Home mortgage lenders will have to meet new standards to ensure their tech-driven appraisals are free from flaws that might cause faulty estimates or discrimination. The Federal Reserve, along with five other federal agencies, introduced the new demands in a final rule on Wednesday. The regulation aims to maintain the credibility and integrity of automated-valuation models (AVMs) used in home valuations for certain mortgages. These quality-control standards, mandated by the Dodd-Frank Act, were proposed in June 2023 and are now being enforced to prevent potential abuses as AI and other technologies become more prevalent in lending.
The rule stipulates that mortgage originators and secondary-market issuers must adhere to quality-control standards for AVMs. Regulators under the Biden administration have intensified efforts to address potential misuse of AI in lending. In January, three top US regulators warned banks about their responsibility for consumer-protection and fair-lending laws if their AI tools violate them. AVMs, which can leverage machine learning or AI, are increasingly being used by lenders to estimate property values, helping to reduce costs and turnaround times.
Market Overview:
- Fed and agencies introduce new standards for AVMs.
- Quality-control standards mandated by Dodd-Frank Act.
- Regulators address AI misuse in lending.
Key Points:
- AVMs must be accurate and non-discriminatory.
- Consumer groups criticize biases in home valuations.
- Regulation aims to ensure fair lending practices.
Looking Ahead:
- Enhanced oversight of AVMs in the mortgage sector.
- Continued efforts to prevent discrimination in lending.
- Focus on maintaining integrity in home valuations.
However, these valuations must be accurate and non-discriminatory. Consumer groups and regulators have long criticized the biases in figures used by many home lenders, which often disadvantage credit-worthy minorities due to flaws in commercial databases. The new rule is designed to address these concerns by ensuring that AVMs do not perpetuate discrimination in the mortgage industry.
The Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the National Credit Union Administration also announced the rule on Wednesday. These agencies are working together to enhance the oversight of AVMs and promote fair lending practices in the mortgage sector.
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