(5)(A)(i).
---------------------------------------------------------------------------

    The CFPB proposed to codify its AVM requirements in Regulation Z, 
12 CFR part 1026, which generally implements TILA. The definition of 
``dwelling'' proposed by the other agencies was consistent with the 
CFPB's existing Regulation Z.\43\ Unlike TILA, however, title XI does 
not limit its coverage generally to credit transactions that are 
primarily for personal, family, or household purposes.\44\ Because this 
rulemaking is conducted pursuant to title XI rather than TILA, the CFPB 
proposed to revise Regulation Z Sec. Sec.  1026.1, 1026.2, 1026.3, and 
1026.42, and related commentary, to clarify that the final AVM rule 
would apply when a mortgage is secured by a consumer's principal 
dwelling, even if the mortgage is primarily for business, commercial, 
agricultural, or organizational purposes.\45\
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    \43\ See 12 CFR 1026.2(a)(19) (definition of ``dwelling'') and 
1026.2(a)(24) (definition of ``residential mortgage transaction''). 
The phrase ``consumer's principal dwelling'' is used in the 
Regulation Z provisions on valuation independence. 12 CFR 1026.42. 
Regulation Z generally defines ``consumer'' as a natural person to 
whom consumer credit is offered or extended. 12 CFR 1026.2(a)(11). 
The CFPB notes that pursuant to Regulation Z comments 2(a)(11)-3 and 
3(a)-10, consumer credit includes credit extended to trusts for tax 
or estate planning purposes and to land trusts.
    \44\ See 12 CFR 1026.2(a)(12) (definition of ``consumer 
credit'').
    \45\ Therefore, the exemptions in 12 CFR 1026.3 would not apply 
to the requirements established by the CFPB under this rule.
---------------------------------------------------------------------------

    Several commenters suggested that the definition of ``dwelling'' 
should cover real property only and exclude AVMs used in lending for 
manufactured homes and recreational vehicles (RVs), trailers, and other 
structures that retain their mobility. These commenters similarly 
suggested that the final rule should exclude from coverage cost 
estimate guides and other valuation tools used to value such collateral 
that may be a consumer's principal dwelling but is not real estate. One 
commenter asked that the final rule confirm that the rule does not 
apply to cost estimates like those used in complying with the higher-
priced mortgage loan appraisal requirements of Regulation Z Sec.  
1026.35. In explaining its suggestion, the commenter stated that a cost 
estimate is derived from closed sales data and that the designation as 
a cost approach is significant as it does not rely on comparable sales 
and is simply the cost to make less depreciation.
    The commenter stated further that cost estimates are not location 
(address or neighborhood) specific; they are region specific. The 
commenter noted that, for example, one cost estimate guide was 
developed exclusively for the factory built, manufactured housing 
industry and that manufactured homeowners, consumers, retailers, and 
lenders all rely on such independent cost estimates to confirm home 
values. The commenter further stated that the burden of attempting to 
comply with the AVM rule, should it be read to cover these cost 
estimates, would be significant and nearly impossible, especially when 
compared with any negligible risk to consumers. Another commenter 
expressed similar concerns relating to valuation tools for non-real 
estate related loans. This commenter noted that lenders in some markets 
make non-real estate loans to meet the credit and housing needs of 
their customers, and, in making these loans, use different tools that 
might be considered AVMs under the proposed definition of dwelling. The 
commenter stated that the increased burden associated with complying 
with the rule could lead some lenders to exit this market.
    One commenter expressed concern about the rule covering loans that 
are used for business purposes, but are secured by principal 
residences, suggesting that Congress intended to limit the statute to 
consumer-purpose credit given that the statute refers to a ``consumer's 
principal dwelling.''
    In contrast, several other commenters recommended that the agencies 
adopt a broad definition of dwelling. One stated that coverage should 
extend to all mortgages involving loans for dwellings, including 
manufactured housing classified as personal property and accessory 
dwelling units. Two commenters suggested the agencies define dwelling 
in a way consistent with uses in the Fair Housing Act and in other 
relevant statutes. Another commenter suggested that it would be 
consistent with safe and sound practices to expand the scope of the 
rule to cover all dwellings, not only those that are principal 
dwellings. One commenter stated that the agencies should consider how 
the principal dwelling requirement may apply to active military 
personnel who are purchasing a home for their future permanent 
residence but who are assigned temporarily to a different duty station.
    In response to these comments, the agencies note that section 1125 
does not limit the definition of AVM to collateral that is deemed to be 
real property, nor does it limit coverage by the AVM requirements to 
credit transactions that are primarily for personal, family, or 
household purposes. Instead, the statute focuses on the valuation of a 
consumer's principal dwelling that secures a mortgage. In response to 
the comments on limiting the rule to a principal dwelling, the agencies 
note that the statute expressly defines an AVM as one used to value a 
consumer's principal dwelling. The final rule is consistent with the 
plain language of the statute and the agencies decline to expand the 
scope of the requirements beyond principal dwellings.
    With respect to the commenters' argument that valuation tools used 
for manufactured homes, RVs, and boats are not AVMs, the definition of 
AVM in the statute covers ``any computerized model'' used to determine 
the value of a consumer's principal dwelling.\46\ The agencies do not 
opine on whether any specific product, including a cost estimate and 
other valuation tool, is an AVM that would be covered under this rule. 
As noted by commenters, AVMs that rely on artificial intelligence, 
machine learning, and other technologies are developing rapidly.

[[Page 64553]]

Since AVM modeling technology will continue to evolve, valuation 
products that do not currently meet the definition of an AVM may meet 
that definition in the future. As such, the agencies have determined 
that a flexible and principles-based approach to this rule would be 
more appropriate than a prescriptive approach. Under this principles-
based approach, mortgage originators and secondary market issuers will 
need to consider whether the valuation products that they are using are 
(1) automated (i.e., computerized); (2) a model; \47\ and (3) designed 
to estimate the value of a consumer's principal dwelling 
collateralizing a mortgage.
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 3354(d) (emphasis added).
    \47\ For example, the Supervisory Guidance on Model Risk 
Management, issued by the OCC, Board, and FDIC describes a ``model'' 
as follows:
    [T]he term model refers to a quantitative method, system, or 
approach that applies statistical, economic, financial, or 
mathematical theories, techniques, and assumptions to process input 
data into quantitative estimates. A model consists of three 
components: an information input component, which delivers 
assumptions and data to the model; a processing component, which 
transforms inputs into estimates; and a reporting component, which 
translates the estimates into useful business information. Models 
meeting this definition might be used for analyzing business 
strategies, informing business decisions, identifying and measuring 
risks, valuing exposures, instruments or positions, conducting 
stress testing, assessing adequacy of capital, managing client 
assets, measuring compliance with internal limits, maintaining the 
formal control apparatus of the bank, or meeting financial or 
regulatory reporting requirements and issuing public disclosures. 
The definition of model also covers quantitative approaches whose 
inputs are partially or wholly qualitative or based on expert 
judgment, provided that the output is quantitative in nature.
    Supervisory Guidance on Model Risk Management, OCC Bulletin 
2011-12 at 3 (Apr. 4, 2011) (emphasis in original); Guidance on 
Model Risk Management, Federal Reserve SR Letter 11-7 (Apr. 4, 
2011); Adoption of Supervisory Guidance on Model Risk Management, 
FDIC FIL-22-2017 (June 7, 2017). Institutions that are not regulated 
by the agency or agencies providing this guidance may still look to 
the guidance for assistance with compliance.
---------------------------------------------------------------------------

    With respect to the comment that the agencies consider the effect 
of the rule on servicemembers who are purchasing a home for their 
future permanent residence, but are assigned to temporary duty 
stations, the final rule will not have an effect on the place 
servicemembers designate as their principal dwelling.
    For these reasons and after considering the comments, the agencies 
are adopting the proposed definition of ``dwelling.'' Under the final 
rule, a dwelling is defined as a residential structure that contains 
one to four units, whether or not that structure is attached to real 
property. Mortgages secured by non-real estate property are covered by 
this rule if the property is used as the borrower's principal dwelling 
and the mortgage originator or secondary market issuer uses an AVM to 
determine the value of the collateral securing the loan.
6. Mortgage
    Section 1125(d) defines an AVM with reference to determining ``the 
collateral worth of a mortgage secured by a consumer's principal 
dwelling.'' \48\ Section 1125 does not define ``mortgage.'' Because the 
statute does not refer to ``mortgage loans'' or ``mortgage credit,'' 
but rather uses the word ``mortgage,'' the proposal defined 
``mortgage'' to broadly cover the mortgage market as fully as the 
statute appears to envision in the language of section 1125(d) and 
throughout section 1125. Consequently, for this purpose, the agencies 
proposed to adopt, in part, the Regulation Z definition of 
``residential mortgage transaction,'' \49\ which existed at the time 
the statute was passed. The proposal would define the term ``mortgage'' 
to mean 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 
consumer's principal dwelling.
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 3354(d).
    \49\ 12 CFR 1026.2(a)(24).
---------------------------------------------------------------------------

    Most commenters who addressed the definition of ``mortgage'' in the 
proposal expressed support for the proposed language. Several 
commenters supported including purchase money security interests 
arising under installment sales contracts in the definition of 
``mortgage.'' One commenter stated that consumers should have the same 
protection in these contracts as in other types of mortgage financing. 
The commenter also stated that TILA, the Real Estate Settlement 
Procedures Act, and the S.A.F.E. Act apply to installment sales 
contracts to the same extent as to traditional mortgage loans 
(depending on whether the originating lender makes a certain volume of 
transactions), so including installment contracts in the rule would be 
consistent with other current laws. The commenter stated further that 
including sales contracts in the AVM rule would ensure appropriate 
protections for these transactions that disproportionately impact 
homebuyers of color. The commenter also stated that sales contracts are 
typically made for smaller amounts and used to purchase less expensive 
homes, and thus AVMs are more likely to be used in these transactions.
    Another commenter in support of covering installment contracts 
stated that a narrower definition would have a disparate impact on 
protected classes by excluding broad swaths of the market from the 
quality control standards. Similarly, a different commenter stated that 
applying quality controls for AVMs used in these contracts would 
provide consumer protection in a space where consumers are often 
vulnerable to coercive agreements.
    Conversely, one commenter stated that, when combined with the 
proposed definitions of ``consumer'' and ``dwelling,'' the definition 
of ``mortgage'' is not clear. The commenter stated that the rule 
proposes to adjust the definition of ``primary use,'' removing the 
exception for business-purpose lending, among other exceptions, from 
Regulation Z Sec.  1026.3. The commenter suggested that the proposed 
definitions and changes to the TILA rules will cause a disconnect in 
how organizations apply the rest of the TILA standards, which take the 
exceptions into consideration when applying the rule to mortgage 
transactions. The commenter stated further that the definitions would 
not align with the current Federal credit union definitions of 
mortgage. For those reasons, the commenter suggested that definitions 
of ``consumer,'' ``dwelling,'' and ``mortgage'' should only be 
applicable to AVM use, and not cause universal changes to Regulation Z. 
In addition, a different commenter suggested that the inclusion of 
sales contracts in the definition of ``mortgage'' should be decided 
separately from a consideration of AVM standards and requested that the 
agencies clarify whether the rule would include HELOCs and closed-end 
home equity loans.
    The agencies have determined that the comprehensive coverage of the 
mortgage market that the proposed definition would bring about is the 
best way to implement the statutory language. The agencies agree with 
those commenters who stated that this definition will provide 
appropriate consumer protection for the often-vulnerable consumers in 
the installment sales contracts market. The agencies do not agree that 
this definition, and the others adopted in this rule, will interfere 
with the current interpretation of Regulation Z. The agencies note that 
these definitions apply to AVM compliance alone, and are not meant to 
alter the current definitions in Regulation Z. Furthermore, the 
definition of ``mortgage'' does not exclude HELOCs and closed-end home 
equity loans that are secured by a consumer's principal dwelling. For 
these reasons and after considering the

[[Page 64554]]

comments, the agencies are adopting the proposed definition of 
``mortgage.''
7. Mortgage Originator
    The proposal would have defined the term ``mortgage originator'' in 
the rule by cross reference to the TILA definition of ``mortgage 
originator''.\50\ Thus, under the proposal, the term ``mortgage 
originator'' generally would have included creditors as defined by 15 
U.S.C. 1602(g), notwithstanding that the definition of ``mortgage 
originator'' at 15 U.S.C. 1602(dd)(2) excludes creditors for certain 
other purposes.\51\ The CFPB's proposal also would have added proposed 
Regulation Z comment 42(i)(2)(vi)-1 to its rule reflecting this 
clarification. Additionally, based on the exception provided at 15 
U.S.C. 1602(dd)(2)(G), the term ``mortgage originator'' generally would 
have excluded servicers as defined by 15 U.S.C. 1602(dd)(7) as well as 
their employees, agents, and contractors. However, consistent with the 
interpretation published in the CFPB's 2013 Loan Originator 
Compensation Rule, the proposed rule would have applied to servicers as 
defined by 15 U.S.C. 1602(dd)(7) as well as their employees, agents, 
and contractors if, in connection with new extensions of credit, they 
both use covered AVMs to engage in credit decisions and to perform any 
of the activities listed in 15 U.S.C. 1602(dd)(2)(A). The CFPB's 
proposal also would have added proposed Regulation Z comment 
42(i)(2)(vi)-2 reflecting this clarification.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 1602(dd)(2).
    \51\ Id.
---------------------------------------------------------------------------

    Although commenters generally supported this proposed definition, 
two commenters asked the agencies to consider making substantive 
changes to the definition. One of these commenters asked the agencies 
to amend the definition of ``mortgage originator'' in the final rule so 
that it would include servicing-only servicers in addition to the 
persons covered as mortgage originators under TILA Sec.  103(dd)(2), 15 
U.S.C. 1602(dd)(2). As explained in the proposal, the agencies proposed 
to define the term ``mortgage originator'' by cross reference to the 
TILA definition of ``mortgage originator'' because doing so ``would 
maintain consistency in the usage of this term with other sections of 
title XI and the agencies' appraisal regulations.'' \52\ Specifically, 
Congress adopted the TILA definition of ``mortgage originator'' by 
cross reference in a 2018 amendment to title XI (section 1127 on 
appraisals in rural areas) \53\ and that the OCC, Board, and FDIC 
implemented the same definition in the appraisal exception for certain 
rural areas in their appraisal regulations.\54\
---------------------------------------------------------------------------

    \52\ See 12 CFR 34.43(a)(14) (OCC), 12 CFR 225.63(a)(15) 
(Board), and 12 CFR 323.3(a)(14) (FDIC).
    \53\ 12 U.S.C. 3356.
    \54\ Id.
---------------------------------------------------------------------------

    TILA Sec.  103(dd)(2)(G), 15 U.S.C. 1602(dd)(2)(G), generally 
excludes servicers as well as their employees, agents, and contractors 
from TILA's definition of ``mortgage originator'' as long as they do 
not perform any of the activities listed in 15 U.S.C. 1602(dd)(2)(A) 
for a transaction that constitutes a new extension of credit, including 
a refinancing or an assumption. Accordingly, the final rule does not 
expand the definition of ``mortgage originator'' to cover servicing-
only servicers in the final rule. Relatedly, the CFPB adopts proposed 
Regulation Z comment 42(i)(2)(vi)-2, which clarifies the activities 
that can make a mortgage servicer a mortgage originator for purposes of 
the rule, as proposed but redesignates it as Regulation Z comment 
42(i)(2)(vi)-1.
    Another commenter noted that the proposed definition of ``mortgage 
originator'' does not align with the proposed changes to the term 
``principal dwelling'' and the inclusion of business purpose loans. To 
address this issue, the final rule no longer cross references the TILA 
definition of ``mortgage originator,'' but instead defines the term 
``mortgage originator'' by incorporating the full text of the TILA 
definition of ``mortgage originator'' with several revisions as 
discussed herein.
    The TILA definition of ``mortgage originator'' applies to persons 
performing activities relating to residential mortgage loans.\55\ In 
relevant part, TILA defines the term ``residential mortgage loan'' as 
``any consumer credit transaction that is secured by a mortgage, deed 
of trust, or other equivalent consensual security interest on a 
dwelling or on residential real property that includes a dwelling, 
other than a consumer credit transaction under an open end credit plan. 
. . .'' \56\ A consumer credit transaction is ``one in which the party 
to whom credit is offered or extended is a natural person, and the 
money, property, or services which are the subject of the transaction 
are primarily for personal, family, or household purposes.'' \57\
---------------------------------------------------------------------------

    \55\ The term ``mortgage originator'':
    (A) means any person who, for direct or indirect compensation or 
gain, or in the expectation of direct or indirect compensation or 
gain--
    (i) takes a residential mortgage loan application;
    (ii) assists a consumer in obtaining or applying to obtain a 
residential mortgage loan; or
    (iii) offers or negotiates terms of a residential mortgage loan;
    (B) includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or 
will provide any of the services or perform any of the activities 
described in subparagraph (A). . . .
    See 15 U.S.C. 1602(dd)(2)(A) and (B) (emphasis added).
    \56\ 15 U.S.C. 1602(dd)(5) (emphasis added).
    \57\ 15 U.S.C. 1602(i).
---------------------------------------------------------------------------

    Title XI generally does not limit its coverage to consumer credit 
transactions.\58\ As a result, the agencies intended the proposal to 
cover a mortgage, including a HELOC, secured by a consumer's principal 
dwelling, even if the mortgage were primarily for business, commercial, 
agricultural, or organizational purposes.\59\ This intent is reflected 
in the proposal's discussion of the definition of the term 
``mortgage.'' In that discussion, the agencies explained that, although 
they based the proposal's definition of the term ``mortgage'' in part 
on TILA's definition of residential mortgage transaction, they proposed 
``to broadly cover the mortgage market as fully as the statute appears 
to envision.'' \60\ As a result, the agencies proposed to define the 
term ``mortgage'' to cover not only consumer credit transactions but 
any 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 
consumer's principal dwelling.\61\
---------------------------------------------------------------------------

