Effective October 1, 2025, the Quality Control Standards for Automated Valuation Models requirements will go into effect. The rule, codified last August, doesn’t give a lot of guidance on what is required for the 5 objectives and states 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.”
What is an AVM?
An automated valuation model (AVM) 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.
What are the requirements?
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:
- Ensure a high level of confidence in the estimates produced,
“Requires quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs.”
The financial institution should validate the quality of the AVMs that it receives. This may be done by completing additional valuations on the properties involved. Potential methods to do this includes having another AVM completed, by a different vendor, having a “drive-by” appraisal done, or having a full appraisal completed, or a combination of the three.
- Protect against the manipulation of data,
“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 model.”
- Seek to avoid conflicts of interest,
- Require random sample testing and reviews, and
- Comply with applicable nondiscrimination laws.
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.
What is a control system?
Control systems mean 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.
Is there any guidance for compliance with the requirements?
The CFPB published a Small Entity Compliance Guide.
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