2024-16197. Quality Control Standards for Automated Valuation Models

Table 1—Summary of Estimated Annual Burden

[OMB No. 1557-0190]

Requirement	Citations	Number of respondents	Burden hours per respondent	Total number of hours annually
Recordkeeping: Resolution stating plans for use of property	§ 7.1024(d)	6	5	30
Recordkeeping: ARM loan documentation must specify indices to which changes in the interest rate will be linked	§ 34.22(a), § 160.35(b)	164	6	984
Recordkeeping: Appraisals must be written and contain sufficient information and analysis to support engaging in the transaction	§ 34.44	976	1,465 responses per respondent @5 minutes per response	119,072
Recordkeeping: Written policies (reviewed annually) for extensions of credit secured by or used to improve real estate	§ 34.62; appendix A to subpart D to part 34; § 160.101; appendix A to § 160.101	1,413	30	42,390
Recordkeeping: Real estate evaluation policy to monitor OREO	§ 34.85	9	5	45
Recordkeeping: New IC 1—AVM Rule—Policies and Procedures (Implementation)	Proposed § 34.222	342	13.33 hours (40 hours divided by 3 years)	4,560
Recordkeeping: New IC 2—AVM Rule—Policies and Procedures (Ongoing)	Proposed § 34.222	342	5	1,710
Recordkeeping: New IC 3—Interagency Appraisal and Evaluation Guidelines—Policies and Procedures	N/A	976	10	9,760
Reporting: Procedure to be followed when seeking to use an alternative index	§ 34.22(b); § 160.35(d)(3)	249	6	1,494
Reporting: Prior notification of making advances under development or improvement plan for OREO	§ 34.86	6	5	30
Disclosure: Default notice to debtor at least 30 days before repossession, foreclosure, or acceleration of payments	§ 190.4(h)	42	2	84
Disclosure: New IC 4—Interagency Appraisal and Evaluation Guidelines	N/A	976	5	4,880
Total Annual Burden Hours				185,039

Board Burden

Table 2—Summary of Estimated Annual Burden

[FR Y-30; OMB No. 7100-0250]

FR Y-30	Estimated number of respondents	Estimated annual frequency	Estimated average hours per response	Estimated annual burden hours
Recordkeeping
Sections 225.61—225.67 for SMBs	706	498	5 minutes	29,299
Sections 225.61—225.67 for BHCs and nonbank subsidiaries of BHCs	4,516	409	5 minutes	153,920
Guidelines	5,222	1	10	52,220
Policies and Procedures AVM rule (Initial setup)	2,036	1	13.3	27,147
Policies and Procedures AVM rule (Ongoing)	2,036	1	5	10,180
Disclosure
Guidelines	5,222	1	5	26,110
Total Annual Burden Hours				298,876

FDIC Burden

Table 3—Summary of Estimated Annual Burden

[OMB No. 3064-0103]

Information collection (obligation to respond)	Type of burden (frequency of response)	Average annual number of respondents	Number of responses per respondent	Time per response (hours/minutes)	Annual burden (hours)
Recordkeeping Requirements Associated with Real Estate Appraisals and Evaluations (Mandatory)	Recordkeeping (On Occasion)	2,936	259	5 minutes (0.083)	63,369
New IC 1—AVM Rule—Policies and Procedures—Implementation (Mandatory)	Recordkeeping (Annual)	1,010	.33	40 hours	13,320
New IC 2—AVM Rule—Policies and Procedures—Ongoing (Mandatory)	Recordkeeping (Annual)	1,010	1	5 hours	5,050
New IC 3—2010 Guidelines—Policies and Procedures—Ongoing (Mandatory)	Recordkeeping (Annual)	2,936	1	10 hours	29,360
New IC 4—2010 Guidelines—Disclosure—Ongoing (Mandatory)	Disclosure (Annual)	2,936	1	5 hours	14,680
Total Annual Burden Hours					125,779

NCUA Burden

Table 4—Summary of Estimated Annual Burden

[OMB No. 3133-0125]