    \58\ 88 FR 40638 at 40645.
    \59\ Id.
    \60\ Id.
    \61\ Id.
---------------------------------------------------------------------------

    The agencies' proposal intended the term ``mortgage originator'' to 
apply with breadth equal to that of the term ``mortgage'' and its 
application only to persons performing activities relating to 
residential mortgage loans was an oversight.
    In defining ``mortgage originator'' by incorporating the full text 
of the TILA definition of ``mortgage originator'', the final rule 
replaces the term ``residential mortgage transaction'' with the term 
``mortgage'' wherever it appears in the TILA definition. As discussed 
in the next section, the term ``mortgage'' retains its meaning from the 
proposal and means ``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 consumer's principal dwelling.'' In line with the intent 
of the

[[Page 64555]]

proposal, this change applies the term ``mortgage originator'' to any 
person who, for direct or indirect compensation or gain, or in the 
expectation of direct or indirect compensation or gain, takes a 
mortgage application, assists a consumer in obtaining or applying to 
obtain a mortgage, or offers or negotiates terms of a mortgage.
    The final rule includes three additional conforming changes to the 
text of the TILA definition of ``mortgage originator'' as incorporated 
in the final rule's definition of ``mortgage originator.'' First, the 
final rule removes the exclusion for seller financers provided at TILA 
Sec.  103(dd)(2)(E), 15 U.S.C. 1602(dd)(2)(E), and replaces it with the 
seller financer exclusions contained in Regulation Z Sec.  
1026.36(a)(4) and (5). This change reflects that the seller financer 
exclusion in TILA Sec.  103(dd)(2)(E) contains five elements, the last 
of which is that the transaction ``meets any other criteria the Board 
may prescribe.'' These additional criteria are incorporated into 
Regulation Z Sec.  1026.36(a)(4) and (5),\62\ and, therefore, the 
agencies, with the exception of the CFPB, are replacing the text from 
TILA Sec.  103(dd)(2)(E) with the text from Regulation Z Sec.  
1026.36(a)(4) and (5) with minor, non-substantive changes, as 
necessary, to conform the text from Regulation Z Sec.  1026.36(a)(4) 
and (5) with the paragraph structure of each agency's final rule. 
Instead of replacing the text from TILA Sec.  103(dd)(2)(E) with the 
text from Regulation Z Sec.  1026.36(a)(4) and (5), the CFPB will 
provide a cross reference to Regulation Z Sec.  1026.36(a)(4) and (5) 
in its version of the final rule.
---------------------------------------------------------------------------

    \62\ 78 FR 11280, 11309-11311 (Feb. 15, 2013).
---------------------------------------------------------------------------

    Second, the final rule removes the exclusion provided at TILA Sec.  
103(dd)(2)(F), 15 U.S.C. 1602(dd)(2)(F). That exclusion provides that 
the term ``mortgage originator'' is inapplicable to creditors for 
purposes of TILA Sec.  129B(c)(1), (2), and (4), 15 U.S.C. 1639b(c)(1), 
(2), and (4) (which relate to TILA's prohibition on the payment of 
steering incentives).\63\ Since the exclusion applies only with respect 
to TILA Sec.  129B(c)(1), (2), and (4), it is inapplicable in the 
context of the AVM rule and has been deleted in the final rule. Because 
the definition of ``mortgage originator'' in the final rule does not 
contain the exclusion at TILA Sec.  103(dd)(2)(F), proposed Regulation 
Z comment 42(i)(2)(vi)-1, which clarified that ``[t]he term mortgage 
originator includes creditors, notwithstanding that the definition of 
mortgage originator at 15 U.S.C. 1602(dd)(2) excludes creditors for 
certain other purposes,'' is no longer necessary. As a result, the CFPB 
does not adopt proposed Regulation Z comment 42(i)(2)(vi)-1. Third, the 
final rule makes minor, nonsubstantive regulatory text changes and 
adjusts paragraph designations and cross-references incorporated from 
the full text of the TILA definition of ``mortgage originator'' as 
necessary to align the text with the paragraph structure of each 
agency's final rule.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 1639b(c)(1), (2), and (4).
---------------------------------------------------------------------------

    One commenter that noted that the proposed definition of ``mortgage 
originator'' does not align with the proposed changes to the term 
``principal dwelling'' and the inclusion of business purpose loans also 
noted that some entities that make business purpose loans may not make 
consumer purpose loans and that, consequently, those entities may face 
uncertainty about their compliance obligations if, as proposed, they 
were mortgage originators for purposes of the rule. The agencies have 
considered this comment. However, because, as previously noted, title 
XI generally does not limit its coverage to consumer credit 
transactions, the agencies have determined that the final rule should 
broadly cover the mortgage market. Accordingly, the final rule applies 
the definition of ``mortgage originator'' to any person who, for direct 
or indirect compensation or gain, or in the expectation of direct or 
indirect compensation or gain, takes a mortgage application, assists a 
consumer in obtaining or applying to obtain a mortgage, or offers or 
negotiates terms of a mortgage secured by a consumer's principal 
dwelling, even if the mortgage is primarily for business, commercial, 
agricultural, or organizational purposes.\64\
---------------------------------------------------------------------------

    \64\ 88 FR 40638 at 40645; see also, Frequently Asked Questions 
on the Appraisal Regulations and the Interagency Appraisal and 
Evaluation Guidelines 4, OCC Bulletin 2018-39 (Oct. 16, 2018); 
Federal Reserve Board SR Letter 18-9 (Oct. 16, 2018); FDIC FIL-62-
2018 (Oct. 16, 2018).
---------------------------------------------------------------------------

    The final rule includes another technical change relating to the 
definition of ``mortgage originator.'' This technical change is the 
addition of a definition of person by cross reference to the definition 
of person in TILA. The addition of a stand-alone definition of 
``person'' is needed because the final rule, unlike the proposed rule, 
does not define ``mortgage originator'' by incorporating by reference 
the definition of ``mortgage originator'' in TILA. As a result, the 
definition of ``person,'' which is defined by cross reference within 
the TILA definition of ``mortgage originator,'' is no longer part of 
the final rule's revised definition of ``mortgage originator.'' The 
adoption of a stand-alone definition of ``person'' does not change the 
incorporated definition of person and is a technical change only. The 
agencies other than the CFPB provide this clarification to ensure that 
the definition of ``mortgage originator'' in the final rule covers both 
natural persons and organizations. The CFPB's final rule does not 
require this clarification because Regulation Z already defines the 
term ``person'' at Sec.  1026.2(a)(22) in a manner that is consistent 
with the meaning provided in TILA Sec.  103(e), 15 U.S.C. 1602(e).
8. Secondary Market Issuer
    The agencies proposed to define a ``secondary market issuer'' as 
any party that creates, structures, or organizes a mortgage-backed 
securities transaction. The agencies proposed the definition in this 
manner due to the statutory focus in section 1125 on ``issuers'' and 
``determin[ing] the collateral worth'' of a mortgage. This type of 
determination, as opposed to verification or monitoring of such 
determination, would typically take place in the secondary market in 
connection with the creation, structuring, and organization of a 
mortgage-backed security. A number of parties may be involved in the 
securitization process. The proposed definition was designed to ensure 
coverage of entities responsible for the core decisions required for 
the issuance of mortgage-backed securities, including making 
determinations of the value of collateral securing the loans in the 
securitization transaction.
    The agencies received two comments on the proposed definition of 
``secondary market issuer.'' One commenter expressed support for the 
definition as proposed. Another commenter stated that the rule should 
cover not only the GSEs, but also other secondary market issuers that 
structure and market residential mortgage-backed securities, such as in 
private-label securitization. The commenter asked that the agencies 
clarify that the final rule will apply beyond the GSEs to these other 
entities.
    The agencies have determined that the proposed definition will 
ensure coverage of entities responsible for the core decisions required 
for the issuance of mortgage-backed securities. For this reason and 
after considering the comments, the agencies are adopting the proposed 
definition of ``secondary market issuer,'' which includes not only the 
GSEs, but any other party that creates, structures, or organizes a 
mortgage-backed securities transaction.

[[Page 64556]]

9. Comments Regarding Undefined Terms
    One commenter stated that the terms ``mortgage-backed securities 
transaction,'' ``securitizations,'' and ``mortgage-backed 
securitizations'' should be defined. In response, the agencies note 
that related terms (e.g., ``mortgage-backed securities'' and 
``securitization'') are currently used without definition in other 
sections of title XI and throughout the agencies' appraisal 
regulations. Based on the agencies' experience, these terms have 
commonly understood meanings and have not caused confusion. For these 
reasons and after considering the comment, the final rule does not 
include definitions of these terms.

D. Implementation Period

    The agencies proposed 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. The proposed 
extended effective date would have given institutions time to come into 
compliance with the rule. Most commenters expressed support for the 
proposed 12-month implementation period for the final rule. One 
commenter asked the agencies to consider an 18-month implementation 
period. Another commenter recommended a tiered implementation model 
with at least 24 months for credit unions to work with vendors, test 
systems, and train staff.
    The agencies have determined that a 12-month effective date is 
appropriate, given that many institutions already have in place 
measures to assess AVMs for quality control and that the final rule 
provides flexibility to tailor policies, practices, procedures, and 
control systems as appropriate. For these reasons and after considering 
the comments, the final rule will be effective on the first day of the 
calendar quarter following the 12 months after publication in the 
Federal Register.

E. Other Comments

1. Uniform Standards and Independent Testing
    A number of commenters suggested that the agencies work with the 
public to foster the development of an SSO for AVMs to create a level 
playing field for AVM users and to reduce regulatory burden. One 
commenter requested that the agencies engage in a full notice and 
comment rulemaking process if the use of an SSO is contemplated. 
Another commenter recommended that SSO members be comprised of AVM 
providers, consumer advocates, investors, mortgage guarantors, mortgage 
insurers, mortgage originators, underwriters, and servicers. The 
commenter also suggested that regulators participate in the SSO. A 
number of commenters called for the establishment of a separate, fully 
independent third-party nonprofit organization to test AVM systems for 
both accuracy and racial bias. Some commenters stated that SSOs and 
third-party testing would save lenders considerable time and effort and 
bolster quality control for AVMs. One commenter, for example, suggested 
that it would be useful to have a set of standards similar to USPAP for 
AVMs that includes key definitions, minimum reporting requirements, and 
required certifications.
    One commenter stated that it would be beneficial to have some level 
of standardization of metrics used to measure an AVM's success or 
failure. The commenter suggested that the industry is best suited to 
continue working with developers and users of AVMs to promote 
consistency in AVM measurement and testing, such as by developing a 
consistent approach to confidence scores.
    Another commenter suggested that regulated parties would greatly 
benefit from more transparency and access to data from the FHFA, the 
Uniform Collateral Data Portal, and the Uniform Mortgage Data Program. 
This commenter further suggested that Federal regulators should 
evaluate real estate data availability at the State and local level, as 
these data are essential for ensuring AVM credibility.
    In contrast, one commenter stated that industry stakeholders, 
including originators, secondary market participants, and property 
valuation vendors have already established straightforward, 
transparent, and fair AVM testing and ranking (i.e., cascading rule 
sets allowing for comparing predictions from different AVMs). The 
commenter stated further that flexible, transparent, principles-based 
approaches to AVM guidelines are relatively inexpensive and not time-
consuming to incorporate and apply and that AVM testing and individual 
AVM model performance detail may be readily available through a firm's 
internal testing group or numerous third-party, independent testing 
organizations. In responding to the question in the proposal about the 
impact on small entities, that commenter stated that AVM testing is 
inexpensive and can be done easily by large or small entities. In 
addition, the commenter stated that cascading rule sets and platforms 
using multiple lending grade AVMs from quality providers are readily 
available. For these reasons, the commenter argued that quality control 
standards for AVMs would not disadvantage small entities.
    Another commenter stated that AVM vendors already provide 
comprehensive information to financial institutions to demonstrate the 
quality control of their AVMs. The commenter further stated that 
financial institutions currently require AVM vendors to fill out 
numerous questionnaires (usually once to twice per year) to address 
large numbers of compliance issues and best practices, in addition to 
AVM developer, lender, and third-party testing. The commenter also 
stated that financial institutions require explanations and testing 
detail that documents how AVMs work, their accuracy, their multiple 
models, and the models' infrastructure. The commenter stated that the 
predominant purpose of the questionnaires is to address concerns that 
the financial institution has, and that the financial institution is 
following a process to protect its customers and its safety and 
soundness. In addition, another commenter recommended that there be 
education and training for users of AVMs.
    The agencies recognize that SSOs and third-party AVM testing 
entities could be beneficial to effective compliance with the AVM rule. 
As long as financial institutions meet the obligations stated in the 
final rule, they are free to work with third parties to assist them 
with their compliance obligations. In regard to comments suggesting 
other methods to promote uniformity in metrics and policies, the 
agencies note that existing standards and guidance on model risk 
management and on testing of AVMs remain applicable, and can be used by 
institutions to assist with compliance.
2. Potential for Additional Guidance
    A number of commenters suggested that the agencies issue guidance 
focused specifically on AVM quality control to help institutions, 
especially small institutions, implement the quality control standards. 
Many of these commenters acknowledged that existing guidance, such as 
model risk guidance and the Appraisal Guidelines, already address 
elements of how to implement the AVM rule, but a number of commenters 
requested additional guidance on how to evaluate AVMs, particularly 
with respect to how to assess AVMs for potential discrimination under 
the fifth factor. One commenter stated that the agencies should provide 
some structure or examples of policies, practices, procedures, or 
control systems. The commenter also stated that it should be

[[Page 64557]]

made clear that lenders can rely on data and external reviews produced 
by the AVM provider to comply with this rule. In addition, one 
commenter suggested that the agencies facilitate further efforts to 
develop fair lending and fair housing testing for AVMs by making 
additional GSE data available to industry stakeholders, organizing 
hackathons and conferences, and encouraging academic research and 
similar engagements that leverage private sector expertise to inform 
ongoing guidance around AVM guidelines.
    One commenter stated that additional guidance is not necessary, 
highlighting the current guidance on third-party and model risk 
management. However, the commenter suggested that commentary on how 
existing guidance applies to third-party oversight of the AVM quality 
control standards may be beneficial at some point in the future.
    Another commenter stated that the Appraisal Guidelines and NCUA's 
third-party risk management expectations already advise credit unions 
that they need to understand the AVMs they use, including the AVM's 
limitations; have controls in place to mitigate risks (including with 
regard to non-discrimination laws); and monitor the relationship and 
results to ensure that the AVM is working and being used as designed.
    As discussed earlier, many of the agencies have already provided 
guidance on implementing policies, practices, procedures, and control 
systems relating to model risk, third-party risk, AVMs, and 
nondiscrimination. As explained above, institutions that are not 
regulated by the agency or agencies providing the guidance may still 
look to the guidance for assistance with compliance. In addition, 
institutions should be able to work with AVM providers to assist them 
with their compliance obligations under the rule.
    Under safety and soundness standards, and as reflected in related 
guidance, while institutions should not rely solely on testing and 
validation representations provided by an AVM vendor, an institution 
does not necessarily need to conduct its own testing and validation, 
provided that the institution's policies, practices, procedures, and 
control systems for evaluating the sufficiency of the vendor's testing 
and validation are appropriate based on the size, complexity, and risk 
profile of the institution and the transactions for which they would 
use AVMs covered by the rule.
    As described above, the agencies have determined that a flexible 
approach to implementing the quality control standards would allow the 
implementation of the standards to evolve along with AVM technology and 
reduce compliance costs. Different policies, practices, procedures, and 
control systems may be appropriate for institutions of different sizes 
with different business models and risk profiles, and a more 
prescriptive rule could unduly restrict institutions' efforts to set 
their risk management practices accordingly. For these reasons and 
after considering the comments, the agencies are not issuing additional 
guidance at this time and recommend that institutions review and 
consider existing guidance when establishing and implementing 
appropriate policies, practices, procedures, and control systems for 
AVM quality control.
3. Small Entity Compliance
    Several commenters asked the agencies to adopt a transaction 
threshold for application of the AVM quality control standards. For 
example, one commenter suggested that the agencies revise the proposed 
rule to exempt loans at or below $400,000 held in portfolio from the 
quality control requirements for AVMs, allow reliance on third-party 
certifications of AVM providers, or provide a safe harbor for small 
lenders. One commenter cited the appraisal thresholds as an example of 
how the agencies could reduce burden for smaller lenders.
    Another commenter stated that small entities do not control the 
data that is used in the AVM and, therefore, do not have the ability to 
quality control the data or the algorithms used by AVM vendors. This 
commenter also argued that small businesses do not have the bargaining 
power that a large company may have to demand information from an AVM 
vendor and do not have the resources to assess the algorithms that are 
used by AVMs. The commenter suggested that it is unreasonable to hold 
small entities responsible for the actions of AVM vendors. The 
commenter stated further that if an exemption is not possible, the 
agencies should consider some type of safe harbor or a certification 
program where a third party reviews the AVM and provides an approval to 
assure small entities that the AVM complies with the regulatory 
requirements.
    As discussed earlier, the flexibility in the rule will limit the 
burden of complying with the rule for institutions, particularly 
smaller entities. As explained above, the policies, practices, 
procedures, and control systems used to ensure compliance may vary 
based on the size, complexity, and risk profile of the institution and 
the transactions for which they would use AVMs covered by the rule. The 
agencies also note that section 1125 does not include safe harbors or 
exemptions, including for smaller entities. For these reasons and after 
considering the comments, the final rule does not include an exemption 
threshold, or other specific provision for smaller institutions.

