Letter to CFPB on Automated Valuation Model

Rohit Chopra, Director
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552

Dear Director Chopra,

The American Bankers Association appreciates the opportunity to comment on the Consumer Financial Protection Bureau's Outline of Proposals under Consideration for the Automated Valuation Model (AVM) Rulemaking under Section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Section 1125 directs the Bureau, in conjunction with the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (the Agencies), to write regulations for AVM quality control standards designed to: (1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate. Our comments focus on selected aspects of the Bureau's outline, including the addition of a quality control (QC) factor for fair lending.

I. Summary of the Comment

As the Bureau considers adding a quality control factor for fair lending, it should keep in mind that banks fully support fair lending laws and that their use of models to inform decision making is already heavily regulated. The OCC, Federal Reserve and FDIC have published model risk management guidance that applies to a bank's use of an AVM. In addition, the Federal Financial Institutions Examinations Council (FFIEC) addresses banks' use of AVMs through supervisory guidance, which details supervisory expectations for bank selection, testing and use of an AVM. In addition, banks are subject to regular supervision for compliance with fair lending
laws.

Given the safeguards already in place for a bank's use of an AVM, the Bureau should consider whether a quality control standard for fair lending would provide sufficient benefits to justify the regulatory burden on banks, especially community banks. The Bureau should also carefully balance any concerns about AVM use with the benefits of AVMs. AVMs provide benefits to consumers and the industry by reducing origination costs, easing issues caused by appraiser shortages, including in rural areas, and providing objectivity that may address concerns about individual appraisers' bias.

Specifically, the Bureau should take care to ensure that the rule does not have the following consequences that detract from the benefits of AVM use:

• Imposing a new compliance burden that would prevent many, mostly smaller community banks, from using AVMs;
• Exacerbating the impact of appraiser shortages in underserved and rural areas; and
• Increasing costs of mortgage credit for homebuyers and homeowners, including low- and moderate-income individuals.

With both the benefits of AVMs and the costs of a potential rule in mind, we make the following specific comments.

II. Comments

A. The Rule's Definitions Should Refer to Established Regulatory Definitions

The Bureau states it is considering defining "mortgage originator," "dwelling," and "consumer's principal dwelling" by reference to existing definitions, including those in Regulation Z, which implements the Truth in Lending Act. We generally support the option of leveraging existing regulatory definitions for key terms in the eventual AVM rule. Doing so may mitigate some of the implementation burden on banks. If the Bureau chooses other options presented in the outline, it will create needless confusion.

B. The Rule's Scope Should be Limited to Underwriting Decisions

The rule's application should be clear and should be limited to AVM use for underwriting decisions. Banks are already subject to FFIEC guidance on AVM use and on model risk management, and are regularly examined for fair lending compliance. Burdening AVM use with ambiguous and/or excess regulation will discourage banks, especially community banks, from using AVMs. Moreover, an overly broad rule could exacerbate certain challenges lenders are facing. Currently, lenders in all areas, including rural and underserved areas, report intense challenges finding seasoned appraisers. Many banks report that the shortage of appraisers is one of the primary challenges in originating mortgages. They also report that appraiser scarcity is driving up the cost of appraisals significantly, in some cases as much as $900. Even where appraisers are available, the ability to access timely appraisals continues to be a problem across many market segments. Given these considerations, we recommend:

• The rule should exclude AVMs when used for portfolio review/prudential considerations. We support the Bureau's first option, which is to exclude AVMs used to reduce or suspend a home equity line of credit. AVMs used for portfolio reviews should be excluded. FIRREA directs the Agencies to apply the quality control (QC) standards to "mortgage originators," indicating that Congress intended to focus on originations, not on servicing activities.
• The rule should exclude appraisal waivers. We strongly support the option for excluding a mortgage originator's use of a secondary market issuer's AVM for appraisal waiver programs. Secondary market issuers will be subject to the rule; therefore, requiring a bank to repeat the review of the issuer's AVM is unnecessary and would add needless cost and compliance burden. Moreover, as noted in the Bureau's outline, the mortgage originator does not have access to the secondary market issuer's underlying AVM.
• The rule should exclude AVM use by a licensed and certified appraiser. We support the option of excluding AVMs when used by a licensed and certified appraiser. As the Bureau notes, an appraiser is subject to quality control standards under other Federal and State regulation and supervision; and if the appraiser is employed by or under contract with a mortgage originator, the originator also will have quality control standards. Moreover, under USPAP and other guidance, the appraiser cannot rely solely on the AVM to arrive at an opinion of value. As it implements section 1125, the Bureau should avoid adding unnecessary and duplicative regulatory requirements.
• The rule should exclude reviews of completed determination of value. We support the Bureau's option to exclude AVMs used to review an already completed determination of value. As the Bureau states, reviewing an already completed value seems to fall outside FIRREA's scope, which is AVMs used to "determine the collateral worth." We concur that covering these uses would impose burden and discourage small banks, in particular, from using AVMs.

