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Question:  Is there a new regulation requiring lenders who engage in credit decisions to implement quality control (QC) standards for the use of automated valuation models (AVMs)?

Answer:  Yes, various banking agencies issued a final rule last year, Quality Control Standards for Automated Valuation Models, which implemented QC standards for AVMs used in determining the value of an individual’s principal dwelling in connection with a mortgage credit decision.  The rule is effective on October 1, 2025 and requires financial institutions to analyze their use of AVMs and validate the use of AVM technology.  The rule applies to both open-ended and closed-ended credit, including closed-ended junior liens and HELOCs.  These requirements also apply regardless of whether the mortgage originator makes the credit decision itself or in cooperation with a third party.

In short, mortgage originators that engage in mortgage credit decisions must adopt and maintain policies, practices, procedures and control systems to ensure that AVMs used in these decisions adhere to five statutorily defined QC standards designed to:

• Ensure a high level of confidence in the quality of the data and the estimates produced;
• Protect against the manipulation of data (presumably exceeding responsibility under AIR);
• Seek to avoid conflicts of interest;
• Require random sampling testing and reviews based on an institutions specific risk profile; and
• Comply with applicable non-discrimination laws.

The rule defines “control systems” as “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.” 

An AVM is defined as a computerized model used to determine the value of an individual’s principal dwelling collateralizing a mortgage.   

The final rule does not set specific requirements for how institutions are to structure these policies, practices, procedures and control systems. This approach provides institutions the flexibility to tailor these QC standards for covered AVMs as appropriate based on the size of the institution and the risk and complexity of transactions for which they will use covered AVMs.

While the rule applies to a mortgage originator’s use of an AVM in determining the value of an individual’s principal dwelling in connection with making a credit decision, it does not apply to the use of an AVM in reviews of the quality of already “completed determinations” of the value of collateral (i.e. appraisals).   

The rule would also not apply to AVMs prepared exclusively for commercial use or for portfolio monitoring, advertising or insurance purposes (provided these do not involve credit decisions).

A copy of Appendix B of the Interagency Appraisal and Evaluation Guidelines which contains detailed guidance for institutions seeking to establish policies, practices, procedures, and control systems to ensure the accuracy, reliability and independence of AVMs can be found HERE (page 31).