Information collection	Type of burden	Average annual number of respondents	Number of responses per respondent	Time per response (hours)	Annual burden (hours)
Recordkeeping Requirements Associated with Real Estate Appraisals and Evaluations	Recordkeeping (On Occasion)	3,555	514	0.083	152,272
New IC 1—AVM Rule—Policies and Procedures—Implementation	Recordkeeping (Annual)	356	1	13.33	4,745
New IC 2—AVM Rule—Policies and Procedures—Ongoing	Recordkeeping (Annual)	356	1	5	1,780
New IC 3—2010 Guidelines—Policies and Procedures—Ongoing	Recordkeeping (Annual)	3,555	1	10	35,550
New IC 4—2010 Guidelines—Disclosure—Ongoing	Disclosure (Annual)	3,555	1	5	17,775
Total Annual Burden Hours					212,122

The CFPB, in consultation with OMB, and the FHFA do not believe that they have any supervised entities that will incur burden as a result of this final rule and therefore will not be making a submission to OMB. Comments are invited on this determination by the CFPB and the FHFA.

V. Regulatory Flexibility Act Analysis

A. OCC

The Regulatory Flexibility Act (RFA) requires an agency to prepare a regulatory flexibility analysis describing the impact of the final rule on small entities (defined by the Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total assets of $850 million or less and trust companies with total revenue of $47.5 million or less) or certify that the rule will not have a significant economic impact on a substantial number of small entities.

The OCC has assessed the burden of the final rule and has determined that the costs associated with the rule will be limited to reviewing the rule; ensuring that existing policies, practices, procedures, and control systems adequately address the four statutory quality control standards; and adopting policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to comply with applicable nondiscrimination laws. To estimate expenditures, the OCC reviews the costs associated with the activities necessary to comply with the final rule. These include an estimate of the total time required to implement the final rule and the estimated hourly wage of bank employees who may be responsible for the tasks associated with achieving compliance with the rule. The OCC uses a bank employee compensation rate of $128 per hour.^[69]

The OCC currently supervises approximately 636 small entities.^[70] The final rule will impact approximately 590 of these small entities. The OCC estimates the annual cost for small entities to comply with the final rule will be approximately $23,040 per bank (180 hours × $128 per hour). In general, the OCC classifies the economic impact on a small entity as significant if the total estimated impact in one year is greater than 5 percent of the small entity's total annual salaries and benefits or greater than 2.5 percent of the small entity's total non-interest expense. The OCC considers 5 percent or more of OCC-supervised small entities to be a substantial number. Thus, at present, 32 OCC-supervised small entities would constitute a substantial number. Based on these thresholds, the OCC estimates that the final rule will have a significant economic impact on 24 small entities, which is below our substantial number threshold. Therefore, the OCC certifies that the final rule will not have a significant economic impact on a substantial number of small entities.

B. Board

An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 603(a) of the RFA.^[71] In the IRFA, the Board requested comment on the effect of the proposed rule on small entities. The Board did not receive any comments on the IRFA. One commenter suggested that the Board's initial regulatory flexibility analysis failed to recognize the web of overlapping and duplicative laws and rules that apply to mortgage valuations.

The RFA requires an agency to prepare a final regulatory flexibility analysis (FRFA) unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. Based on its analysis and for the reasons stated below, the Board certifies that the rule will not have a significant economic impact on a substantial number of small entities.

1. Reasons action is being taken by the Board.

As discussed above, the Dodd-Frank Act amended title XI to add a new section governing the use of AVMs in mortgage lending and directing the agencies to promulgate regulations to implement specified quality control standards. The final rule serves to implement this statutory mandate.