IV. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995.\65\ 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.
---------------------------------------------------------------------------

    \65\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    The agencies received three comments on estimated labor hours and 
costs for the information collection requirements of the proposed rule. 
One commenter stated that the agencies' estimate of the labor hours 
associated with recordkeeping by covered entities in years following 
implementation may be appropriate for documentation of policies and 
procedures, but suggested that the proposed rule underestimated other 
regulatory burdens associated with ongoing compliance. Another 
commenter stated that the agencies' estimate of labor hours associated 
with recordkeeping by covered entities seemed relatively low given the 
effort needed to establish control systems. Finally, one commenter 
stated that incorporating principles-based guidelines regarding AVMs is 
not costly or time consuming.
    The agencies have carefully reviewed burdens associated with 
recordkeeping, reporting, and disclosure for each section of the rule 
in consideration of the comments received. The agencies note that, 
consistent with the PRA, the PRA burden estimates reflect only the 
burden related to recordkeeping, reporting, and disclosure requirements 
in the final rule. PRA burdens, like compliance costs, may vary across 
institutions, and the agencies' PRA burden estimates are meant to be 
overall averages. The agencies believe the estimates of burden hours 
are reasonable considering the recordkeeping requirements of the final 
rule. For further discussion of response to commenters, particularly 
related to other regulatory costs incurred by covered entities, please 
refer to the part titled ``Discussion of the Proposed Rule,

[[Page 64558]]

Comments Received, and the Final Rule'' within the SUPPLEMENTARY 
INFORMATION section of this document.
    The final rule establishes 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 final rule requires 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.
    The quality control standards in the final rule are applicable only 
to covered AVMs, which are AVMs as defined in the final rule. The final 
rule requires 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 final rule creates new recordkeeping requirements. 
The agencies therefore revised their current information collections 
related to real estate appraisals and evaluations. The OMB control 
numbers are for the OCC, 1557-0190; for the Board, 7100-0250; for the 
FDIC, 3064-0103; and for the NCUA, 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 
final rule, the agencies are also updating and aligning their 
information collections with respect to the estimated burden hours 
associated with the Appraisal Guidelines.
    The information collection requirements contained in this final 
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 \66\ and 
section 1320.11 of the OMB's implementing regulations.\67\ The Board 
reviewed the final rule under the authority delegated to the Board by 
OMB.
---------------------------------------------------------------------------

    \66\ 44 U.S.C. 3507(d).
    \67\ 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;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (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. Written comments and 
recommendations for the proposed information collection should be sent 
within 30 days of publication of this notice to www.reginfo.gov/public/do/PRAMain. Find this information collection by selecting ``Currently 
under 30-day Review--Open for Public Comments'' or using the search 
function.
    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 Information Collection:
    For federally related transactions, title XI requires regulated 
institutions \68\ to obtain appraisals prepared in accordance with 
USPAP as 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.
---------------------------------------------------------------------------

    \68\ 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.
---------------------------------------------------------------------------

    The final rule requires 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.
    Current Action: The final 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 final rule will result 
in an implementation burden of 40 hours and .33 responses per 
respondent and an annual ongoing burden of 5 hours and one response per 
respondent. In addition to accounting for the PRA burden incurred, as a 
result of this final rule, the agencies are also updating and

[[Page 64559]]

aligning their information collections (IC) with respect to the 
estimated burden hours associated with the Appraisal Guidelines. This 
will 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]
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total number
            Requirement                   Citations           Number of       Burden hours per       of hours
                                                             respondents         respondent          annually
----------------------------------------------------------------------------------------------------------------
Recordkeeping: Resolution stating   Sec.   7.1024(d).....               6  5....................              30
 plans for use of property.
Recordkeeping: ARM loan             Sec.   34.22(a), Sec.             164  6....................             984
 documentation must specify            160.35(b).
 indices to which changes in the
 interest rate will be linked.
Recordkeeping: Appraisals must be   Sec.   34.44.........             976  1,465 responses per           119,072
 written and contain sufficient                                             respondent @5
 information and analysis to                                                minutes per response.
 support engaging in the
 transaction.
Recordkeeping: Written policies     Sec.   34.62;                   1,413  30...................          42,390
 (reviewed annually) for             appendix A to
 extensions of credit secured by     subpart D to part
 or used to improve real estate.     34; Sec.   160.101;
                                     appendix A to Sec.
                                     160.101.
Recordkeeping: Real estate          Sec.   34.85.........               9  5....................              45
 evaluation policy to monitor OREO.
Recordkeeping: New IC 1--AVM Rule-- Proposed Sec.                     342  13.33 hours (40 hours           4,560
 Policies and Procedures             34.222.                                divided by 3 years).
 (Implementation).
Recordkeeping: New IC 2--AVM Rule-- Proposed Sec.                     342  5....................           1,710
 Policies and Procedures (Ongoing).  34.222.
Recordkeeping: New IC 3--           N/A..................             976  10...................           9,760
 Interagency Appraisal and
 Evaluation Guidelines--Policies
 and Procedures.
Reporting: Procedure to be          Sec.   34.22(b); Sec.             249  6....................           1,494
 followed when seeking to use an       160.35(d)(3).
 alternative index.
Reporting: Prior notification of    Sec.   34.86.........               6  5....................              30
 making advances under development
 or improvement plan for OREO.
Disclosure: Default notice to       Sec.   190.4(h)......              42  2....................              84
 debtor at least 30 days before
 repossession, foreclosure, or
 acceleration of payments.
Disclosure: New IC 4--Interagency   N/A..................             976  5....................           4,880
 Appraisal and Evaluation
 Guidelines.
                                   -----------------------------------------------------------------------------
    Total Annual Burden Hours.....  .....................  ..............  .....................         185,039
----------------------------------------------------------------------------------------------------------------

Board Burden

                                   Table 2--Summary of Estimated Annual Burden
                                     [FR Y[dash]30; OMB No. 7100[dash]0250]
----------------------------------------------------------------------------------------------------------------
                                         Estimated       Estimated                                   Estimated
            FR Y[dash]30                 number of        annual        Estimated average hours    annual burden
                                        respondents      frequency           per response              hours
----------------------------------------------------------------------------------------------------------------
                                                  Recordkeeping
----------------------------------------------------------------------------------------------------------------
Sections 225.61--225.67 for SMBs....             706             498  5 minutes.................          29,299
Sections 225.61--225.67 for BHCs and           4,516             409  5 minutes.................         153,920
 nonbank subsidiaries of BHCs.
Guidelines..........................           5,222               1  10........................          52,220
Policies and Procedures AVM rule               2,036               1  13.3......................          27,147
 (Initial setup).
Policies and Procedures AVM rule               2,036               1  5.........................          10,180
 (Ongoing).
----------------------------------------------------------------------------------------------------------------
                                                   Disclosure
----------------------------------------------------------------------------------------------------------------
Guidelines..........................           5,222               1  5.........................          26,110
    Total Annual Burden Hours.......  ..............  ..............  ..........................         298,876
----------------------------------------------------------------------------------------------------------------

FDIC Burden

[[Page 64560]]



                                                       Table 3--Summary of Estimated Annual Burden
                                                                   [OMB No. 3064-0103]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Average
 Information collection (obligation to   Type of burden  (frequency of   annual  number     Number of      Time per  response  (hours/     Annual burden
               respond)                            response)                   of         responses per              minutes)                 (hours)
                                                                           respondents     respondent
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements Associated   Recordkeeping (On Occasion)....           2,936             259  5 minutes (0.083)..............          63,369
 with Real Estate Appraisals and
 Evaluations (Mandatory).
New IC 1--AVM Rule--Policies and        Recordkeeping (Annual).........           1,010             .33  40 hours.......................          13,320
 Procedures--Implementation
 (Mandatory).
New IC 2--AVM Rule--Policies and        Recordkeeping (Annual).........           1,010               1  5 hours........................           5,050
 Procedures--Ongoing (Mandatory).
New IC 3--2010 Guidelines--Policies     Recordkeeping (Annual).........           2,936               1  10 hours.......................          29,360
 and Procedures--Ongoing (Mandatory).
New IC 4--2010 Guidelines--Disclosure-- Disclosure (Annual)............           2,936               1  5 hours........................          14,680
 Ongoing (Mandatory).
                                       -----------------------------------------------------------------------------------------------------------------
    Total Annual Burden Hours.........  ...............................  ..............  ..............  ...............................         125,779
--------------------------------------------------------------------------------------------------------------------------------------------------------

NCUA Burden

                                   Table 4--Summary of Estimated Annual Burden
                                               [OMB No. 3133-0125]
----------------------------------------------------------------------------------------------------------------
                                                      Average
                                                  annual  number     Number of       Time per      Annual burden
    Information collection       Type of burden         of         responses per     response         (hours)
                                                    respondents     respondent        (hours)
----------------------------------------------------------------------------------------------------------------
Recordkeeping Requirements      Recordkeeping              3,555             514           0.083         152,272
 Associated with Real Estate     (On Occasion).
 Appraisals and Evaluations.
New IC 1--AVM Rule--Policies    Recordkeeping                356               1           13.33           4,745
 and Procedures--                (Annual).
 Implementation.
New IC 2--AVM Rule--Policies    Recordkeeping                356               1               5           1,780
 and Procedures--Ongoing.        (Annual).
New IC 3--2010 Guidelines--     Recordkeeping              3,555               1              10          35,550
 Policies and Procedures--       (Annual).
 Ongoing.
New IC 4--2010 Guidelines--     Disclosure                 3,555               1               5          17,775
 Disclosure--Ongoing.            (Annual).
                               ---------------------------------------------------------------------------------
    Total Annual Burden Hours.  ................  ..............  ..............  ..............         212,122
----------------------------------------------------------------------------------------------------------------

    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 final 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 Regulatory Flexibility Act (RFA) requires an agency to prepare 
a regulatory flexibility analysis describing the impact of the final 
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 certify that 
the rule will not have a significant economic impact on a substantial 
number of small entities.
    The OCC has assessed the burden of the final rule and has 
determined that the costs associated with the rule will be limited to 
reviewing the rule; ensuring that existing policies, 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 reviews the costs associated 
with the activities necessary to comply with the final rule. These 
include an estimate of the total time required to implement the final 
rule and the estimated hourly wage of bank employees who may be 
responsible for the tasks associated with achieving compliance with the 
rule. The OCC uses a bank employee compensation rate of $128 per 
hour.\69\
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    \69\ To estimate wages, the OCC reviewed May 2022 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 $128.05 per hour, which is based on the average 
of the 90th percentile for six occupations adjusted for inflation 
(5.1 percent as of Q1 2023), plus an additional 34.3 percent for 
benefits (based on the percent of total compensation allocated to 
benefits as of Q4 2022 for NAICS 522: credit intermediation and 
related activities).
---------------------------------------------------------------------------

    The OCC currently supervises approximately 636 small entities.\70\ 
The

[[Page 64561]]

final rule will impact approximately 590 of these small entities. The 
OCC estimates the annual cost for small entities to comply with the 
final rule will be approximately $23,040 per bank (180 hours x $128 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. The OCC considers 5 percent or more of OCC-supervised 
small entities to be a substantial number. Thus, at present, 32 OCC-
supervised small entities would constitute a substantial number. Based 
on these thresholds, the OCC estimates that the final rule will have a 
significant economic impact on 24 small entities, which is below our 
substantial number threshold. Therefore, the OCC certifies that the 
final rule will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \70\ The OCC bases its estimate of the number of small entities 
on the SBA's size thresholds, which are $850 million or less in 
total assets for commercial banks and savings institutions, and $47 
million or less in total assets for trust companies. 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, 2023, 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 U.S. 
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

B. Board

    An initial regulatory flexibility analysis (IRFA) was included in 
the proposal in accordance with section 603(a) of the RFA.\71\ In the 
IRFA, the Board requested comment on the effect of the proposed rule on 
small entities. The Board did not receive any comments on the IRFA. One 
commenter suggested that the Board's initial regulatory flexibility 
analysis failed to recognize the web of overlapping and duplicative 
laws and rules that apply to mortgage valuations.
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    The RFA requires an agency to prepare a final regulatory 
flexibility analysis (FRFA) unless the agency certifies that the rule 
will not, if promulgated, have a significant economic impact on a 
substantial number of small entities. Based on its analysis and for the 
reasons stated below, the Board certifies that the rule will not have a 
significant economic impact on a substantial number of small entities.
    1. Reasons action is being taken 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 final rule serves to implement this statutory 
mandate.
    2. The objectives of, and legal basis for, the rule.
    The final rule implements statutorily mandated quality control 
standards for the use of AVMs. The Board is adopting this rule pursuant 
to section 1125 of title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989.\72\
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

    3. Estimate of the number of small entities.
    The final rule applies to Board-regulated small entities that are 
mortgage originators or secondary market issuers. There are 
approximately 462 state member banks and approximately 3,281 bank 
holding companies and savings and loan holding companies that qualify 
as small entities for purposes of the RFA.\73\
---------------------------------------------------------------------------

    \73\ 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 December 31, 2023. Small entity information for bank 
holding companies and savings holding companies is based on average 
assets reflected in December 31, 2023 Parent Company Only Financial 
Statements for Small Holding Companies (FR Y-9SP) data.
---------------------------------------------------------------------------

    4. Description of the compliance requirements of the rule.
    The final rule requires 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, seek to 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 or would already be in compliance with the specified 
standards or could become compliant with relatively minor modifications 
to their current practices.\74\
---------------------------------------------------------------------------

    \74\ For example, the Board has provided guidance to most such 
entities on use of AVMs. See Appraisal Guidelines, 75 FR 77450, 
77468.
---------------------------------------------------------------------------

    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 $116.86.\75\ The 
estimated aggregate initial administrative costs of the proposal to 
Board-supervised small entities amount to $8,638,291 or $18,697.60 per 
bank \76\ and ongoing costs are expected to be small when measured by 
small entities' annual expenses. The Board also notes that, while 
section 1125 explicitly applies to mortgage originators and secondary 
market issuers, not third-party AVM vendors, financial institutions 
should be able to work with AVM developers and vendors to assist them 
with their compliance obligations under the rule, as they do with other 
third-party vendors in order to comply with relevant regulatory 
requirements.
---------------------------------------------------------------------------

    \75\ To estimate wages, the Federal Reserve reviewed May 2023 
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 $116.86 per hour, which is based on the average of the 
90th percentile for five occupations adjusted for inflation (2 
percent as of Q1 2021), plus an additional 34.6 percent for benefits 
(based on the percent of total compensation allocated to benefits as 
of Q4 2023 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.
    \76\ 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, 462, 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.
    Although there are multiple statutes and regulations that apply to 
various aspects of real estate lending, the Board has not identified 
any Federal statutes or regulations that would duplicate, overlap, or 
conflict with the final rule's quality control standards for AVMs. 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.\77\
---------------------------------------------------------------------------

    \77\ 12 U.S.C. 3354.
---------------------------------------------------------------------------

    Therefore, the Board concludes that the final rule will not have a 
significant

[[Page 64562]]

economic impact on a substantial number of small entities.