C. The Need for a Fifth Quality Control Standard is Not Clear; Nor Are the Options for a Fifth Quality Control Standard

The Bureau has provided two options for a standard for fair lending. The first option is a flexible approach that would allow mortgage originators and secondary market issuers to adopt their own policies, practices, procedures and control systems to ensure that AVMs adhere to QC standards designed to comply with fair lending laws. The second option is a prescriptive rule with more detailed and specific requirements for mortgage originators and secondary market issuers to follow.
In addition, the Bureau is considering an alternative to the two options—specifically, the Bureau would not add a QC factor for fair lending. The Bureau states that it is considering whether compliance with fair lending laws is already encompassed within FIRREA's first three statutory factors, making the addition of a fifth factor unnecessary.

We share these concerns and considerations with the Bureau:

• It is not clear that a fifth factor specific to fair lending is necessary. Banks strongly support fair lending laws, and have robust processes and procedures in place to address fair lending risk. They are examined regularly to ensure that these systems are working as intended and designed. Moreover, as discussed above, banks have long been subject to federal guidance on AVMs and prudential guidance on model risk management. Thus, it is not clear that a fifth factor would improve a bank's use of AVMs from a fair lending perspective.
• The prescriptive option is too vague for comment. The outline does not describe the prescriptive option at all, or even offer an example of what prescriptive standards might look like, and therefore we cannot comment on which option is preferable at this time. That being said, generally, flexibility is preferred, as it allows for tailoring to the institution's size and complexity, and would allow for innovations in the technology without the need for regulators to revise prescriptive rules. We reserve comment until the Agencies issue a proposed rule with more detail.
• The Bureau and Agencies should set reasonable expectations for fair lending testing. If nonetheless the Agencies decide to add a fifth factor, expectations for fair lending QC must recognize that model providers control the variables used and may resist making that information available. In addition, amassing sufficient data to perform a robust analysis of a third party's AVM is costly and would increase burden on community banks, making it harder for them to compete with larger institutions. Moreover, small banks do not have in-house data analytics expertise and would have to hire consultants, further increasing cost and discouraging AVM use.

D. The Bureau's Preliminary Cost Estimate is Misplaced

The Bureau asserts that compliance with the rule would only entail one-time costs and that the costs would be limited to either developing new policies and procedures, or, if an institution already has policies and procedures for AVM use, then the costs imposed would be for legal and compliance review and revision of existing documents.

As noted, the options presented are vague, and as a result, ABA believes the Bureau cannot begin to estimate the costs it would impose. We are skeptical that the rule would only impose one-time costs.

ABA also believes that the Bureau's reliance on its estimates from the 1071 notice of proposed rulemaking is completely misplaced. First, the two rules cover entirely different areas and involve different operations. Second, the Bureau relied on its survey of one-time costs of compliance with the 1071 rule, a survey that only garnered 105 responses. As discussed at length in the comment letter on 1071 filed by ABA and its state banking association partners, the Bureau greatly underestimated the one-time and ongoing costs of 1071. We urge the Bureau to gather more information – especially information pertinent to the cost of complying with QC standards for an automated system – and present that information in any proposed rule for comment.

III. Conclusion

Thank you for the opportunity to comment on the SBREFA outline. If you have any questions about our comment letter, please contact me at [email protected] or (202) 663-5478.

Sincerely,

Kathleen C. Ryan
Vice President and Senior Counsel
American Bankers Association