2. The objectives of, and legal basis for, the rule.

The final rule implements statutorily mandated quality control standards for the use of AVMs. The Board is adopting this rule pursuant to section 1125 of title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.^[72]

3. Estimate of the number of small entities.

The final rule applies to Board-regulated small entities that are mortgage originators or secondary market issuers. There are approximately 462 state member banks and approximately 3,281 bank holding companies and savings and loan holding companies that qualify as small entities for purposes of the RFA.^[73]

4. Description of the compliance requirements of the rule.

The final rule requires Board-regulated small entities that are mortgage originators or secondary market issuers to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in credit decisions or covered securitization determinations adhere to specified quality control standards. These quality control standards must ensure a high level of confidence in the estimates produced, protect against the manipulation of data, seek to avoid conflicts of interest, and require random sample testing and reviews and comply with applicable nondiscrimination laws. To the extent that small entities do not already maintain adequate policies, practices, procedures, and control systems, they could incur administrative costs to do so. It is likely that the majority of Board-regulated small entities that are mortgage originators or secondary market issuers either do not use AVMs in credit decisions or covered securitization determinations or would already be in compliance with the specified standards or could become compliant with relatively minor modifications to their current practices.^[74]

Board staff estimates that impacted Board-supervised small entities would spend 160 hours establishing or modifying policies, practices, procedures, and control systems, at an hourly cost of $116.86.^[75] The estimated aggregate initial administrative costs of the proposal to Board-supervised small entities amount to $8,638,291 or $18,697.60 per bank ^[76] and ongoing costs are expected to be small when measured by small entities' annual expenses. The Board also notes that, while section 1125 explicitly applies to mortgage originators and secondary market issuers, not third-party AVM vendors, financial institutions should be able to work with AVM developers and vendors to assist them with their compliance obligations under the rule, as they do with other third-party vendors in order to comply with relevant regulatory requirements.

5. Consideration of duplicative, overlapping, or conflicting rules and significant alternatives to the proposal.

Although there are multiple statutes and regulations that apply to various aspects of real estate lending, the Board has not identified any Federal statutes or regulations that would duplicate, overlap, or conflict with the final rule's quality control standards for AVMs. The Board is required by statute to promulgate regulations to implement the quality control standards required under section 1125 of title XI, and thus no significant alternatives are available.^[77]

Therefore, the Board concludes that the final rule will not have a significant economic impact on a substantial number of small entities.

C. FDIC

The RFA generally requires an agency, in connection with a final rule, to prepare and make available for public comment a FRFA that describes the impact of the final rule on small entities.^[78] However, a FRFA is not required if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $850 million.^[79] Generally, the FDIC considers a significant economic impact to be a quantified effect in excess of 5 percent of total annual salaries and benefits or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of one or more of these thresholds typically represent significant economic impacts for FDIC-supervised institutions. For the reasons described below and under section 605(b) of the RFA, the FDIC certifies that this rule will not have a significant economic impact on a substantial number of small entities.

The final rule applies to all FDIC-supervised insured depository institutions (IDIs) that are mortgage originators or secondary market issuers. As of the quarter ending December 31, 2023, the FDIC supervised 2,936 insured depository institutions, of which 2,221 are considered small entities for the purposes of the RFA. Of these, 2,183 FDIC-supervised small institutions reported a non-zero value for mortgages on their books.^[80] Therefore, the FDIC estimates that 2,183 small institutions could be subject to the final rule.

The FDIC lacks data on the number of small FDIC-supervised institutions that use AVMs for their mortgage originations. FDIC subject matter experts believe that up to approximately 10 percent of all FDIC-supervised institutions currently use an AVM for mortgage origination decisions, loan modification decisions, and securitization decisions covered by the rule. However, based on supervisory experience, these experts believe a smaller percentage of small, FDIC-supervised institutions use AVMs because they believe AVM use is strongly positively correlated with institution size.

The final rule generally reflects existing Guidelines, supervisory expectations, and statutory obligations regarding the use of AVMs by supervised institutions. As mentioned, since 2010, the FDIC has provided supervisory Guidelines on the use of AVMs by its regulated institutions.^[81] The FDIC believes that institutions covered by the rule ^[82] using AVMs, including small institutions, have considered the Guidelines in developing policies, procedures, practices, and control systems, and therefore should also be consistent with the final rule's quality control standards 1 through 4. This belief is supported by a review of ten years of FDIC bank examination reports, which revealed that just 0.2 percent of the examinations flagged shortcomings in AVM management practices.^[83] This suggests that the labor hours required to implement the four quality control standards would be relatively modest for small, FDIC-supervised institutions.