C. FDIC

    The RFA generally requires an agency, in connection with a final 
rule, to prepare and make available for public comment a FRFA that 
describes the impact of the final rule on small entities.\78\ However, 
a FRFA is not required if the agency certifies that the final rule will 
not 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.\79\ 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 represent significant economic impacts for FDIC-supervised 
institutions. For the reasons described below and under section 605(b) 
of the RFA, the FDIC certifies that this rule will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \78\ 5 U.S.C. 601 et seq.
    \79\ 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 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 final rule applies to all FDIC-supervised insured depository 
institutions (IDIs) that are mortgage originators or secondary market 
issuers. As of the quarter ending December 31, 2023, the FDIC 
supervised 2,936 insured depository institutions, of which 2,221 are 
considered small entities for the purposes of the RFA. Of these, 2,183 
FDIC-supervised small institutions reported a non-zero value for 
mortgages on their books.\80\ Therefore, the FDIC estimates that 2,183 
small institutions could be subject to the final rule.
---------------------------------------------------------------------------

    \80\ Based on Call Reports data as of December 31, 2023. The 
variable LNRERES represents balances for 1-4 family residential real 
estate loans.
---------------------------------------------------------------------------

    The FDIC lacks data on the number of small FDIC-supervised 
institutions that use AVMs for their mortgage originations. FDIC 
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 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.
    The final rule generally reflects 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.\81\ The FDIC believes that institutions covered by the 
rule \82\ 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 final 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.\83\ This suggests that the labor hours required 
to implement the four quality control standards would be relatively 
modest for small, FDIC-supervised institutions.
---------------------------------------------------------------------------

    \81\ The FDIC provides guidance on the use of AVMs by their 
regulated institutions in Appendix B to the Appraisal Guidelines. 
The Guidelines advise that institutions should establish policies, 
practices, and procedures governing the selection, use, and 
validation of AVMs, including steps to ensure the accuracy, 
reliability, and independence of an AVM. In addition, the FDIC has 
issued guidance on model risk management practices (Model Risk 
Guidance) that provides supervisory guidance on validation and 
testing of computer-based financial models (FDIC FIL-22-2017, dated 
June 7, 2017). See generally part I.A. of the SUPPLEMENTARY 
INFORMATION in this document.
    \82\ The term ``covered institutions'' refers to financial 
institutions that would be subject to the proposed rule.
    \83\ The search of nearly 22,000 FDIC Reports of Examination 
from June 2011 to June 2021 revealed just 44 instances of a flag 
indicating an institution's AVM use or management practices needed 
to improve. Therefore, 99.8 percent of the examination reports do 
not mention AVM practices and imply satisfactory practices (or no 
AVM use).
---------------------------------------------------------------------------

    The final rule's fifth quality control standard is consistent with 
existing applicable nondiscrimination laws. For example, the ECOA and 
its implementing Regulation B, bar discrimination on a prohibited basis 
in any aspect of a credit transaction.\84\ Similarly, the Fair Housing 
Act \85\ prohibits unlawful discrimination in all aspects of 
residential real estate-related transactions, including valuations of 
residential real estate. However, the FDIC has not previously issued 
guidance or regulations that directly address nondiscrimination laws as 
it relates to expected or required AVM policies, procedures, practices, 
and controls. As a result, some small, FDIC-supervised institutions may 
not have fully integrated nondiscrimination laws directly into their 
AVM policies and risk management practices.
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 1691(a) (prohibiting discrimination on the basis 
of race, color, religion, national origin, sex or marital status, 
age (provided the applicant has the capacity to contract), because 
all or part of the applicant's income derives from any public 
assistance program, or because the applicant has in good faith 
exercised any right under the Consumer Credit Protection Act); see 
also 12 CFR part 1002.
    \85\ 42 U.S.C. 3605 (prohibiting discrimination because of race, 
color, religion, national origin, sex, handicap, or familial status 
in residential real estate-related transactions); 42 U.S.C. 
3605(b)(2) (defining ``real estate-related transactions'' to include 
the ``selling, brokering, or appraising of residential real 
property''); see also 24 CFR part 100.
---------------------------------------------------------------------------

    The FDIC lacks information on the labor hours and costs that will 
be incurred by covered institutions to comply with the final rule. 
Therefore, it assumes that small, FDIC-supervised institutions will 
expend 120 labor hours, on average, to comply with the final rule 
during the first year of implementation, and 40 labor hours, on 
average, in each successive year. In the first year, the FDIC's 
estimates include the review of the newly enacted rule, conducting a 
review of existing policies, practices, procedures, and controls for 
their consistency with the rule; identifying any deficiencies; and 
implementing corrective action as needed. In the second year, the FDIC 
believes that institutions' expected costs would be lower on average, 
as they limit their actions to primarily reviewing and maintaining 
their compliance.
    This analysis subdivides the assumed compliance-related average 
labor hours spent by small FDIC-supervised IDIs into two types: (1) 
compliance with recordkeeping, reporting, and disclosure requirements 
under the PRA; and (2) hours for non-PRA compliance activities. 
According to supervisory experience, covered, small, FDIC-supervised 
IDIs using AVMs for originations or modifications would spend 40 hours 
in the first year and 5 hours in each subsequent year, on average for 
recordkeeping.
    The FDIC believes small, FDIC-supervised IDIs affected by the final 
rule will incur additional labor hours and costs associated with 
compliance activities other than recordkeeping. For the first four 
quality control standards, these requirements may include, for

[[Page 64563]]

example, back-testing of AVM outputs relative to property sale prices 
to understand the degree of confidence they merit, and the development 
and implementation of safeguards against data manipulation. The FDIC 
believes that compliance activities other than recordkeeping associated 
with the first four quality control standards in the final rule will be 
relatively modest for small, FDIC-supervised IDIs. As previously 
discussed, the 2010 Appraisal Guidelines already encourage small, FDIC-
supervised IDIs to conduct such activities. The FDIC believes that 
small, FDIC-supervised IDIs may incur relatively greater labor hours 
and costs to comply with the fifth quality control standard initially. 
The FDIC lacks data on the time required by the institutions to develop 
and implement the nondiscrimination quality control standard. Based on 
supervisory experience and subject matter expertise, the FDIC assumes 
that all compliance activities other than recordkeeping would average 
80 hours per institution in the first year of the final rule's adoption 
and 35 hours in subsequent years.
    This analysis estimates the total labor hours and costs incurred by 
small, FDIC-supervised IDIs associated with the final rule by adding 
compliance estimates associated with recordkeeping with activities 
other than recordkeeping. The FDIC estimates first year compliance 
labor hours per covered institution to be 120 on average,\86\ and 
compliance labor hours to be 40 on average \87\ for each subsequent 
year. As previously discussed, and for the purposes of this analysis, 
the FDIC assumes that 10 percent of small, FDIC-supervised IDIs that 
report non-zero value for mortgages on their books will incur costs to 
comply with the rule. Therefore, the FDIC estimates that small, FDIC-
supervised IDIs will incur 26,196 labor hours in the first year \88\ 
after the final rule becomes effective, and 8,732 labor hours in each 
subsequent year.\89\ Employing a total hourly compensation estimate of 
$99.65 \90\ for the first year and an estimate of $92.07 \91\ for 
subsequent years, the FDIC estimates that small, FDIC-supervised IDIs 
will incur $2,610,431 compliance costs in the first year \92\ after the 
final rule becomes effective, and $803,955 in compliance costs in each 
subsequent year.\93\
---------------------------------------------------------------------------

    \86\ 40 labor hours + 80 labor hours = 120 labor hours.
    \87\ 5 labor hours + 35 labor hours = 40 labor hours.
    \88\ (2,183 * 10 percent AVM use rate) * 120 labor hours = 
26,196 labor hours.
    \89\ (2,183 * 10 percent AVM use rate) * 40 labor hours = 8,732 
labor hours.
    \90\ The assumed distribution of occupation groups involved in 
the actions taken by institutions in response to the proposed rule 
in year 1 include Financial Analysts (40 percent of hours), 
Compliance Officers (40 percent), Lawyers (15 percent), and 
Executives and Managers (5 percent). This combination of occupations 
results in an overall estimated hourly total compensation rate of 
$99.65. This average rate is derived from the BLS' Specific 
Occupational Employment and Wage Estimates, and BLS' Cost of 
Employee Compensation data.
    \91\ In year 2 and beyond, the assumed distribution is Financial 
Analysts (50 percent of hours), Compliance Officers (40 percent), 
Lawyers (5 percent), and Executives and Managers (5 percent). This 
combination of occupations results in an overall estimated hourly 
total compensation rate of $92.07. This average rate is derived from 
the BLS' Specific Occupational Employment and Wage Estimates, and 
BLS' Cost of Employee Compensation data.
    \92\ (2,183 * 10 percent AVM use rate) * 120 labor hours * 
$99.65 per hour = $2,610,431.
    \93\ (2,183 * 10 percent AVM use rate) * 40 labor hours * $92.07 
per hour = $803,955.
---------------------------------------------------------------------------

    Further analysis shows that the estimated costs of the final rule 
would not impose a significant economic impact on a substantial number 
of small institutions. The analysis estimates that small, FDIC-
supervised IDIs will incur approximately $11,960 in compliance costs on 
average in the first year \94\ after the final rule becomes effective 
and approximately $3,680 in each subsequent year.\95\ In the first year 
after the final rule becomes effective, estimated average costs exceed 
the 5 percent threshold of annual salaries and benefits for 6 (0.27 
percent) small, FDIC-supervised IDIs, and 94 (4.23 percent) exceed the 
2.5 percent threshold of total non-interest expense.\96\ A combined 
total of 99 (4.46 percent) small, FDIC-supervised IDIs exceed either or 
both thresholds in the first year. In subsequent years, estimated 
average costs do not exceed the 5 percent threshold of annual salaries 
and benefits for any small, FDIC-supervised IDIs, and 13 (0.59 percent) 
exceed the 2.5 percent threshold of total non-interest expense. A 
combined total of 13 (0.59 percent) small, FDIC-supervised IDIs exceed 
either or both thresholds in subsequent years.
---------------------------------------------------------------------------

    \94\ 120 labor hours * $99.65 per hour = $11,958.00.
    \95\ 40 labor hours * $92.07 per hour = $3,682.80.
    \96\ Based on Call Report data as of December 31, 2023. The 
variable ESALA represents annualized salaries and employee benefits 
and the variable CHBALNI represents non-interest bearing cash 
balances.
---------------------------------------------------------------------------

    The compliance costs incurred by any one covered institution is 
likely to vary with the volume of covered AVM activity, the degree to 
which current AVM compliance activities differ from the robust quality 
control standards in the proposed rule, or the usage of in-house or 
third-party AVM service providers.
    Some commenters expressed concerns that the proposed rule would be 
costly and burdensome, especially for small entities and their ability 
to ensure that their policies and procedures meet the quality control 
standards. Some commenters cautioned that the proposed rule would 
create an uneven playing field between large and small companies and 
that some small entities would be at risk of going out of business. For 
additional discussion of the comments received on the proposed rule, 
please refer to part III (Discussion of the Proposed Rule, Comments 
Received, and the Final Rule) within the SUPPLEMENTARY INFORMATION of 
this document. The FDIC carefully considered the comments it received. 
The FDIC notes that compliance costs may vary across institutions but 
believes that they are unlikely to have a significant effect on a 
substantial number of small, FDIC-supervised IDIs. Finally, the FDIC 
notes that section 1125 does not provide for exemption authority and 
the FDIC does not believe that an exemption is necessary or 
appropriate.
    In light of the foregoing, the FDIC certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small, supervised entities.

D. NCUA

    The RFA generally requires an agency to conduct a regulatory 
flexibility analysis of any rule subject to notice and comment, unless 
the agency certifies it will not have a significant economic impact on 
a substantial number of small entities.\97\
---------------------------------------------------------------------------

    \97\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    The RFA establishes terms for various subgroups that potentially 
qualify as a ``small entity''--including ``small business,'' ``small 
organization,'' and ``small governmental jurisdiction.'' \98\ 
Federally-insured credit unions (FICUs), as not-for-profit enterprises, 
are ``small organizations,'' within the broader meaning of ``small 
entity.'' Moreover, the RFA permits a regulator (such as the NCUA) to 
sharpen the definition of ``small organization'' as appropriate for 
agency activities--provided that definition is subjected to public 
comment and published in the Federal Register.\99\ The NCUA's 
Interpretive Ruling and Policy Statement (IRPS) 15-1 defined ``small 
entity'' as any FICU with less than $100 million in assets.\100\ IRPS 
15-1 (with this definition) was published in the Federal Register, and

[[Page 64564]]

the NCUA solicited and reviewed public comments on this 
definition.\101\
---------------------------------------------------------------------------

    \98\ 5 U.S.C. 601.
    \99\ 5 U.S.C. 601(4).
    \100\ 80 FR 57512 (Sept. 24, 2015).
    \101\ IRPS 15-1 was preceded by IRPS 81-4, which defined ``small 
entity'' as any FICU with fewer than $1 million in assets (46 FR 
29248 (June 1, 1981)). The NCUA Board updated the definition in 2003 
to include FICUs holding fewer than $10 million in assets with IRPS 
03-2 (68 FR 31949 (May 29, 2003)). In 2013, IRPS 13-1 increased the 
threshold to under $50 million in assets (78 FR 4032 (Jan. 18, 
2013)). In addition, the NCUA's Board pledged to review the RFA 
threshold after two years and thereafter on a three-year cycle, as 
part of its routine cycle of regulatory review.
---------------------------------------------------------------------------

    FICUs tend to be much smaller than commercial banks. Indeed, at 
year-end 2023, median asset size was $55.9 million--less than one-sixth 
the median for U.S. commercial banks. As of December 31, 2023, there 
were 4,604 FICUs, of which 2,831 (61.5 percent) qualified as ``small 
entities'' by holding fewer than $100 million in assets.\102\ Only 699 
commercial banks (15.2 percent) fall beneath this threshold. For 
reasons noted below, the NCUA does not believe the regulatory 
amendments will have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \102\ These figures are based on data submitted by FICUs 
quarterly on their 5300 forms (call report).
---------------------------------------------------------------------------

    1. Why action is being considered.
    The final rule fulfills the statutory mandate in the Dodd-Frank Act 
requiring agencies to promulgate quality control standards for AVMs 
used by mortgage originators and secondary market issuers to value 
principal dwellings used as collateral. As noted, this final rule 
follows publication of a June 23, 2023, proposed rule and takes into 
consideration the public comments received in response to the proposal. 
Interested readers are referred to the discussion elsewhere in this 
preamble of the significant issues raised by the public comments, the 
assessment of the agencies of such issues, and changes made in the 
proposed rule as a result of such comments. Further, the RFA analysis 
provided by the CFPB elsewhere in this preamble responds to the 
comments filed by the Chief Counsel for Advocacy of the Small Business 
Administration in response to the proposed rule and provide a detailed 
statement of any change made to the proposed rule in the final rule as 
a result of the comments.
    2. Policy objectives of, and legal basis for, the final rule.
    The NCUA is issuing this final rule to: (1) promote credit union 
safety and soundness by enhancing the integrity of collateral valuation 
for residential mortgage lending; and (2) help ensure credit unions 
comply with all applicable nondiscrimination laws. The legal basis for 
this rule is section 1125 of title XI of the FIRREA, as added by the 
Dodd-Frank Act--which directs covered agencies (in consultation with 
the staff of the Appraisal Subcommittee and Appraisal Standards Board 
of the Appraisal Foundation) to promulgate regulations with AVM 
quality-control standards.\103\ The statute charges the NCUA with 
enforcing the regulations with respect to financial institutions, 
defined in title XI to include FICUs, for which the NCUA is the primary 
Federal supervisor.\104\
---------------------------------------------------------------------------

    \103\ 12 U.S.C. 3354.
    \104\ See 12 U.S.C. 3350(7).
---------------------------------------------------------------------------

    3. Description and estimate of the number of small institutions 
subject to final rule.
    The final rule will apply to FICUs relying on AVMs in their 
residential mortgage-lending decisions. Year-end 2023 data indicate 
1,789 small-entity FICUs held residential real-estate loans (1st or 
junior liens). This represents 63.2 percent of small credit unions.
    The NCUA does not currently require supervised credit unions to 
note in their quarterly data submissions whether AVMs are used in 
mortgage originations/modifications for owner-occupied residential real 
estate. In prior AVM analysis, the FDIC estimated that as many as 10 
percent of their supervised institutions currently use an AVM for 
mortgage origination decisions, loan modification decisions, and 
securitization decisions covered by the final rule.\105\ Applying this 
10 percent estimate suggests the final rule could apply to up to 178 
``small entity'' credit unions. The FDIC notes AVM use is likely 
strongly positively correlated with institution size. Given the small 
size of most FICUs, it is likely far fewer than 10 percent use AVMs in 
residential-mortgage underwriting.\106\ To be conservative, the 10 
percent is used as an upper bound in the following analysis.
---------------------------------------------------------------------------

    \105\ 88 FR 40638 at 40659 (June 23, 2023).
    \106\ Discussions with NCUA examiners and supervisors supported 
the notion 10 percent is a high upper bound.
---------------------------------------------------------------------------

    4. Projected reporting, recordkeeping, and other compliance 
requirements of the final rule, including an estimate of the classes of 
small entities which will be subject to the requirement and the type of 
professional skills necessary for preparation of the report or record.
    As noted, since 2010, the OCC, Board, FDIC, and NCUA have provided 
supervisory guidance on AVM use to regulated institutions in Appendix B 
to the Appraisal Guidelines.\107\ The Appraisal Guidelines recommend 
that institutions establish policies, practices, and procedures 
governing the selection, use, and validation of AVMs--including steps 
to ensure accuracy, reliability, and independence.\108\ The quality-
control standards in the final rule are consistent with those in the 
Appraisal Guidelines, existing supervisory expectations, and statutory 
nondiscrimination requirements. The NCUA believes the final rule will 
largely serve to make explicit standards that have been communicated 
through less formal, more varied means for over ten years. Accordingly, 
the NCUA anticipates compliance costs for ``small'' credit unions are 
likely be minimal.
---------------------------------------------------------------------------

    \107\ See supra note 4. The Appraisal Guidelines were adopted 
after notice and comment.
    \108\ Because such a small percentage of credit unions actively 
relied on AVMs at the time, written NCUA guidance was not as 
detailed as that provided by the banking agencies. Nonetheless, 
expectations for safe-and-sound use have been conveyed through the 
supervisory process to FICUs employing AVMs in residential mortgage 
lending.
---------------------------------------------------------------------------

    Based on interviews with examiners and supervisors (about 
experience with rules largely codifying existing practice as well as 
the specifics of the AVM rule), the NCUA estimates the upper-bound for 
compliance burden is 33 labor hours annually. The upper-bound estimate 
for AVM usage of 178 credit unions implies the aggregate compliance 
burden should not exceed 5,874 hours. To put this figure in context, 
the 1,789 credit unions under $100 million with residential mortgages 
on their books paid their employees an average of $33.13 per hour in 
salary and benefits.\109\ The upper-bound compliance estimate of 5,874 
hours, therefore, implies an upper bound on aggregate cost of 
$194,606.\110\ Viewed another way, this aggregate cost is only 0.008 
percent of total 2023 non-interest expense for ``small'' credit unions. 
These figures suggest the compliance cost of the final rule will not 
impose a significant burden on a substantial number of ``small 
entities.'' \111\
---------------------------------------------------------------------------

    \109\ This figure was obtained by dividing 2023 total 
compensation expense for the 1,789 credit unions by the product of 
full-time equivalent employees, 52 weeks per years, and 40 hours per 
week.
    \110\ There are other good reasons to believe 5,874 hours is an 
upper bound. The final rule should, for example, ease compliance 
with existing supervisory guidance/expectations by making the exact 
``rules of the game'' more explicit. In theory, this applies to all 
covered institutions. But, given the small size of credit unions--
the median number full-time equivalent employees for the 1,789 
``small entities'' with residential mortgages at year-end 2023 was 
eight--time savings from any reduction in supervisory ambiguity are 
particularly valuable. Moreover, following the now explicit guidance 
should result in fewer safety-and-soundness and fair-lending issues 
for small credit unions to address).
    \111\ Of course, estimates of an extremely modest impact based 
on central tendency do not exclude the possibility the compliance 
costs will prove meaningful for some small credit unions.

