February 23, 2022

CFPB Revisits Rules to Eliminate Algorithmic Bias in Home Valuations

In a review panel, the CFPB outlined its options to ensure that computer models used to help determine home valuations are accurate and fair. Those options are to be reviewed to determine their possible impact on small businesses. The CFPB expressed its concerns about implementing proper safeguards regarding automated valuation methods (“AVM”) that would minimize flaws that could “further embed and perpetuate historical lending, wealth, and home value disparities.”


The CFPB considered the following proposals under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Section 1125 (“FIRREA”), under the Dodd-Frank Act, including:

  • Defining AVMs used to "determine" collateral worth.
    • Redefining the coverage of AVMs used to “determine” collateral worth that would include making underwriting decisions regarding the value of collateral rather than broadly covering AVMs used to produce any valuation estimate.
    • Expressly not covering AVMs used in subsequent reviews of a completed determination of collateral value (often an appraisal).
    • Proposing that AVMs are not covered when used by a certified appraiser already subject to quality control standards under other Federal and State regulation and supervision.
    • Considering proposing one of the two following alternatives regarding loan modifications:
      • Having the rule cover AVMs used in transactions that would result in the consumer receiving a new mortgage origination; or
      • Having the rule cover any AVM used to decide whether to change the terms of an existing mortgage even if the change does not result in a new mortgage origination so long as the AVM is used “to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling."
    • Considering proposing one of the two following alternatives regarding credit line reductions or suspensions:
      • Expressly not cover AVMs used to make reduction or suspension decisions for HELOCs so long as they were made in accordance with an initial agreement and did not involve a new mortgage origination; or
      • Broadly cover reduction or suspension decisions whenever the institution making the decision is a mortgage originator or its service provider and the AVM is used to determine the collateral worth of a of a mortgage secured by a consumer’s principal dwelling.
    • Excluding a secondary market issuer’s use of an AVM in the offer and sale of residential mortgage-backed securities.
  • Proposing a new definition of “mortgage originator” that would (i) cover persons who are “loan originators” for purposes of Regulation Z §1026.36, (ii) cover persons who are “creditors” for purposes of Regulation Z §1026.2(a)(17), and (iii) under limited circumstances, cover persons who are “servicers” for purposes of Regulation Z §1026.36(c).
  • Proposing to define “secondary market issuer” to either (i) include only entities that issue residential mortgage-backed securities (“RMBS”), or (ii) broadly expand it to mean issuer, guarantor, insurer, or underwriter of RMBS.
  • Proposing to define “mortgage” to mean either (i) an extension of credit secured by a dwelling, or (ii) a transaction in which a mortgage, deed of trust, purchase money security interest under an installment sales contract, or equivalent consensual security interest is created or retained in a dwelling.
  • Proposing to define “consumer’s principal dwelling” in accordance with the CFPB’s provisions on valuation independence under Regulation Z §1026.42.
  • Proposing either (i) to require regulated institutions to adopt and maintain their own policies and procedures regarding the first four factors to ensure that AVMs used for covered transactions adhere to quality control standards designed to meet those factors under FIRREA Section 1125(a) while not proposing specific requirements; or (ii) implement a more prescriptive rule with more specific requirements for the first four factors.
  • Proposing that the final quality control factor be specified to require compliance with applicable nondiscrimination laws.
  • Consider a 12-month implementation period after issuance of a final interagency rule.

According to the statute, the FERRIA section 1125 rule will be enforced by the FDIC, the Federal Reserve Board, the NCUA, and the OCC with respect to financial institutions as well as federally-regulated subsidiaries. The statute provides the CFPB, the FTC and State attorneys general enforcement authority with respect to other non-depository participants.