The final rule's fifth quality control standard is consistent with existing applicable nondiscrimination laws. For example, the ECOA and its implementing Regulation B, bar discrimination on a prohibited basis in any aspect of a credit transaction.^[84] Similarly, the Fair Housing Act ^[85] prohibits unlawful discrimination in all aspects of residential real estate-related transactions, including valuations of residential real estate. However, the FDIC has not previously issued guidance or regulations that directly address nondiscrimination laws as it relates to expected or required AVM policies, procedures, practices, and controls. As a result, some small, FDIC-supervised institutions may not have fully integrated nondiscrimination laws directly into their AVM policies and risk management practices.

The FDIC lacks information on the labor hours and costs that will be incurred by covered institutions to comply with the final rule. Therefore, it assumes that small, FDIC-supervised institutions will expend 120 labor hours, on average, to comply with the final rule during the first year of implementation, and 40 labor hours, on average, in each successive year. In the first year, the FDIC's estimates include the review of the newly enacted rule, conducting a review of existing policies, practices, procedures, and controls for their consistency with the rule; identifying any deficiencies; and implementing corrective action as needed. In the second year, the FDIC believes that institutions' expected costs would be lower on average, as they limit their actions to primarily reviewing and maintaining their compliance.

This analysis subdivides the assumed compliance-related average labor hours spent by small FDIC-supervised IDIs into two types: (1) compliance with recordkeeping, reporting, and disclosure requirements under the PRA; and (2) hours for non-PRA compliance activities. According to supervisory experience, covered, small, FDIC-supervised IDIs using AVMs for originations or modifications would spend 40 hours in the first year and 5 hours in each subsequent year, on average for recordkeeping.

The FDIC believes small, FDIC-supervised IDIs affected by the final rule will incur additional labor hours and costs associated with compliance activities other than recordkeeping. For the first four quality control standards, these requirements may include, for example, back-testing of AVM outputs relative to property sale prices to understand the degree of confidence they merit, and the development and implementation of safeguards against data manipulation. The FDIC believes that compliance activities other than recordkeeping associated with the first four quality control standards in the final rule will be relatively modest for small, FDIC-supervised IDIs. As previously discussed, the 2010 Appraisal Guidelines already encourage small, FDIC-supervised IDIs to conduct such activities. The FDIC believes that small, FDIC-supervised IDIs may incur relatively greater labor hours and costs to comply with the fifth quality control standard initially. The FDIC lacks data on the time required by the institutions to develop and implement the nondiscrimination quality control standard. Based on supervisory experience and subject matter expertise, the FDIC assumes that all compliance activities other than recordkeeping would average 80 hours per institution in the first year of the final rule's adoption and 35 hours in subsequent years.

This analysis estimates the total labor hours and costs incurred by small, FDIC-supervised IDIs associated with the final rule by adding compliance estimates associated with recordkeeping with activities other than recordkeeping. The FDIC estimates first year compliance labor hours per covered institution to be 120 on average,^[86] and compliance labor hours to be 40 on average ^[87] for each subsequent year. As previously discussed, and for the purposes of this analysis, the FDIC assumes that 10 percent of small, FDIC-supervised IDIs that report non-zero value for mortgages on their books will incur costs to comply with the rule. Therefore, the FDIC estimates that small, FDIC-supervised IDIs will incur 26,196 labor hours in the first year ^[88] after the final rule becomes effective, and 8,732 labor hours in each subsequent year.^[89] Employing a total hourly compensation estimate of $99.65 ^[90] for the first year and an estimate of $92.07 ^[91] for subsequent years, the FDIC estimates that small, FDIC-supervised IDIs will incur $2,610,431 compliance costs in the first year ^[92] after the final rule becomes effective, and $803,955 in compliance costs in each subsequent year.^[93]

Further analysis shows that the estimated costs of the final rule would not impose a significant economic impact on a substantial number of small institutions. The analysis estimates that small, FDIC-supervised IDIs will incur approximately $11,960 in compliance costs on average in the first year ^[94] after the final rule becomes effective and approximately $3,680 in each subsequent year.^[95] In the first year after the final rule becomes effective, estimated average costs exceed the 5 percent threshold of annual salaries and benefits for 6 (0.27 percent) small, FDIC-supervised IDIs, and 94 (4.23 percent) exceed the 2.5 percent threshold of total non-interest expense.^[96] A combined total of 99 (4.46 percent) small, FDIC-supervised IDIs exceed either or both thresholds in the first year. In subsequent years, estimated average costs do not exceed the 5 percent threshold of annual salaries and benefits for any small, FDIC-supervised IDIs, and 13 (0.59 percent) exceed the 2.5 percent threshold of total non-interest expense. A combined total of 13 (0.59 percent) small, FDIC-supervised IDIs exceed either or both thresholds in subsequent years.

