Quality Control Standards for Automated Valuation Models
August 21, 2023
Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Consumer Financial Protection Bureau
c/o Legal Division Docket Manager
1700 G Street NW, Washington DC 20552
Re: NASCUS Comments on Quality Control Standards for Automated Valuation Models (RIN 31233-AE23/Docket No: NCUA-2023-0019, Docket No. CFPB-2023-0025)
Dear Agencies,
The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following in response to the National Credit Union Administration (NCUA) Consumer Financial Protection Bureau (CFPB), Office of Comptroller of Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), and Federal Housing Finance Agency (FHFA, collectively, the Agencies, request for comment regarding Quality Control Standards for Automated Valuation Models (AVM)[2].
NASCUS believes strong quality control standards for evaluating Automated Valuation Models (AVMs) are critical to protecting consumers from discriminatory lending practices. We commend the Agencies for recognizing the potential benefits of AVMs, however, we recommend the following for your consideration to ensure the effective and responsible use of AVMS.
Policies, Procedures, and Control Standards
The proposed rule would require mortgage originators and secondary market issuers that engage in credit decisions, and covered securitization determinations themselves, or through a third party or affiliate, to adopt and maintain policies, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to 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.
Proposed 722.203 would establish parameters for quality control standards applicable to AVMs. The proposal does not set specific requirements for how credit unions are to structure these parameters, but rather the Agencies intend to allow covered entities, including credit unions, to have flexibility in establishing quality control standards as opposed to prescriptive requirements.
Since the 2008 financial crisis state supervisory authorities (SSAs), as the prudential regulator for over 1900 credit unions, have worked hand in hand with their regulated institutions to ensure safe and sound practices in all facets of lending. Increased consumer protection and risk reduction have remained agency priorities.
NASCUS appreciates and supports having flexibility with respect to compliance, however, the broad standards in the proposal raise concerns of ambiguity. For example, the first quality control standard would require the adoption of standards to ensure a “high level of confidence in estimates produced.” “High level of confidence” is an amorphous standard that could foreseeably lead to divergent views of whether the standard has been met. NASCUS would strongly encourage the Agencies to consult and coordinate with the prudential state regulators in developing examiner and system guidance with respect to this standard. NASCUS would also encourage the Agencies to work closely with SSAs when conducting joint examinations when evaluating credit union programs and NASCUS would be glad to assist in bringing together the Agencies and SSAs to further this discussion.
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.”[3] Based on this authority, the proposal includes a fifth factor that would require covered entities to adopt policies, practices, procedures, and control systems to ensure that AVMs used in connection with a credit decision adhere to quality control standards designed to comply with applicable nondiscrimination laws. This policy would be independent of policies addressing the first four factors.
We believe the creators of this technology should also be held responsible for compliance with non-discrimination laws as well. Without more specificity with regard to expectations around this factor, it may prove exceedingly difficult and cost-prohibitive for financial institutions on their own to shoulder such a burden. Therefore, it is recommended the requirements be placed upon the AVM providers also as they are in a better position with respect to product design adherence to existing and future consumer protection and anti-discrimination laws. To place the burden on financial institutions to verify whether an AVM complies with nondiscrimination laws is excessive as financial institutions are obligated to comply with existing regulatory regimes under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).[4] Therefore, a more appropriate, and certainly more effective, regulatory regime would impose obligations on those product designers and vendors.
In the alternative, the Agencies should develop guidance on AVM compliance monitoring and utilize established structures, policies, and procedures to assist credit unions in enhancing their oversight of third parties, such as AVMs.
Establishment of Testing and AVM Standards
Section 1135 of FIRREA sections a.2 through a.4 requires that AVMs should be subject to random sample testing and reviews. For these reasons, NASCUS recommends that AVM providers complete frequent third-party testing and reviews. Third-party testing provides trust and equal opportunity across AVM providers by providing objective, independent evaluations of AVM quality. With the third-party testers being independent of the AVM provider, the risks of data manipulation and conflicts of interest are greatly reduced.
Additionally, NASCUS recommends the Agencies consider the standards set by the International Association of Assessing Officers (IAAO)[5] which has established standards for measuring the fairness, quality, equity, and accuracy of AVMs. The industry with the most significant stake in AVMs is providing appropriate guidance on what an AVM should do. The IAAO standards address data quality, calibration of AVMs, market analysis, models, and credentialing of AVM developers and AVM users. It is appropriate for credit unions to rely on such industry standards following appropriate vendor due diligence.
Conclusion
NASCUS commends the Agencies’ commitment to consumer protection and risk mitigation. We appreciate the opportunity to provide comments.
Sincerely,
Sarah Stevenson
Vice President, Regulatory Affairs
NASCUS
[1] NASCUS is the professional association of the nation’s forty-six state and territorial credit union regulatory agencies that charter and supervise over 1900 state credit unions. NASCUS membership includes state regulatory agencies, state-chartered and federally chartered credit unions, and other important stakeholders in the state system. State-chartered credit unions hold over half of the $2.2 trillion assets in the credit union system and are proud to represent nearly half of the 134 million members.
[2] “Quality Control Standards for Automated Valuation Models” 88 No.118 Fed. Reg. 40638 (June 21, 2023)
[3] 12 U.S.C. 3354(a)(5)
[4] 42 U.S.C. §3601 et seq.
[5] IAAO Standard on Automated Valuation Models (AVM) Rev. July 2018.