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[[Page 64565]]

    5. An identification, to the extent practicable, of all relevant 
federal rules which may duplicate, overlap with, or conflict with the 
final rule.
    The NCUA has not identified any likely duplication, overlap, or 
potential conflict with this final rule and any other federal rule.
    6. Any significant alternatives to the final rule that accomplish 
its stated objectives.
    As noted, the final rule implements a statutory mandate, thereby 
limiting the ability of covered agencies to consider alternatives. That 
said, agencies did exercise authority provided by section 1125 to 
include the nondiscrimination quality-control factor (given continued 
evidence of disparities in residential property lending terms along 
racial and ethnic lines). Further, covered agencies determined this 
factor should impose little additional burden since institutions have a 
preexisting obligation to comply with all federal law, including 
federal nondiscrimination laws. For the above reasons, the NCUA 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities.

E. CFPB

    The RFA \112\ generally requires an agency to conduct an IRFA and a 
FRFA of any rule subject to notice-and-comment rulemaking requirements. 
These analyses must ``describe the impact of the proposed rule on small 
entities.'' \113\ An IRFA or FRFA is not required if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities.\114\ If it will have such an 
impact, the CFPB is subject to certain additional procedures under the 
RFA, as amended by the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA) \115\ and the Dodd-Frank Act, involving the 
convening of a panel (SBREFA Panel) to consult with small entity 
representatives (SERs) prior to proposing a rule for which an IRFA is 
required.\116\
---------------------------------------------------------------------------

    \112\ 5 U.S.C. 601 et seq.
    \113\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of SBA regulations 
and reference to the NAICS classifications and size standards. 5 
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of 
less than 50,000. 5 U.S.C. 601(5).
    \114\ 5 U.S.C. 605(b).
    \115\ Public Law 104-121, 110 Stat. 857 (1996) (5 U.S.C. 609) 
(amended by Dodd-Frank Act section 1100G).
    \116\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The CFPB has not certified that the proposed rule would not have a 
significant economic impact on a substantial number of small entities 
within the meaning of the RFA. Accordingly, the CFPB convened and 
chaired a SBREFA Panel to consider the impact of the proposed rule on 
small entities that would be subject to that rule and to obtain 
feedback from representatives of such small entities. 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).\117\ The proposal preamble included a discussion of the 
SBREFA Panel for this rulemaking.\118\ The CFPB also published an IRFA 
in the proposal. Comments addressing individual provisions of the 
proposed rule are addressed in part III of the SUPPLEMENTARY 
INFORMATION of this document. Comments addressing the impact on small 
entities are discussed below. Many of these comments implicated 
individual provisions of the final rule and are also addressed in those 
parts.
---------------------------------------------------------------------------

    \117\ 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.
    \118\ 88 FR 40638 at 40649. 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.
---------------------------------------------------------------------------

    The FRFA for this rulemaking follows this discussion. Section 
604(a) of the RFA sets forth the required elements of the FRFA. Section 
604(a)(1) requires the FRFA to contain a statement of the need for, and 
objectives of, the rule. Section 604(a)(2) requires the FRFA to contain 
a statement of the significant issues raised by the public comments in 
response to the initial regulatory flexibility analysis, a statement of 
the assessment of the agency of such issues, and a statement of any 
changes made in the proposed rule as a result of such comments. Section 
604(a)(3) requires the CFPB to respond to any comments filed by the 
Chief Counsel for Advocacy of the Small Business Administration 
(Advocacy) \119\ in response to the proposed rule and provide a 
detailed statement of any change made to the proposed rule in the final 
rule as a result of the comments.
---------------------------------------------------------------------------

    \119\ Advocacy is an independent office within SBA, so the views 
expressed by Advocacy do not necessarily reflect the views of the 
SBA.
---------------------------------------------------------------------------

    The FRFA further must contain a description of and an estimate of 
the number of small entities to which the rule will apply or an 
explanation of why no such estimate is available.\120\ Section 
604(b)(5) requires a description of the projected reporting, 
recordkeeping, and other compliance requirements of the 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 the 
preparation of the report or record. In addition, the CFPB must 
describe any steps it has taken to minimize the significant economic 
impact on small entities consistent with the stated objectives of 
applicable statutes, including a statement of the factual, policy, and 
legal reasons for selecting the alternative adopted in the final rule 
and why each one of the other significant alternatives to the rule 
considered by the agency which affect the impact on small entities was 
rejected.\121\ Finally, as amended by the Dodd-Frank Act, RFA section 
604(a)(6) requires that the FRFA include a description of the steps the 
agency has taken to minimize any additional cost of credit for small 
entities.
---------------------------------------------------------------------------

    \120\ 5 U.S.C. 604(a)(4).
    \121\ 5 U.S.C. 604(a)(6). (So in original. Two paragraphs (6) 
were enacted.)
---------------------------------------------------------------------------

    1. Statement of the need for, and objectives of, the rule.
    As discussed in part I of the SUPPLEMENTARY INFORMATION section of 
this document, section 1473(q) of the Dodd-Frank Act amended title XI 
of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 to add a new section 1125. Section 1125 directs the agencies to 
promulgate regulations for quality control standards for AVMs, which 
are ``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.'' \122\ Specifically, section 1125 
requires that AVMs meet 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 final 
rule effectuates Congress's mandate to the agencies to adopt rules to 
implement quality control standards for AVMs.
---------------------------------------------------------------------------

    \122\ 12 U.S.C. 3354(d).

---------------------------------------------------------------------------

[[Page 64566]]

    The objectives of the final rule include protecting consumers and 
protecting Federal financial and public policy interests in real estate 
related transactions. To achieve these objectives, the final rule will 
require mortgage originators and secondary market issuers to adopt 
policies, practices, procedures, and control systems to ensure that 
covered AVMs adhere to quality control standards designed to meet 
specific quality control factors. The objectives of the final rule are 
further discussed in parts I and III of the SUPPLEMENTARY INFORMATION 
of this document.
    2. Statement of the significant issues raised by the public 
comments in response to the initial regulatory flexibility analysis, a 
statement of the assessment of the agency of such issues, and a 
statement of any changes made to the proposed rule in the final rule as 
a result of such comments.
    In the IRFA, the CFPB estimated the possible compliance cost for 
small entities with respect to a pre-statute baseline. Additionally, 
the IRFA discussed possible impacts on small entities.
    Very few commenters specifically addressed the IRFA included in the 
proposal. Comments made by Advocacy related to the estimates included 
in the IRFA are addressed below in part V.E.3 of this document. This 
section addresses specific significant comments that affect the FRFA 
analysis.
    Many industry commenters expressed concerns that the proposed rule 
would be costly and burdensome, especially for small entities and their 
ability to ensure that their policies and procedures meet the quality 
control standards. Some commenters even cautioned that the proposed 
rule would create an uneven playing field between large and small 
companies and that some small entities would be at risk of going out of 
business. These commenters did not provide specifics about the costs or 
burdens on small entities. The CFPB reviewed these comments and 
recognizes that small entities will experience some new compliance 
costs in the final rule. The CFPB accounted for these costs in the IRFA 
and therefore is not making any changes related to these concerns in 
the FRFA.
    Some industry commenters provided feedback on the magnitude of the 
estimated burden hours, which form a core part of the IRFA analysis. 
Two commenters provided estimates for what they believe the burden 
hours will be. One of these commenters stated that a statistically-
based, rigorous analytical approach would require between 100 and 400 
hours a year and that, in particular, testing AVMs for compliance with 
nondiscrimination laws requires building a database, cleaning data, 
carefully building samples, and running regression tests. The commenter 
noted that if a company were to outsource their validation of AVMs, 
then the agencies' estimated burden hours might be adequate, but that 
there would be a cost to outsourcing. Another commenter stated that 
covered institutions would need to create some controls that would be 
based on statistical analysis and provided a rough estimate of 320 to 
480 hours. The CFPB outlined the estimated burden hours that it uses in 
the IRFA analysis more explicitly in the SBREFA Panel Report: 69 hours 
for verifying compliance, 65 hours for drafting and developing 
policies, practices, procedures, and control systems, and 60 hours for 
training. Therefore, the total number of estimated hours in the first 
year is 194 and primarily includes costs for ``Legal Services.'' In 
both the SBREFA Panel Report and the IRFA, the CFPB did not assume 
costs for statistician services. If a small entity needs statistician 
services, the SBREFA analysis ``anticipates that most third parties 
would be able to provide institution-specific . . . service that 
accompanies an AVM.'' As discussed in part III.E.2 of the SUPPLEMENTARY 
INFORMATION of this document, as long as institutions adopt and 
maintain policies, practices, procedures, and control systems to ensure 
that AVMs adhere to the rule's requisite quality control standards--and 
consistent with the flexibility to set their quality control standards 
as appropriate based on the size of their institution and the risk and 
complexity of transactions for which they will use covered AVMs--
institutions should be able to work with AVM providers to assist them 
with their compliance obligations under the rule.
    Furthermore, the SBREFA analysis states that ``Whether small 
entities' costs increase depends ultimately on whether third-party 
service providers [such as AVM providers] pass along costs. For 
example, costs may increase if each third-party service provider has . 
. . to customiz[e] . . . for each small entity. Costs may not increase 
if third-party service providers can sell the same general set . . . to 
many small entities with little modification.'' The CFPB has considered 
the estimates provided by the commenters and either considers them 
consistent with the CFPB's estimates or deficient in showing that more 
burden hours are necessary. Therefore, the CFPB is not making any 
changes related to the estimated burden hours in the FRFA.
    3. Response of the agency to any comments filed by the Chief 
Counsel for Advocacy of the Small Business Administration in response 
to the proposed rule, and a detailed statement of any change made to 
the proposed rule in the final rule as a result of the comments.
    Advocacy provided a formal comment letter to the agencies in 
response to the proposed rule. This letter stated that small entities 
should not be responsible for the actions of AVM providers, that the 
agencies should reduce the burden of the rule so that harm to small 
entities and consumers would be minimized, and that the 
nondiscrimination quality control factor should not be included in the 
final rule. Additionally, Advocacy suggested that small entities be 
exempt from the rule and, if that was not possible, that they should be 
allowed to rely on third-party certification of AVM providers or be 
provided a safe harbor for compliance. Finally, Advocacy asked that the 
agencies provide clear guidance to small entities to aid in compliance 
with the rule.
    Small entities and AVM providers. Advocacy stated that small 
entities should not be responsible for the activities of AVM providers 
because they do not control those providers, and therefore cannot 
quality control the data or the algorithms used. In addition, Advocacy 
stated that small entities do not have the bargaining power to require 
AVM providers to take actions to be in compliance with the rule. As 
discussed above, the agencies believe that financial institutions, 
including small financial institutions, will be able to work with AVM 
providers to assist them with their compliance obligations under the 
rule, as they do with other third-party vendors in order to comply with 
relevant regulatory requirements.
    Burden on small entities. Advocacy stated that the agencies should 
work to reduce the burden of the rule on small entities. Advocacy 
explained that it believed that the rule's costs would harm small 
entities and potentially reduce the use of AVMs, causing consumers to 
pay for more costly appraisals. As discussed above and below, in an 
effort to minimize the economic impact on small entities, the agencies 
considered and rejected a number of alternatives while drafting the 
final rule that otherwise would have resulted in greater costs to small 
entities than would the final rule. The CFPB recognizes that small 
entities will experience some new costs to comply with the final rule, 
but the CFPB does not believe that the burden of the rule

[[Page 64567]]

is excessive. Furthermore, the CFPB believes that the rule will not 
reduce the availability of AVMs, and that it will benefit consumers by 
ensuring the quality and accuracy of the valuations provided.
    Nondiscrimination quality control factor. Advocacy stated that the 
agencies should exclude the nondiscrimination quality control factor 
from the regulation. Advocacy stated that the statute does not 
specifically state that quality control standards for AVMs must address 
the issue of discrimination. In addition, Advocacy noted that at the 
SBREFA Panel outreach meeting, the SERs uniformly raised concerns 
regarding how they could assess fair lending issues in AVMs or know 
that they are violating the law. Moreover, Advocacy stated that there 
are other mechanisms to address the issue of discrimination. Advocacy 
explained that small entities are already required to comply with 
nondiscrimination and fair lending laws, and making small entities 
responsible for assessing fair lending issues in AVMs adds an extra 
layer of burden. As explained above, the agencies have the authority to 
account for any other such factor that the agencies determine to be 
appropriate. Moreover, while existing nondiscrimination law applies to 
an institution's use of AVMs, the CFPB believes that it is important to 
specify a fifth factor relating to nondiscrimination to heighten 
awareness among lenders of the applicability of nondiscrimination laws 
to AVMs. Given the existing obligation, the CFPB does not believe that 
the burden of the rule is excessive. Furthermore, as discussed above, 
the agencies believe that financial institutions, including small 
financial institutions, will be able to work with AVM providers to 
assist them with their compliance obligations under the rule, including 
compliance with the nondiscrimination factor, as they do with other 
third-party vendors in order to comply with relevant regulatory 
requirements.
    Exemption, certification or safe harbor. Advocacy suggested that 
small entities be exempt from the rule and, if that was not possible, 
that they should be allowed to rely on third-party certification of AVM 
providers or be provided a safe harbor for compliance. The CFPB notes 
that section 1125 does not provide for exemption authority and the CFPB 
does not believe that an exemption is necessary or appropriate. Section 
1125 requires quality controls for AVMs, and the CFPB believes that 
consumers who patronize small entities should benefit from the consumer 
protections that the rule provides, and the CFPB does not believe that 
the burden of the rule is excessive. In regard to the request for 
third-party certification, as explained above, the CFPB recognizes that 
third-party certification could be beneficial to effective 
implementation of the AVM rule and, as long as financial institutions 
meet the obligations stated in the rule, they are free to work with 
third parties to assist them with their compliance obligations. 
Finally, the CFPB does not believe that a safe harbor is warranted, as 
the burden on small entities will not be such that a simplified 
compliance method, which might be less protective of consumers, would 
be needed.
    Clear guidance. Finally, Advocacy asked that the agencies provide 
clear guidance to small entities to aid in compliance with the rule. As 
explained above, the rule's quality control standards are consistent 
with the existing guidance described in part I of this SUPPLEMENTARY 
INFORMATION and institutions that are not regulated by the agency or 
agencies providing the guidance may still look to the guidance for 
assistance with complying with this final rule. In addition, the CFPB 
will consider issuing further guidance in the future, as implementation 
of the rule is carried out, depending on the need.
    4. Description of and an estimate of the number of small entities 
to which the final rule will apply.
    A ``small business'' is determined by application of SBA 
regulations in reference to the North American Industry Classification 
System (NAICS) classification and size standards.\123\ Under such 
standards, the CFPB identified three categories of small nondepository 
entities that may be subject to the proposed provisions: (1) real 
estate credit companies; (2) secondary market financing companies; and 
(3) other activities related to credit intermediation (which includes 
mortgage loan servicers).
---------------------------------------------------------------------------

    \123\ The current SBA size standards are found on SBA's website, 
Small Bus. Admin., Table of size standards (March 17, 2023), https://www.sba.gov/document/support-table-size-standards.
---------------------------------------------------------------------------

    The following table summarizes the CFPB's estimate of the number 
and industry of entities that may be affected by the final rule:

                             Table A--Estimated Number of Small Entities by Industry
----------------------------------------------------------------------------------------------------------------
                                                               SBA small                Est. number  Est. number
                                                                 entity     Est. total    of small     of small
              NAICS                         Industry           threshold   entities in  entities in  entities in
                                                                  (m)          2017         2017         2023
----------------------------------------------------------------------------------------------------------------
522292...........................  Real Estate Credit.......         $470        3,289        2,904        3,881
522294...........................  Secondary Market                   470          115          106          142
                                    Financing.
522390...........................  Other Activities Related          28.5          566          566          756
                                    to Credit Intermediation.
                                  ------------------------------------------------------------------------------
    Column Total.................  .........................  ...........        3,970        3,576        4,779
----------------------------------------------------------------------------------------------------------------
Note: See footnote 124 for methodology to extrapolate 2017 numbers to 2023.
Source: 2017 County Business Patterns and Economic Census (Release Date: 5/28/2021).