The compliance costs incurred by any one covered institution is likely to vary with the volume of covered AVM activity, the degree to which current AVM compliance activities differ from the robust quality control standards in the proposed rule, or the usage of in-house or third-party AVM service providers.

Some commenters expressed concerns that the proposed rule would be costly and burdensome, especially for small entities and their ability to ensure that their policies and procedures meet the quality control standards. Some commenters cautioned that the proposed rule would create an uneven playing field between large and small companies and that some small entities would be at risk of going out of business. For additional discussion of the comments received on the proposed rule, please refer to part III (Discussion of the Proposed Rule, Comments Received, and the Final Rule) within the SUPPLEMENTARY INFORMATION of this document. The FDIC carefully considered the comments it received. The FDIC notes that compliance costs may vary across institutions but believes that they are unlikely to have a significant effect on a substantial number of small, FDIC-supervised IDIs. Finally, the FDIC notes that section 1125 does not provide for exemption authority and the FDIC does not believe that an exemption is necessary or appropriate.

In light of the foregoing, the FDIC certifies that the final rule will not have a significant economic impact on a substantial number of small, supervised entities.

D. NCUA

The RFA generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment, unless the agency certifies it will not have a significant economic impact on a substantial number of small entities.^[97]

The RFA establishes terms for various subgroups that potentially qualify as a “small entity”—including “small business,” “small organization,” and “small governmental jurisdiction.” ^[98] Federally-insured credit unions (FICUs), as not-for-profit enterprises, are “small organizations,” within the broader meaning of “small entity.” Moreover, the RFA permits a regulator (such as the NCUA) to sharpen the definition of “small organization” as appropriate for agency activities—provided that definition is subjected to public comment and published in the Federal Register .^[99] The NCUA's Interpretive Ruling and Policy Statement (IRPS) 15-1 defined “small entity” as any FICU with less than $100 million in assets.^[100] IRPS 15-1 (with this definition) was published in the Federal Register , and the NCUA solicited and reviewed public comments on this definition.^[101]

FICUs tend to be much smaller than commercial banks. Indeed, at year-end 2023, median asset size was $55.9 million—less than one-sixth the median for U.S. commercial banks. As of December 31, 2023, there were 4,604 FICUs, of which 2,831 (61.5 percent) qualified as “small entities” by holding fewer than $100 million in assets.^[102] Only 699 commercial banks (15.2 percent) fall beneath this threshold. For reasons noted below, the NCUA does not believe the regulatory amendments will have a significant economic impact on a substantial number of small entities.

1. Why action is being considered.

The final rule fulfills the statutory mandate in the Dodd-Frank Act requiring agencies to promulgate quality control standards for AVMs used by mortgage originators and secondary market issuers to value principal dwellings used as collateral. As noted, this final rule follows publication of a June 23, 2023, proposed rule and takes into consideration the public comments received in response to the proposal. Interested readers are referred to the discussion elsewhere in this preamble of the significant issues raised by the public comments, the assessment of the agencies of such issues, and changes made in the proposed rule as a result of such comments. Further, the RFA analysis provided by the CFPB elsewhere in this preamble responds to the comments filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule and provide a detailed statement of any change made to the proposed rule in the final rule as a result of the comments.

2. Policy objectives of, and legal basis for, the final rule.

The NCUA is issuing this final rule to: (1) promote credit union safety and soundness by enhancing the integrity of collateral valuation for residential mortgage lending; and (2) help ensure credit unions comply with all applicable nondiscrimination laws. The legal basis for this rule is section 1125 of title XI of the FIRREA, as added by the Dodd-Frank Act—which directs covered agencies (in consultation with the staff of the Appraisal Subcommittee and Appraisal Standards Board of the Appraisal Foundation) to promulgate regulations with AVM quality-control standards.^[103] The statute charges the NCUA with enforcing the regulations with respect to financial institutions, defined in title XI to include FICUs, for which the NCUA is the primary Federal supervisor.^[104]

3. Description and estimate of the number of small institutions subject to final rule.

The final rule will apply to FICUs relying on AVMs in their residential mortgage-lending decisions. Year-end 2023 data indicate 1,789 small-entity FICUs held residential real-estate loans (1st or junior liens). This represents 63.2 percent of small credit unions.

The NCUA does not currently require supervised credit unions to note in their quarterly data submissions whether AVMs are used in mortgage originations/modifications for owner-occupied residential real estate. In prior AVM analysis, the FDIC estimated that as many as 10 percent of their supervised institutions currently use an AVM for mortgage origination decisions, loan modification decisions, and securitization decisions covered by the final rule.^[105] Applying this 10 percent estimate suggests the final rule could apply to up to 178 “small entity” credit unions. The FDIC notes AVM use is likely strongly positively correlated with institution size. Given the small size of most FICUs, it is likely far fewer than 10 percent use AVMs in residential-mortgage underwriting.^[106] To be conservative, the 10 percent is used as an upper bound in the following analysis.

4. Projected reporting, recordkeeping, and other compliance requirements of the final rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record.

As noted, since 2010, the OCC, Board, FDIC, and NCUA have provided supervisory guidance on AVM use to regulated institutions in Appendix B to the Appraisal Guidelines.^[107] The Appraisal Guidelines recommend that institutions establish policies, practices, and procedures governing the selection, use, and validation of AVMs—including steps to ensure accuracy, reliability, and independence.^[108] The quality-control standards in the final rule are consistent with those in the Appraisal Guidelines, existing supervisory expectations, and statutory nondiscrimination requirements. The NCUA believes the final rule will largely serve to make explicit standards that have been communicated through less formal, more varied means for over ten years. Accordingly, the NCUA anticipates compliance costs for “small” credit unions are likely be minimal.

Based on interviews with examiners and supervisors (about experience with rules largely codifying existing practice as well as the specifics of the AVM rule), the NCUA estimates the upper-bound for compliance burden is 33 labor hours annually. The upper-bound estimate for AVM usage of 178 credit unions implies the aggregate compliance burden should not exceed 5,874 hours. To put this figure in context, the 1,789 credit unions under $100 million with residential mortgages on their books paid their employees an average of $33.13 per hour in salary and benefits.^[109] The upper-bound compliance estimate of 5,874 hours, therefore, implies an upper bound on aggregate cost of $194,606.^[110] Viewed another way, this aggregate cost is only 0.008 percent of total 2023 non-interest expense for “small” credit unions. These figures suggest the compliance cost of the final rule will not impose a significant burden on a substantial number of “small entities.” ^[111]

5. An identification, to the extent practicable, of all relevant federal rules which may duplicate, overlap with, or conflict with the final rule.

The NCUA has not identified any likely duplication, overlap, or potential conflict with this final rule and any other federal rule.

6. Any significant alternatives to the final rule that accomplish its stated objectives.

As noted, the final rule implements a statutory mandate, thereby limiting the ability of covered agencies to consider alternatives. That said, agencies did exercise authority provided by section 1125 to include the nondiscrimination quality-control factor (given continued evidence of disparities in residential property lending terms along racial and ethnic lines). Further, covered agencies determined this factor should impose little additional burden since institutions have a preexisting obligation to comply with all federal law, including federal nondiscrimination laws. For the above reasons, the NCUA certifies that this final rule will not have a significant economic impact on a substantial number of small entities.