    In developing these estimates, the CFPB chose assumptions that 
would likely overcount the number of small entities and explains this 
reasoning in detail herein. Thus, the true number of small entities is 
likely to be less than the estimates reported. The following paragraphs 
describe the categories of entities that the CFPB expects will be 
affected by the final rule.
    Real Estate Credit companies (NAICS 522292). This industry 
encompasses establishments primarily engaged in lending funds with real 
estate as collateral, including mortgage companies and real estate 
credit lenders. Economic Census data states that there were 3,289 
nondepository institutions (nondepositories) in 2017 that engaged in 
real estate credit and whose use of AVMs may be covered by

[[Page 64568]]

the final rule. The SBA established a revenue threshold for small 
entities of average annual receipts of less than $47 million. The 
Economic Census provides data for the number of small entities with 
less than $40 million and less than $50 million in revenue, but not 
less than $47 million in revenue. Using the conservative threshold of 
$50 million, the CFPB estimates that about 2,904 of these 3,289 
institutions were small entities in 2017. This estimate is most likely 
an overcount because this NAICS industry also includes firms involved 
in construction lending, farm mortgages, and Federal land banks, which 
will not be covered by the final rule if such credit is not secured by 
a consumer's principal dwelling. Lastly, due to a lack of more recent 
data in the Economic Census, the CFPB scales up the 2017 estimate by a 
factor of 1.3363 to obtain a 2023 estimate of 3,881 small 
entities.\124\
---------------------------------------------------------------------------

    \124\ According to U.S. Bureau of Economic Analysis, ``Gross 
Output by Industry'' (https://apps.bea.gov/iTable/?reqid=150&step=2&isuri=1&categories=gdpxind, accessed March 28, 
2024), from 2017 to 2023 (the latest available data at the time of 
writing), the finance sector (NAICS 52) gross output expanded from 
$2,807.7 billion to $ 3,752.0 billion, a 33.63 percent increase. 
Thus, the CFPB scales up the number of entities in 2017 by a factor 
of 1.3363 and rounds to the nearest whole number.
---------------------------------------------------------------------------

    Secondary market financing companies (NAICS 522294). This industry 
encompasses establishments primarily engaged in buying, pooling, and 
repackaging loans for sale to others on the secondary market, including 
collateralized mortgage obligation issuers and real estate mortgage 
investment conduits. Economic Census data states that there were 115 
nondepository secondary market financing companies in 2017 whose use of 
AVMs may be covered by the final rule. This industry has a size 
standard threshold of less than $47 million in average annual receipts. 
However, the Economic Census only reports breakdowns in number of firms 
with less than $15 million and less than $100 million in revenue. Using 
the more conservative threshold of less than $100 million, the CFPB 
estimates that 106 secondary market financing companies were small 
entities in 2017. This estimate is most likely an overcount because 
this NAICS industry also includes firms involved in secondary market 
financing of student loans and other debt products, which will not be 
covered by the AVM rule. Lastly, due to a lack of more recent data in 
the Economic Census, the CFPB scales up the 2017 estimate by a factor 
of 1.3363 (same as before) to obtain a 2023 estimate of 142 small 
entities.
    Other Activities Related to Credit Intermediation (NAICS 522390). 
This industry encompasses establishments primarily engaged in 
facilitating credit intermediation (except mortgage and loan brokerage; 
and financial transactions processing, reserve, and clearinghouse 
activities), and includes loan servicing firms. NAICS 522390 is a 
broader category than the previous two categories discussed in this 
section. Some examples of business activity in this NAICS industry are 
check cashing services, loan servicing, money transmission services, 
payday lending services, and traveler's check issuance services, but 
only loan servicing will fall under the final rule. To account for this 
broader categorization, using Economic Census data on number of 
establishments in this NAICS industry broken down by the North American 
Product Classification System (NAPCS), the CFPB filtered NAICS 522390 
by the relevant NAPCS collection codes: (1) Residential Mortgage Loans, 
and (2) Other Secured or Guaranteed Home Loans to Consumers. The 
filtered count of the number of establishments is 566. However, these 
data do not provide the number of firms, each of which may consist of 
one or more establishments. Thus, the CFPB uses the most conservative 
assumption--that each firm has only one establishment--to estimate the 
number of firms covered by the final rule to be (at most) 566 in 2017. 
Furthermore, data broken down by firm/establishment size are 
unavailable, so the CFPB assumes the most conservative extreme that all 
566 of these firms are small entities. Lastly, due to a lack of more 
recent data in the Economic Census, the CFPB scales up the 2017 
estimate by a factor of 1.3363 (same as before) to obtain a 2023 
estimate of 756 small entities.
    Finally, only small entities that themselves, or through or in 
cooperation with a third-party or affiliate, utilize AVMs in credit 
decisions or covered securitization determinations will be covered by 
the final rule. The remaining small entities may opt for alternative 
valuation methods not involving AVMs. Due to the lack of data on the 
usage of AVMs by small entities in credit decisions or covered 
securitization determinations, the CFPB follows the FDIC and makes the 
following assumption: the range of AVM usage lies between 10 percent 
(lower bound) and 100 percent (upper bound). Applying this assumption 
to the estimated total number of small entities results in the 
estimated range of covered small entities shown in the following table:

 Table B--Estimated Lower and Upper Bounds of Covered Small Entities in
                                  2023
------------------------------------------------------------------------
                                         Lower bound       Upper bound
------------------------------------------------------------------------
Est. Number of Covered Small                       478             4,779
 Entities...........................
Assumed Proportion of Small Entities               10%              100%
 Using AVMs.........................
------------------------------------------------------------------------

    In summary, the CFPB estimates that between 478 and 4,779 small 
entities will be covered by the final rule.
    In this analysis, the CFPB also considered including other NAICS 
categories, most notably ``Mortgage and Nonmortgage Loan Brokers'' 
(NAICS 522310). This industry includes establishments primarily engaged 
in arranging loans by bringing borrowers and lenders together on a 
commission or fee basis. Based on this definition, the CFPB believes 
that this industry is generally not involved in credit decisions or 
covered securitization determinations and, thus, typically will not be 
covered by the final rule.
    5. Projected reporting, recordkeeping, and other compliance 
requirements of the final rule, including an estimate of the classes of 
small entities which will be subject to the requirement and the type of 
professional skills necessary for the preparation of the report or 
record.
    The final rule will not impose new reporting or recordkeeping 
requirements for CFPB respondents but will impose new compliance 
requirements on small entities subject to the rule. The final rule 
requirements and the costs associated with them are discussed herein.
    Entities will likely have to spend time and resources reading and 
understanding the regulation and developing the required policies,

[[Page 64569]]

practices, procedures, and control systems for their employees to 
follow to ensure compliance, in addition to engaging a legal team to 
review their draft policies, practices, procedures, and control 
systems. Costs associated with drafting compliance policies, practices, 
procedures, and control systems are likely to be higher for 
institutions who use AVMs for a more diverse set of circumstances. Such 
entities will likely need to tailor guidance for each specific use 
case. Small entities will also likely have to implement training of 
staff that utilize AVM output for covered purposes.
    Costs to small entities. The CFPB expects that the final rule may 
impose one-time and ongoing costs on small nondepository entities who 
use AVMs in valuing real estate collateral securing mortgage loans. The 
CFPB has identified three categories of costs that make up the 
components necessary for a nondepository institution to comply with the 
final rule. Those categories are drafting and developing policies, 
practices, procedures, and control systems; verifying compliance; and 
training staff and third parties. Nondepositories will incur the bulk 
of these costs in the first year. However, the CFPB anticipates that 
nondepositories will incur some ongoing costs in subsequent years, such 
as updating policies, practices, procedures, and control systems, 
continuing review for compliance, and training new staff. Following the 
FDIC, the CFPB assumes that the ongoing annual costs will be one-third 
of the one-time first-year costs.
    Using the cost methodology outlined in the SBREFA Panel Report, the 
CFPB estimates that the one-time costs in the first year for each 
covered small nondepository entity will be the following: $7,000 for 
drafting and developing policies, practices, procedures, and control 
systems, $10,000 for verifying compliance, and $6,000 for training. 
Thus, the total costs per entity will be $23,000 in the first year and 
$7,667 for each subsequent year.
    The CFPB calculates the overall market impact of the final rule on 
small entities by multiplying the costs per entity by the estimated 
number of covered small entities. The CFPB estimates that the overall 
market impact of one-time costs in the first year for covered small 
nondepositories will be between $10,994,000 and $109,917,000. The CFPB 
estimates that the overall market impact of ongoing costs in each 
subsequent year for covered small nondepositories will be between 
$3,664,826 and $36,640,593 per year. The ranges in estimated impact are 
wide due to uncertainty surrounding the percentage of small entities 
using AVMs in credit decisions or covered securitization 
determinations.
    6. Description of the steps the agency has taken to minimize the 
significant economic impact on small entities consistent with the 
stated objectives of applicable statutes, including a statement of the 
factual, policy, and legal reasons for selecting the alternative 
adopted in the final rule and why each one of the other significant 
alternatives to the rule considered by the agency that affect the 
impact on small entities was rejected.
    In an effort to minimize the significant economic impact on small 
entities, the CFPB considered a number of alternatives while drafting 
the final rule, including those considered as part of the SBREFA 
process. Many of the alternatives considered would have resulted in 
greater costs to small entities than would the final rule. For example, 
the CFPB considered proposing a prescriptive rule with more detailed 
and specific requirements, and the CFPB considered a rule that would 
also cover the use of AVMs solely to review completed value 
determinations (e.g., to review appraisals). Since such alternatives 
would result in a greater economic impact on small entities than the 
final rule, they are not discussed here.
    The CFPB also considered alternatives that might have resulted in a 
smaller economic impact on small entities than would the final rule. 
Some of these alternatives are briefly described and their impacts 
relative to the final provisions are discussed herein.
    Coverage of loan modifications and other changes to existing loans. 
The CFPB considered a rule that would exclude AVMs used in loan 
modifications not resulting in new mortgage originations. As discussed 
in the proposal preamble and the SBREFA Panel Report, during the SBREFA 
process SERs generally favored that approach. The CFPB understands that 
the final rule's coverage of loan modifications and other changes to 
existing loans will introduce additional burden to small entities. 
However, the CFPB has determined that this coverage will aid in 
fulfilling the consumer protection objective of section 1125. For 
consumers seeking loss mitigation, obtaining an AVM valuation that 
adheres to the quality control standards in the final rule during the 
loan modification process will be particularly important for their 
financial decision-making and outcomes, given they are already in 
financial distress. During the proposed rule stage, the CFPB requested 
comments on the likely impact of this coverage aspect of the rule on 
the compliance costs of small entities and did not receive specific 
feedback to warrant excluding AVMs used in loan modifications that do 
not result in new mortgage originations.
    Coverage of credit line reductions or suspensions. The CFPB 
considered a rule that would not cover AVMs used solely in deciding 
whether or to what extent to reduce or suspend a home equity line of 
credit. As discussed in the proposal preamble and the SBREFA Panel 
Report, during the SBREFA process SERs discussed balancing the consumer 
protections of covering credit line reductions or suspensions against 
the burdens of such regulation. The CFPB understands that the final 
rule's coverage of credit line reductions and suspensions will 
introduce additional burden to small entities. However, the CFPB has 
determined that this coverage will aid in fulfilling the consumer 
protection objective of section 1125. Credit line reductions and 
suspensions impose hardship on consumers, who now face greater credit 
constraints and reduced financial options. Obtaining an AVM valuation 
that adheres to the quality control standards in the final rule during 
the credit decision process is particularly important for these 
consumers, given the potential for improving consumer financial 
outcomes. During the proposed rule stage, the CFPB requested comments 
on the likely impact of this coverage aspect of the rule on the 
compliance costs of small entities and did not receive specific 
feedback to warrant excluding AVMs used in deciding whether or to what 
extent to reduce or suspend a home equity line of credit.
    Nondiscrimination quality control factor. The CFPB considered a 
rule that would not specify a nondiscrimination quality control factor. 
As discussed in the proposal preamble and the SBREFA Panel Report, 
during the SBREFA process, SERs expressed concern regarding the 
nondiscrimination quality control factor. In particular, SERs noted the 
impracticality of having small entities assess fair lending performance 
of AVMs provided by third parties, as well as noting concerns that this 
nondiscrimination quality control factor potentially duplicates other 
fair lending regulatory infrastructure. The CFPB understands that the 
final rule's nondiscrimination quality control factor will introduce 
additional burden to small entities. However, the CFPB has determined 
that this factor will aid in fulfilling the consumer protection 
objective of section 1125. There is a long

[[Page 64570]]

history of housing market discrimination in the United States, 
including misvaluation of property owned by minority consumers, as 
observed in biases in the appraisal process.\125\ Misvaluations limit 
credit access for minority consumers, potentially leading to worse 
financial outcomes by hampering home ownership and wealth accumulation 
among minority consumers.
---------------------------------------------------------------------------

    \125\ Interagency Task Force on Property Appraisal and Valuation 
Equity (PAVE), Action Plan to Advance Property Appraisal and 
Valuation Equity: Closing the Racial Wealth Gap by Addressing Mis-
valuations for Families and Communities of Color 2-4 (Mar. 2022), 
available at https://pave.hud.gov/sites/pave.hud.gov/files/documents/PAVEActionPlan.pdf.
---------------------------------------------------------------------------

    The CFPB acknowledges that for small entities with a limited volume 
of AVM valuation observations, detecting discrimination in AVMs may not 
be feasible. Nevertheless, there are other steps small entities could 
take towards satisfying the nondiscrimination quality control factor. 
For example, the SBREFA process described various points in the 
valuation process where humans interact with AVMs and make decisions 
regarding AVM usage and application of AVM outputs; having policies, 
practices, procedures, and control systems in place that ensure such 
human interactions and decision-making comply with applicable 
nondiscrimination laws would be feasible for small entities. As another 
example, in choosing third-party AVM providers, small entities can do 
research into how providers assess and account for discrimination in 
their AVMs and opt for providers who have taken such factors into 
consideration.
    During the proposed rule stage, the CFPB requested comments on the 
likely impact of the nondiscrimination quality control factor of the 
rule on the compliance costs of small entities and did not receive 
specific feedback to warrant not specifying a nondiscrimination quality 
control factor.
    7. Description of the steps the agency has taken to minimize any 
additional cost of credit for small entities.
    The CFPB believes that there will be little to no impact on the 
cost of credit incurred by small entities covered by the final rule. 
Should a covered small entity apply for a business loan, the lender is 
unlikely to consider that covered small entity's use of AVMs or their 
compliance with the final rule in their credit pricing or credit 
extension decisions.
    During the SBREFA process, the CFPB asked SERs (including community 
banks, credit unions, and non-depository mortgage lenders) about this 
possible impact, but they did not provide feedback on how their credit 
would be affected by the rule. This lack of feedback is consistent with 
the above assertions.

F. FHFA

    The RFA requires that a regulation that has a significant economic 
impact on a substantial number of small entities, small businesses, or 
small organizations must include an analysis describing the 
regulation's impact on small entities.\126\ FHFA need not undertake 
such an analysis if the Agency has certified that the regulation will 
not have a significant economic impact on a substantial number of small 
entities.\127\ FHFA has considered the impact of the final rule under 
the RFA and FHFA certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities 
because the regulation only applies to Fannie Mae and Freddie Mac, 
which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \126\ 12 U.S.C. 601 et seq.
    \127\ 12 U.S.C. 605(b).
---------------------------------------------------------------------------

VI. Use of Plain Language

    Section 722 of the Gramm-Leach- Bliley Act \128\ requires the 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies invited comment on how to 
make the rule easier to understand, but no such comments were received.
---------------------------------------------------------------------------

    \128\ Public Law 106-102, section 722, 113 Stat. 1338 1471 
(1999).
---------------------------------------------------------------------------

VII. Riegle Community Development and Regulatory Improvement Act of 
1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\129\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), each Federal banking agency 
must consider, consistent with principles of safety and soundness and 
the public interest, any administrative burdens that such regulations 
would place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
generally to take effect on the first day of a calendar quarter that 
begins on or after the date on which the regulations are published in 
final form.\130\
---------------------------------------------------------------------------

    \129\ 12 U.S.C. 4802(a).
    \130\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The agencies have considered the administrative burdens and the 
benefits of the proposed rule in preparing this final rule and have 
adopted a 12-month delayed effective date. The final rule will be 
effective on the first day of the calendar quarter following the 12 
months after publication in the Federal Register.

VIII. OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC has analyzed the final rule under the factors set forth in 
the Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532. Under 
this analysis, the OCC considered whether the final rule includes a 
federal mandate that may result in the expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $183 
million or more in any one year.\131\
---------------------------------------------------------------------------

    \131\ Id.
---------------------------------------------------------------------------

    The burden associated with the final rule will 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 reviews the costs associated with the activities 
necessary to comply with the final rule. These include an estimate of 
the total time required to implement the final rule and the estimated 
hourly wage of bank employees who may be responsible for the tasks 
associated with achieving compliance with the final rule. For the cost 
estimates, the OCC uses a compensation rate of $128 per hour.\132\ 
Based on this approach, the OCC estimates that expenditures to comply 
with the final rule's mandates will be approximately $21 million (180 
hours x $128 per hour x 909 banks = $20.94 million). Therefore, the OCC 
concludes that the final rule will not result in the expenditure of 
$183 million or more annually by state, local, and tribal governments, 
or by the private sector.
---------------------------------------------------------------------------

    \132\ See supra note 69 (providing information on how the OCC 
estimates wages and compensation costs associated with the rule).

---------------------------------------------------------------------------

[[Page 64571]]

IX. NCUA Executive Order 13132 Federalism

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on State and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This final rule will not have substantial direct 
effects on the states, on the relationship between the National 
Government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Although the 
AVM statute and the final rule apply to federally insured, state-
chartered credit unions, the NCUA does not believe that the rule will 
change the relationship between the NCUA and state regulatory agencies. 
The NCUA anticipates coordinating with state regulatory agencies to 
implement and enforce the rule as part of its ongoing coordination with 
these agencies. Accordingly, the NCUA believes that the effect of this 
change on the states will be limited. The NCUA has therefore determined 
that this rule does not constitute a policy that has federalism 
implications for purposes of the executive order.

X. NCUA Assessment of Federal Regulations and Policies on Families

    The NCUA Board has determined that this final rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999.\133\ As discussed, the 
final rule implements the quality control standards mandated by section 
1125 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. Accordingly, the rule could potentially 
affect mortgage financing options regarding principal dwelling units 
purchased by a family. However, the potential effect on family well-
being of these mortgage financing decisions is, at most, indirect.
---------------------------------------------------------------------------

    \133\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

XI. Severability

    Each of the agencies intend that, if any provision of the final 
rule, or any application of a provision, is stayed or determined to be 
invalid, the remaining provisions or applications are severable and 
shall continue in effect.