E. CFPB

The RFA ^[112] generally requires an agency to conduct an IRFA and a FRFA of any rule subject to notice-and-comment rulemaking requirements. These analyses must “describe the impact of the proposed rule on small entities.” ^[113] An IRFA or FRFA is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.^[114] If it will have such an impact, the CFPB is subject to certain additional procedures under the RFA, as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) ^[115] and the Dodd-Frank Act, involving the convening of a panel (SBREFA Panel) to consult with small entity representatives (SERs) prior to proposing a rule for which an IRFA is required.^[116]

The CFPB has not certified that the proposed rule would not have a significant economic impact on a substantial number of small entities within the meaning of the RFA. Accordingly, the CFPB convened and chaired a SBREFA Panel to consider the impact of the proposed rule on small entities that would be subject to that rule and to obtain feedback from representatives of such small entities. On May 13, 2022, the CFPB released the Final Report of the Panel on the CFPB's Proposals and Alternatives Under Consideration for the AVM Rulemaking (SBREFA Panel Report).^[117] The proposal preamble included a discussion of the SBREFA Panel for this rulemaking.^[118] The CFPB also published an IRFA in the proposal. Comments addressing individual provisions of the proposed rule are addressed in part III of the SUPPLEMENTARY INFORMATION of this document. Comments addressing the impact on small entities are discussed below. Many of these comments implicated individual provisions of the final rule and are also addressed in those parts.

The FRFA for this rulemaking follows this discussion. Section 604(a) of the RFA sets forth the required elements of the FRFA. Section 604(a)(1) requires the FRFA to contain a statement of the need for, and objectives of, the rule. Section 604(a)(2) requires the FRFA to contain a statement of the significant issues raised by the public comments in response to the initial regulatory flexibility analysis, a statement of the assessment of the agency of such issues, and a statement of any changes made in the proposed rule as a result of such comments. Section 604(a)(3) requires the CFPB to respond to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration (Advocacy) ^[119] in response to the proposed rule and provide a detailed statement of any change made to the proposed rule in the final rule as a result of the comments.

The FRFA further must contain a description of and an estimate of the number of small entities to which the rule will apply or an explanation of why no such estimate is available.^[120] Section 604(b)(5) requires a description of the projected reporting, recordkeeping, and other compliance requirements of the rule, including an estimate of the classes of small entities that will be subject to the requirement and the type of professional skills necessary for the preparation of the report or record. In addition, the CFPB must describe any steps it has taken to minimize the significant economic impact on small entities consistent with the stated objectives of applicable statutes, including a statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule and why each one of the other significant alternatives to the rule considered by the agency which affect the impact on small entities was rejected.^[121] Finally, as amended by the Dodd-Frank Act, RFA section 604(a)(6) requires that the FRFA include a description of the steps the agency has taken to minimize any additional cost of credit for small entities.

1. Statement of the need for, and objectives of, the rule.

As discussed in part I of the SUPPLEMENTARY INFORMATION section of this document, section 1473(q) of the Dodd-Frank Act amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to add a new section 1125. Section 1125 directs the agencies to promulgate regulations for quality control standards for AVMs, which are “any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer's principal dwelling.” ^[122] Specifically, section 1125 requires that AVMs meet quality control standards designed to ensure a high level of confidence in the estimates produced by AVMs; protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and account for any other such factor that the agencies determine to be appropriate. The final rule effectuates Congress's mandate to the agencies to adopt rules to implement quality control standards for AVMs.

The objectives of the final rule include protecting consumers and protecting Federal financial and public policy interests in real estate related transactions. To achieve these objectives, the final rule will require mortgage originators and secondary market issuers to adopt policies, practices, procedures, and control systems to ensure that covered AVMs adhere to quality control standards designed to meet specific quality control factors. The objectives of the final rule are further discussed in parts I and III of the SUPPLEMENTARY INFORMATION of this document.

2. Statement of the significant issues raised by the public comments in response to the initial regulatory flexibility analysis, a statement of the assessment of the agency of such issues, and a statement of any changes made to the proposed rule in the final rule as a result of such comments.

In the IRFA, the CFPB estimated the possible compliance cost for small entities with respect to a pre-statute baseline. Additionally, the IRFA discussed possible impacts on small entities.

Very few commenters specifically addressed the IRFA included in the proposal. Comments made by Advocacy related to the estimates included in the IRFA are addressed below in part V.E.3 of this document. This section addresses specific significant comments that affect the FRFA analysis.