List of Subjects

12 CFR Part 34

    Appraisal, Appraiser, Banks, banking, Consumer protection, Credit, 
Mortgages, National banks, Reporting and recordkeeping requirements, 
Savings associations, Truth in lending.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Investments, Reporting and 
recordkeeping requirements, Securities.

12 CFR Part 323

    Banks, banking, Mortgages, Reporting and recordkeeping 
requirements, Savings associations.

12 CFR Part 722

    Appraisal, Appraiser, Credit unions, Mortgages, Reporting and 
recordkeeping requirements, Truth in lending.

12 CFR Part 741

    Credit, Credit unions.

12 CFR Part 1026

    Advertising, Banks, banking, Consumer protection, Credit, Credit 
unions, Mortgages, National banks, Reporting and recordkeeping 
requirements, Savings associations, Truth in lending.

12 CFR Part 1222

    Appraisals, Government-sponsored enterprises, Mortgages.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For reasons set out in the joint preamble, the Office of the 
Comptroller of the Currency amends part 34 of chapter I of title 12 of 
the Code of Federal Regulations to read as follows:

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
1. The authority citation for part 34 is revised to read as follows:

    Authority:  12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1465, 1701j-
3, 1828(o), 3331 et seq., 5101 et seq., and 5412(b)(2)(B).


0
2. Add subpart I, consisting of Sec. Sec.  34.220 through 34.222, to 
part 34 to read as follows:

Subpart I--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes

Sec.
34.220 Authority, purpose, and scope.
34.221 Definitions.
34.222 Quality control standards.


Sec.  34.220   Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to section 1125 of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 
Stat. 1376, 2198 (2010)).
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement the quality control standards in section 3354 of title 12 for 
the use of automated valuation models in determining the value of 
collateral in connection with making a credit decision or covered 
securitization determination regarding a mortgage or mortgage-backed 
security. This subpart applies to entities regulated by the OCC that 
are mortgage originators or secondary market issuers.
    (2) This subpart does not apply to the use of automated valuation 
models in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or
    (iii) The development of an appraisal by a certified or licensed 
appraiser.


Sec.  34.221   Definitions.

    As used in this subpart:
    Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    Control systems means the functions (such as internal and external 
audits, risk review, quality control, and quality assurance) and 
information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    Covered securitization determination means a determination 
regarding:
    (1) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (2) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    Credit decision means a decision regarding whether and under what 
terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.

[[Page 64572]]

    Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home, if it is used as a 
residence. A consumer can have only one ``principal'' dwelling at a 
time. Thus, a vacation or other second home would not be a principal 
dwelling. However, if a consumer buys or builds a new dwelling that 
will become the consumer's principal dwelling within a year or upon the 
completion of construction, the new dwelling is considered the 
principal dwelling for purposes of this subpart.
    Mortgage means 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 consumer's principal dwelling.
    Mortgage originator means:
    (1) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (i) Takes a mortgage application;
    (ii) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (iii) Offers or negotiates terms of a mortgage;
    (2) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (1) of this definition;
    (3) Does not include any person who is--
    (i) Not otherwise described in paragraph (1) or (2) of this 
definition and who performs purely administrative or clerical tasks on 
behalf of a person who is described in any such paragraph; or
    (ii) A retailer of manufactured or modular homes or an employee of 
the retailer if the retailer or employee, as applicable--
    (A) Does not receive compensation or gain for engaging in 
activities described in paragraph (1) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (B) Discloses to the consumer--
    (1) In writing any corporate affiliation with any creditor; and
    (2) If the retailer has a corporate affiliation with any creditor, 
at least 1 unaffiliated creditor; and
    (C) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (4) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (5) Does not include a person that meets all of the following 
criteria:
    (i) The person provides seller financing for the sale of three or 
fewer properties in any 12-month period to purchasers of such 
properties, each of which is owned by the person and serves as security 
for the financing;
    (ii) The person has not constructed, or acted as a contractor for 
the construction of, a residence on the property in the ordinary course 
of business of the person;
    (iii) The person provides seller financing that meets the following 
requirements:
    (A) The financing is fully amortizing;
    (B) The financing is one that the person determines in good faith 
the consumer has a reasonable ability to repay;
    (C) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (6) Does not include a natural person, estate, or trust that meets 
all of the following criteria:
    (i) The natural person, estate, or trust provides seller financing 
for the sale of only one property in any 12-month period to purchasers 
of such property, which is owned by the natural person, estate, or 
trust and serves as security for the financing;
    (ii) The natural person, estate, or trust has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person;
    (iii) The natural person, estate, or trust provides seller 
financing that meets the following requirements:
    (A) The financing has a repayment schedule that does not result in 
negative amortization;
    (B) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (7) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    Person has the meaning given in section 103 of the Truth in Lending 
Act (15 U.S.C. 1602).
    Secondary market issuer means any party that creates, structures, 
or organizes a mortgage-backed securities transaction.


Sec.  34.222   Quality control standards.

    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, must 
adopt and maintain policies, practices, procedures, and control systems 
to ensure that automated valuation models 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board amends 
part 225 of chapter II of title 12 of the Code of Federal Regulations, 
as follows:

[[Page 64573]]

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
3. The authority citation for part 225 is revised to read as follows:

    Authority:  12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3354, 
3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
4. Add subpart O, consisting of Sec. Sec.  225.350 through 225.352, to 
part 225 to read as follows:
Subpart O--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes
Sec.
225.350 Authority, purpose and scope.
225.351 Definitions.
225.352 Quality control standards.

Subpart O--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes


Sec.  225.350   Authority, purpose and scope.

    (a) Authority. (1) In general. This subpart is issued pursuant to 
section 1125 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989, 12 U.S.C. 3354, as added by section 1473(q) of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 
111-203, 124 Stat. 1376, 2198 (2010)), as well as under the Federal 
Reserve Act, as amended (12 U.S.C. 221 et seq.); the Bank Holding 
Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); the Home 
Owners' Loan Act of 1933 (12 U.S.C. 1461 et seq.); section 165 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5365); and the International Banking Act of 1978, as amended (12 U.S.C. 
3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of 
the Board to take action under provisions of law other than 12 U.S.C. 
3354, including but not limited to action to address unsafe or unsound 
practices or conditions, or violations of law or regulation, under 
section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 
1818).
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement the quality control standards in section 3354 of title 12 for 
the use of automated valuation models in determining the value of 
collateral in connection with making a credit decision or covered 
securitization determination regarding a mortgage or a mortgage-backed 
security. This subpart applies to entities and institutions regulated 
by the Board (Board-regulated institutions) that are mortgage 
originators or secondary market issuers.
    (2) This subpart does not apply to the use of automated valuation 
models in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or
    (iii) The development of an appraisal by a certified or licensed 
appraiser.


Sec.  225.351   Definitions.

    As used in this subpart:
    Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    Control systems means the functions (such as internal and external 
audits, risk review, quality control, and quality assurance) and 
information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    Covered securitization determination means a determination 
regarding:
    (1) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (2) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    Credit decision means a decision regarding whether and under what 
terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.
    Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home, if it is used as a 
residence. A consumer can have only one ``principal'' dwelling at a 
time. Thus, a vacation or other second home would not be a principal 
dwelling. However, if a consumer buys or builds a new dwelling that 
will become the consumer's principal dwelling within a year or upon the 
completion of construction, the new dwelling is considered the 
principal dwelling for purposes of this subpart.
    Mortgage means 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 consumer's principal dwelling.
    Mortgage originator means:
    (1) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (i) Takes a mortgage application;
    (ii) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (iii) Offers or negotiates terms of a mortgage;
    (2) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (1) of this definition;
    (3) Does not include any person who is--
    (i) Not otherwise described in paragraph (1) or (2) of this 
definition and who performs purely administrative or clerical tasks on 
behalf of a person who is described in any such paragraph; or
    (ii) A retailer of manufactured or modular homes or an employee of 
the retailer if the retailer or employee, as applicable--
    (A) Does not receive compensation or gain for engaging in 
activities described in paragraph (1) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (B) Discloses to the consumer--
    (1) In writing any corporate affiliation with any creditor; and
    (2) If the retailer has a corporate affiliation with any creditor, 
at least 1 unaffiliated creditor; and
    (C) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (4) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (5) Does not include a person that meets all of the following 
criteria:
    (i) The person provides seller financing for the sale of three or 
fewer properties in any 12-month period to purchasers of such 
properties, each of which is owned by the person and serves as security 
for the financing;
    (ii) The person has not constructed, or acted as a contractor for 
the

[[Page 64574]]

construction of, a residence on the property in the ordinary course of 
business of the person;
    (iii) The person provides seller financing that meets the following 
requirements:
    (A) The financing is fully amortizing;
    (B) The financing is one that the person determines in good faith 
the consumer has a reasonable ability to repay;
    (C) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (6) Does not include a natural person, estate, or trust that meets 
all of the following criteria:
    (i) The natural person, estate, or trust provides seller financing 
for the sale of only one property in any 12-month period to purchasers 
of such property, which is owned by the natural person, estate, or 
trust and serves as security for the financing;
    (ii) The natural person, estate, or trust has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person;
    (iii) The natural person, estate, or trust provides seller 
financing that meets the following requirements:
    (A) The financing has a repayment schedule that does not result in 
negative amortization;
    (B) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (7) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    Person has the meaning given in section 103 of the Truth in Lending 
Act (15 U.S.C. 1602).
    Secondary market issuer means any party that creates, structures, 
or organizes a mortgage-backed securities transaction.


Sec.  225.352   Quality control standards.

    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, must 
adopt and maintain policies, practices, procedures, and control systems 
to ensure that automated valuation models 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the joint preamble, the FDIC amends 12 
CFR part 323 as follows:

PART 323--APPRAISALS

0
5. The authority citation for part 323 continues to read as follows:

    Authority:  12 U.S.C. 1818, 1819(a) (``Seventh'' and ``Tenth''), 
1831p-1 and 3331 et seq.


0
6. Add subpart C, consisting of Sec. Sec.  323.15 through 323.17, to 
part 323 to read as follows:

Subpart C--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes

Sec.
323.15 Authority, purpose, and scope.
323.16 Definitions.
323.17 Quality control standards.


Sec.  323.15   Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to section 1125 of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 
Stat. 1376, 2198 (2010)).
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement the quality control standards in section 3354 of title 12 for 
the use of automated valuation models in determining the value of 
collateral in connection with making a credit decision or covered 
securitization determination regarding a mortgage or mortgage-backed 
security. This subpart applies to entities regulated by the FDIC that 
are mortgage originators or secondary market issuers.
    (2) This subpart does not apply to the use of automated valuation 
models in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or
    (iii) The development of an appraisal by a certified or licensed 
appraiser.


Sec.  323.16   Definitions.

    As used in this subpart:
    Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    Control systems means the functions (such as internal and external 
audits, risk review, quality control, and quality assurance) and 
information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    Covered securitization determination means a determination 
regarding:
    (1) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (2) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    Credit decision means a decision regarding whether and under what 
terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.
    Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home, if it is used as a 
residence. A consumer can have only one ``principal'' dwelling at a 
time. Thus, a vacation or other second home would not be a principal 
dwelling. However, if a consumer buys or builds

[[Page 64575]]

a new dwelling that will become the consumer's principal dwelling 
within a year or upon the completion of construction, the new dwelling 
is considered the principal dwelling for purposes of this subpart.
    Mortgage means 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 consumer's principal dwelling.
    Mortgage originator means:
    (1) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (i) Takes a mortgage application;
    (ii) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (iii) Offers or negotiates terms of a mortgage;
    (2) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (1) of this definition;
    (3) Does not include any person who is--
    (i) Not otherwise described in paragraph (1) or (2) of this 
definition and who performs purely administrative or clerical tasks on 
behalf of a person who is described in any such paragraph; or
    (ii) A retailer of manufactured or modular homes or an employee of 
the retailer if the retailer or employee, as applicable--
    (A) Does not receive compensation or gain for engaging in 
activities described in paragraph (1) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (B) Discloses to the consumer--
    (1) In writing any corporate affiliation with any creditor; and
    (2) If the retailer has a corporate affiliation with any creditor, 
at least 1 unaffiliated creditor; and
    (C) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (4) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (5) Does not include a person that meets all of the following 
criteria:
    (i) The person provides seller financing for the sale of three or 
fewer properties in any 12-month period to purchasers of such 
properties, each of which is owned by the person and serves as security 
for the financing;
    (ii) The person has not constructed, or acted as a contractor for 
the construction of, a residence on the property in the ordinary course 
of business of the person;
    (iii) The person provides seller financing that meets the following 
requirements:
    (A) The financing is fully amortizing;
    (B) The financing is one that the person determines in good faith 
the consumer has a reasonable ability to repay;
    (C) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (6) Does not include a natural person, estate, or trust that meets 
all of the following criteria:
    (i) The natural person, estate, or trust provides seller financing 
for the sale of only one property in any 12-month period to purchasers 
of such property, which is owned by the natural person, estate, or 
trust and serves as security for the financing;
    (ii) The natural person, estate, or trust has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person;
    (iii) The natural person, estate, or trust provides seller 
financing that meets the following requirements:
    (A) The financing has a repayment schedule that does not result in 
negative amortization;
    (B) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (7) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    Person has the meaning given in section 103 of the Truth in Lending 
Act (15 U.S.C. 1602).
    Secondary market issuer means any party that creates, structures, 
or organizes a mortgage-backed securities transaction.


Sec.  323.17   Quality control standards.

    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, must 
adopt and maintain policies, practices, procedures, and control systems 
to ensure that automated valuation models 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 722 and Part 741

Authority and Issuance

    For the reasons set forth in the joint preamble, the NCUA Board 
amends 12 CFR parts 722 and 741 as follows:

PART 722--APPRAISALS

0
7. The authority citation for part 722 continues to read as follows:

    Authority:  12 U.S.C. 1766, 1789, and 3331 et seq. Section 
722.3(a) is also issued under 15 U.S.C. 1639h.


Sec. Sec.  722.1 through 722.7   [Redesignated as Sec. Sec.  722.101 
through 722.107]

0
8. Redesignate Sec. Sec.  722.1 through 722.7 as Sec. Sec.  722.101 
through 722.107.


Sec. Sec.  722.101 through 722.107   [Designated as Subpart A]

0
9. Designate newly redesignated Sec. Sec.  722.101 through 722.107 as 
subpart A.

0
10. Add a heading for newly designated subpart A to read as follows:

[[Page 64576]]

Subpart A--Appraisals Generally

0
11. Add subpart B, consisting of Sec. Sec.  722.201 through 722.203, to 
read as follows:
Subpart B--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes
Sec.
722.201 Authority, purpose, and scope.
722.202 Definitions.
722.203 Quality control standards.

Subpart B--Quality Control Standards for Automated Valuation Models 
Used for Mortgage Lending Purposes


Sec.  722.201   Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to section 1125 of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, 12 U.S.C. 3354, as added by section 1473(q) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 
Stat. 1375, 2198 (2010)).
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement the quality control standards in section 3354 of title 12 for 
the use of automated valuation models in determining the value of 
collateral in connection with making a credit decision or covered 
securitization determination regarding a mortgage or mortgage-backed 
security. This subpart applies to credit unions insured by the NCUA 
that are mortgage originators or secondary market issuers.
    (2) This subpart does not apply to the use of automated valuation 
models in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or
    (iii) The development of an appraisal by a certified or licensed 
appraiser.


Sec.  722.202   Definitions.

    As used in this subpart:
    Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    Control systems means the functions (such as internal and external 
audits, risk review, quality control, and quality assurance) and 
information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    Covered securitization determination means a determination 
regarding:
    (1) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (2) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    Credit decision means a decision regarding whether and under what 
terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.
    Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home, if it is used as a 
residence. A consumer can have only one ``principal'' dwelling at a 
time. Thus, a vacation or other second home would not be a principal 
dwelling. However, if a consumer buys or builds a new dwelling that 
will become the consumer's principal dwelling within a year or upon the 
completion of construction, the new dwelling is considered the 
principal dwelling for purposes of this subpart.
    Mortgage means 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 consumer's principal dwelling.
    Mortgage originator means:
    (1) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (i) Takes a mortgage application;
    (ii) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (iii) Offers or negotiates terms of a mortgage;
    (2) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (1) of this definition;
    (3) Does not include any person who is--
    (i) Not otherwise described in paragraph (1) or (2) of this 
definition and who performs purely administrative or clerical tasks on 
behalf of a person who is described in any such paragraph; or
    (ii) A retailer of manufactured or modular homes or an employee of 
the retailer if the retailer or employee, as applicable--
    (A) Does not receive compensation or gain for engaging in 
activities described in paragraph (1) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (B) Discloses to the consumer--
    (1) In writing any corporate affiliation with any creditor; and
    (2) If the retailer has a corporate affiliation with any creditor, 
at least 1 unaffiliated creditor; and
    (C) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (4) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (5) Does not include a person that meets all of the following 
criteria:
    (i) The person provides seller financing for the sale of three or 
fewer properties in any 12-month period to purchasers of such 
properties, each of which is owned by the person and serves as security 
for the financing;
    (ii) The person has not constructed, or acted as a contractor for 
the construction of, a residence on the property in the ordinary course 
of business of the person;
    (iii) The person provides seller financing that meets the following 
requirements:
    (A) The financing is fully amortizing;
    (B) The financing is one that the person determines in good faith 
the consumer has a reasonable ability to repay;
    (C) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (6) Does not include a natural person, estate, or trust that meets 
all of the following criteria:
    (i) The natural person, estate, or trust provides seller financing 
for the sale of only one property in any 12-month period to purchasers 
of such property,

[[Page 64577]]

which is owned by the natural person, estate, or trust and serves as 
security for the financing;
    (ii) The natural person, estate, or trust has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person;
    (iii) The natural person, estate, or trust provides seller 
financing that meets the following requirements:
    (A) The financing has a repayment schedule that does not result in 
negative amortization;
    (B) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (7) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    Person has the meaning given in section 103 of the Truth in Lending 
Act (15 U.S.C. 1602).
    Secondary market issuer means any party that creates, structures, 
or organizes a mortgage-backed securities transaction.


Sec.  722.203   Quality control standards.

    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, must 
adopt and maintain policies, practices, procedures, and control systems 
to ensure that automated valuation models 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.

PART 741--REQUIREMENTS FOR INSURANCE

0
12. The authority citation for part 741 is revised to read as follows:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790, 1790d, 3331 et 
seq; 31 U.S.C. 3717.


0
13. Revise Sec.  741.203(b) to read as follows:


Sec.  741.203   Minimum loan policy requirements.

* * * * *
    (b) Adhere to the requirements stated in part 722 of this chapter.
* * * * *

CONSUMER FINANCIAL PROTECTION BUREAU

Authority and Issuance

    For reasons set out in the joint preamble, the CFPB amends 
Regulation Z, 12 CFR part 1026, as follows:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
14. The authority citation for part 1026 is revised to read as follows:

    Authority:  12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
3354, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart A--General

0
15. Section 1026.1 is amended by adding paragraph (c)(6) to read as 
follows:


Sec.  1026.1   Authority, purpose, coverage, organization, enforcement, 
and liability.

* * * * *
    (c) * * *
    (6) The requirements of Sec.  1026.42(i) apply to certain persons 
regardless of whether they are creditors and even if the mortgage, as 
defined in Sec.  1026.42(i)(2)(v), is primarily for business, 
commercial, agricultural, or organizational purposes.
* * * * *

0
16. Section 1026.2 is amended by revising paragraph (a)(11) to read as 
follows:


Sec.  1026.2   Definitions and rules of construction.

    (a) * * *
    (11) Consumer means a cardholder or natural person to whom consumer 
credit is offered or extended. However, for purposes of rescission 
under Sec. Sec.  1026.15 and 1026.23, the term also includes a natural 
person in whose principal dwelling a security interest is or will be 
retained or acquired, if that person's ownership interest in the 
dwelling is or will be subject to the security interest. For purposes 
of Sec.  1026.42(i), the term means a natural person to whom credit is 
offered or extended, even if the credit is primarily for business, 
commercial, agricultural, or organizational purposes. For purposes of 
Sec. Sec.  1026.20(c) through (e), 1026.36(c), 1026.39, and 1026.41, 
the term includes a confirmed successor in interest.
* * * * *

0
17. Section 1026.3 is amended by adding paragraph (i) to read as 
follows:


Sec.  1026.3   Exempt transactions.

* * * * *
    (i) The exemptions in this section are not applicable to Sec.  
1026.42(i) (Quality Control Standards for Automated Valuation Models).

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
18. Section 1026.42 is amended by revising paragraph (a) and adding 
paragraph (i) to read as follows:


Sec.  1026.42   Valuation independence.

    (a) Scope. Except for paragraph (i) of this section, this section 
applies to any consumer credit transaction secured by the consumer's 
principal dwelling. Paragraph (i) of this section applies to any 
mortgage, as defined in paragraph (i)(2)(v) of this section, secured by 
the consumer's principal dwelling, even if the mortgage is primarily 
for business, commercial, agricultural, or organizational purposes.
* * * * *
    (i) Quality Control Standards for Automated Valuation Models--(1) 
Scope. The purpose of this paragraph (i) is to implement quality 
control standards for the use of automated valuation models in 
determining the value of collateral in connection with making a credit 
decision or covered securitization determination regarding a mortgage 
or mortgage-backed security. This paragraph (i) applies to the use of 
automated valuation models by any mortgage originator or secondary 
market issuer, other than either a financial institution as defined in 
12 U.S.C. 3350(7), or a subsidiary owned and controlled by such a 
financial institution and regulated by one of the Federal financial 
institutions regulatory agencies as defined in 12 U.S.C. 3350(6). This 
paragraph (i) does not apply to the use of automated valuation models 
in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or

[[Page 64578]]

    (iii) The development of an appraisal by a certified or licensed 
appraiser as defined in Sec.  1026.35(c)(1)(i).
    (2) Definitions. As used in this paragraph (i):
    (i) Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    (ii) Control systems means the functions (such as internal and 
external audits, risk review, quality control, and quality assurance) 
and information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    (iii) Covered securitization determination means a determination 
regarding:
    (A) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (B) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    (iv) Credit decision means a decision regarding whether and under 
what terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.
    (v) Mortgage means 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 consumer's principal dwelling.
    (vi) Mortgage originator means:
    (A) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (1) Takes a mortgage application;
    (2) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (3) Offers or negotiates terms of a mortgage;
    (B) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (A) of this definition;
    (C) Does not include any person who is not otherwise described in 
paragraph (A) or (B) of this definition and who performs purely 
administrative or clerical tasks on behalf of a person who is described 
in any such paragraph;
    (D) Does not include a retailer of manufactured or modular homes or 
an employee of the retailer if the retailer or employee, as 
applicable--
    (1) Does not receive compensation or gain for engaging in 
activities described in paragraph (A) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (2) Discloses to the consumer in writing any corporate affiliation 
with any creditor and, if the retailer has a corporate affiliation with 
any creditor, at least 1 unaffiliated creditor; and
    (3) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (E) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (F) Does not include a person that meets the criteria for seller 
financers provided in Sec.  1026.36(a)(4) and (5); and
    (G) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    (vii) Secondary market issuer means any party that creates, 
structures, or organizes a mortgage-backed securities transaction.
    (3) Quality control standards. 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, must adopt and maintain policies, 
practices, procedures, and control systems to ensure that automated 
valuation models used in these transactions adhere to quality control 
standards designed to:
    (i) Ensure a high level of confidence in the estimates produced;
    (ii) Protect against the manipulation of data;
    (iii) Seek to avoid conflicts of interest;
    (iv) Require random sample testing and reviews; and
    (v) Comply with applicable nondiscrimination laws.

0
19. In Supplement I to Part 1026--Official Interpretations:
0
a. Under Section 1026.2--Definitions and Rules of Construction, revise 
and republish 2(a)(19)--Dwelling;
0
b. Under Section 1026.3--Exempt Transactions, paragraph 1 is 
republished and paragraph 2 is added.
0
c. Under Section 1026.42--Valuation Independence:
0
i. Revise and republish section 42(a)--Scope;
0
ii. Revise section Paragraph 42(b)(2);
0
iii. Add, in alphabetical order, a heading for 42(i) Quality Control 
Standards for Automated Valuation Models;
0
iv. Under heading 42(i) Quality Control Standards for Automated 
Valuation Models add section Paragraph 42(i)(2)(vi).
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.2--Definitions and Rules of Construction

* * * * *

2(a)(19) Dwelling

    1. Scope. A dwelling need not be the consumer's principal 
residence to fit the definition, and thus a vacation or second home 
could be a dwelling. However, for purposes of the definition of 
residential mortgage transaction, the right to rescind, and the 
application of automated valuation model requirements, a dwelling 
must be the principal residence of the consumer. (See the commentary 
to Sec. Sec.  1026.2(a)(24), 1026.15, 1026.23, and 1026.42.)
    2. Use as a residence. Mobile homes, boats, and trailers are 
dwellings if they are in fact used as residences, just as are 
condominium and cooperative units. Recreational vehicles, campers, 
and the like not used as residences are not dwellings.
    3. Relation to exemptions. Any transaction involving a security 
interest in a consumer's principal dwelling (as well as in any real 
property) remains subject to the regulation despite the general 
exemption in Sec.  1026.3(b).
    4. Automated valuation models. For purposes of the application 
of the automated valuation model requirements in Sec.  1026.42(i), a 
consumer can have only one principal dwelling at a time. Thus, a 
vacation or other second home would not be a principal dwelling. 
However, if a consumer buys or builds a new dwelling that will 
become the consumer's principal dwelling within a year or upon the 
completion of construction, the new dwelling is considered the 
principal dwelling for purposes of applying this definition to a 
particular transaction. (See the commentary to Sec.  1026.2(a)(24).)
* * * * *

Section 1026.3--Exempt Transactions

    1. Relationship to Sec.  1026.12. The provisions in Sec.  
1026.12(a) and (b) governing

[[Page 64579]]

the issuance of credit cards and the limitations on liability for 
their unauthorized use apply to all credit cards, even if the credit 
cards are issued for use in connection with extensions of credit 
that otherwise are exempt under this section.
    2. Relationship to Sec.  1026.42(i). As provided in Sec.  
1026.3(i), the provisions in Sec.  1026.42(i) governing the use of 
automated valuation models apply even if the transactions in which 
automated valuation models are used would otherwise be exempt under 
this section.
* * * * *

Section 1026.42--Valuation Independence

42(a) Scope

    1. Open- and closed-end credit. Section 1026.42 applies to both 
open-end and closed-end transactions secured by the consumer's 
principal dwelling.
    2. Consumer's principal dwelling. Except for section 1026.42(i), 
section 1026.42 applies only if the dwelling that will secure a 
consumer credit transaction is the principal dwelling of the 
consumer who obtains credit. Section 1026.42(i) applies if the 
dwelling that will secure a mortgage, as defined in Sec.  
1026.42(i)(2)(v), is the principal dwelling of the consumer who 
obtains credit, even if the mortgage is primarily for business, 
commercial, agricultural, or organizational purposes. The term 
``dwelling'' is defined in Sec.  1026.2(a)(19). Comments 2(a)(19)-4 
and 42(b)(2)-1 discuss the term ``principal dwelling.''

42(b) Definitions

* * * * *

Paragraph 42(b)(2)

    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  1026.42(b) and (i) as under Sec. Sec.  
1026.2(a)(24), 1026.15(a), and 1026.23(a). See comments 2(a)(19)-4, 
2(a)(24)-3, 15(a)(1)-5, and 23(a)-3. The term ``dwelling'' is 
defined in Sec.  1026.2(a)(19).
* * * * *

42(i) Quality Control Standards for Automated Valuation Models

Paragraph 42(i)(2)(vi)

    1. Servicers. The term mortgage originator generally excludes 
servicers and their employees, agents, and contractors. However, a 
person is a servicer with respect to a particular transaction only 
after it is consummated, and that person retains or obtains its 
servicing rights. Therefore, the term mortgage originator includes a 
servicer and its employees, agents, or contractors when they perform 
mortgage originator activities for purposes of 15 U.S.C. 1602(dd)(2) 
with respect to any transaction that constitutes a new extension of 
credit, including a refinancing or a transaction that obligates a 
different consumer on an existing debt.
* * * * *

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

Authority and Issuance

    For the reasons stated in the joint preamble, the Federal Housing 
Finance Agency amends 12 CFR part 1222, of chapter 12 of title 12 of 
the Code of Federal Regulations as follows:

PART 1222--APPRAISALS

0
20. The authority citation for part 1222 is revised to read as follows:

    Authority:  12 U.S.C. 3354(b); 12 U.S.C. 4501 et seq.; 12 U.S.C. 
4526; and 15 U.S.C. 1639h.


0
21. Add subpart C, consisting of Sec. Sec.  1222.27 through 1222.29, to 
part 1222 to read as follows:

Subpart C--Quality Control Standards for Automated Valuation Models

Sec.
1222.27 Authority, purpose, and scope.
1222.28 Definitions.
1222.29 Quality control standards.


Sec.  1222. 27   Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Federal Housing 
Finance Agency pursuant to 12 U.S.C. 4501 et seq., 12 U.S.C. 4526, 
section 1125 of FIRREA, 12 U.S.C. 3354, as added by section 1473(q) of 
the Dodd-Frank Act.
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement the quality control standards in section 3354 of title 12 for 
the use of automated valuation models in determining the value of 
collateral in connection with making a credit decision or covered 
securitization determination regarding a mortgage or mortgage-backed 
security. This subpart applies to entities regulated by the Federal 
Housing Finance Agency.
    (2) This subpart does not apply to the use of automated valuation 
models in:
    (i) Monitoring of the quality or performance of mortgages or 
mortgage-backed securities;
    (ii) Reviews of the quality of already completed determinations of 
the value of collateral; or
    (iii) The development of an appraisal by a certified or licensed 
appraiser.


Sec.  1222.28   Definitions.

    As used in this subpart:
    Automated valuation model means any computerized model used by 
mortgage originators and secondary market issuers to determine the 
value of a consumer's principal dwelling collateralizing a mortgage.
    Control systems means the functions (such as internal and external 
audits, risk review, quality control, and quality assurance) and 
information systems that are used to measure performance, make 
decisions about risk, and assess the effectiveness of processes and 
personnel, including with respect to compliance with statutes and 
regulations.
    Covered securitization determination means a determination 
regarding:
    (1) Whether to waive an appraisal requirement for a mortgage 
origination in connection with its potential sale or transfer to a 
secondary market issuer; or
    (2) Structuring, preparing disclosures for, or marketing initial 
offerings of mortgage-backed securitizations.
    Credit decision means a decision regarding whether and under what 
terms to originate, modify, terminate, or make other changes to a 
mortgage, including a decision whether to extend new or additional 
credit or change the credit limit on a line of credit.
    Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, 
factory-built housing, or manufactured home, if it is used as a 
residence. A consumer can have only one ``principal'' dwelling at a 
time. Thus, a vacation or other second home would not be a principal 
dwelling. However, if a consumer buys or builds a new dwelling that 
will become the consumer's principal dwelling within a year or upon the 
completion of construction, the new dwelling is considered the 
principal dwelling for purposes of this subpart.
    Mortgage means 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 consumer's principal dwelling.
    Mortgage originator means:
    (1) Any person who, for direct or indirect compensation or gain, or 
in the expectation of direct or indirect compensation or gain--
    (i) Takes a mortgage application;
    (ii) Assists a consumer in obtaining or applying to obtain a 
mortgage; or
    (iii) Offers or negotiates terms of a mortgage;
    (2) Includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in paragraph (1) of this definition;

[[Page 64580]]

    (3) Does not include any person who is--
    (i) Not otherwise described in paragraph (1) or (2) of this 
definition and who performs purely administrative or clerical tasks on 
behalf of a person who is described in any such paragraph; or
    (ii) A retailer of manufactured or modular homes or an employee of 
the retailer if the retailer or employee, as applicable--
    (A) Does not receive compensation or gain for engaging in 
activities described in paragraph (1) of this definition that is in 
excess of any compensation or gain received in a comparable cash 
transaction;
    (B) Discloses to the consumer--
    (1) In writing any corporate affiliation with any creditor; and
    (2) If the retailer has a corporate affiliation with any creditor, 
at least one unaffiliated creditor; and
    (C) Does not directly negotiate with the consumer or lender on loan 
terms (including rates, fees, and other costs);
    (4) Does not include a person or entity that only performs real 
estate brokerage activities and is licensed or registered in accordance 
with applicable State law, unless such person or entity is compensated 
by a lender, a mortgage broker, or other mortgage originator or by any 
agent of such lender, mortgage broker, or other mortgage originator;
    (5) Does not include a person that meets all of the following 
criteria:
    (i) The person provides seller financing for the sale of three or 
fewer properties in any 12-month period to purchasers of such 
properties, each of which is owned by the person and serves as security 
for the financing;
    (ii) The person has not constructed, or acted as a contractor for 
the construction of, a residence on the property in the ordinary course 
of business of the person;
    (iii) The person provides seller financing that meets the following 
requirements:
    (A) The financing is fully amortizing;
    (B) The financing is one that the person determines in good faith 
the consumer has a reasonable ability to repay;
    (C) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (6) Does not include a natural person, estate, or trust that meets 
all of the following criteria:
    (i) The natural person, estate, or trust provides seller financing 
for the sale of only one property in any 12-month period to purchasers 
of such property, which is owned by the natural person, estate, or 
trust and serves as security for the financing;
    (ii) The natural person, estate, or trust has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person;
    (iii) The natural person, estate, or trust provides seller 
financing that meets the following requirements:
    (A) The financing has a repayment schedule that does not result in 
negative amortization;
    (B) The financing has a fixed rate or an adjustable rate that is 
adjustable after five or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases. If the financing 
agreement has an adjustable rate, the rate is determined by the 
addition of a margin to an index rate and is subject to reasonable rate 
adjustment limitations. The index the adjustable rate is based on is a 
widely available index such as indices for U.S. Treasury securities or 
SOFR.
    (7) Does not include a servicer or servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a mortgage for purposes of renegotiating, modifying, replacing 
and subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.
    Person has the meaning given in section 103 of the Truth in Lending 
Act (15 U.S.C. 1602).
    Secondary market issuer means any party that creates, structures, 
or organizes a mortgage-backed securities transaction.


Sec.  1222.29   Quality control standards.

    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, must 
adopt and maintain policies, practices, procedures, and control systems 
to ensure that automated valuation models 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;
    (c) Seek to avoid conflicts of interest;
    (d) Require random sample testing and reviews; and
    (e) Comply with applicable nondiscrimination laws.

Michael J. Hsu,
Acting Comptroller of the Currency.

    By order of the Board Governors of the Federal Reserve System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.
    Dated at Washington, DC, on June 20, 2024.
James P. Sheesley,
Assistant Executive Secretary.
Melane Conyers-Ausbrooks,
Secretary of the Board, National Credit Union Administration.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2024-16197 Filed 8-6-24; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P; 4810-AM-P; 
8070-01-P