Many industry commenters expressed concerns that the proposed rule would be costly and burdensome, especially for small entities and their ability to ensure that their policies and procedures meet the quality control standards. Some commenters even cautioned that the proposed rule would create an uneven playing field between large and small companies and that some small entities would be at risk of going out of business. These commenters did not provide specifics about the costs or burdens on small entities. The CFPB reviewed these comments and recognizes that small entities will experience some new compliance costs in the final rule. The CFPB accounted for these costs in the IRFA and therefore is not making any changes related to these concerns in the FRFA.

Some industry commenters provided feedback on the magnitude of the estimated burden hours, which form a core part of the IRFA analysis. Two commenters provided estimates for what they believe the burden hours will be. One of these commenters stated that a statistically-based, rigorous analytical approach would require between 100 and 400 hours a year and that, in particular, testing AVMs for compliance with nondiscrimination laws requires building a database, cleaning data, carefully building samples, and running regression tests. The commenter noted that if a company were to outsource their validation of AVMs, then the agencies' estimated burden hours might be adequate, but that there would be a cost to outsourcing. Another commenter stated that covered institutions would need to create some controls that would be based on statistical analysis and provided a rough estimate of 320 to 480 hours. The CFPB outlined the estimated burden hours that it uses in the IRFA analysis more explicitly in the SBREFA Panel Report: 69 hours for verifying compliance, 65 hours for drafting and developing policies, practices, procedures, and control systems, and 60 hours for training. Therefore, the total number of estimated hours in the first year is 194 and primarily includes costs for “Legal Services.” In both the SBREFA Panel Report and the IRFA, the CFPB did not assume costs for statistician services. If a small entity needs statistician services, the SBREFA analysis “anticipates that most third parties would be able to provide institution-specific . . . service that accompanies an AVM.” As discussed in part III.E.2 of the SUPPLEMENTARY INFORMATION of this document, as long as institutions adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs adhere to the rule's requisite quality control standards—and consistent with the flexibility to set their quality control standards as appropriate based on the size of their institution and the risk and complexity of transactions for which they will use covered AVMs—institutions should be able to work with AVM providers to assist them with their compliance obligations under the rule.

Furthermore, the SBREFA analysis states that “Whether small entities' costs increase depends ultimately on whether third-party service providers [such as AVM providers] pass along costs. For example, costs may increase if each third-party service provider has . . . to customiz[e] . . . for each small entity. Costs may not increase if third-party service providers can sell the same general set . . . to many small entities with little modification.” The CFPB has considered the estimates provided by the commenters and either considers them consistent with the CFPB's estimates or deficient in showing that more burden hours are necessary. Therefore, the CFPB is not making any changes related to the estimated burden hours in the FRFA.

3. Response of the agency to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule, and a detailed statement of any change made to the proposed rule in the final rule as a result of the comments.

Advocacy provided a formal comment letter to the agencies in response to the proposed rule. This letter stated that small entities should not be responsible for the actions of AVM providers, that the agencies should reduce the burden of the rule so that harm to small entities and consumers would be minimized, and that the nondiscrimination quality control factor should not be included in the final rule. Additionally, Advocacy suggested that small entities be exempt from the rule and, if that was not possible, that they should be allowed to rely on third-party certification of AVM providers or be provided a safe harbor for compliance. Finally, Advocacy asked that the agencies provide clear guidance to small entities to aid in compliance with the rule.

Small entities and AVM providers. Advocacy stated that small entities should not be responsible for the activities of AVM providers because they do not control those providers, and therefore cannot quality control the data or the algorithms used. In addition, Advocacy stated that small entities do not have the bargaining power to require AVM providers to take actions to be in compliance with the rule. As discussed above, the agencies believe that financial institutions, including small financial institutions, will be able to work with AVM providers to assist them with their compliance obligations under the rule, as they do with other third-party vendors in order to comply with relevant regulatory requirements.

Burden on small entities. Advocacy stated that the agencies should work to reduce the burden of the rule on small entities. Advocacy explained that it believed that the rule's costs would harm small entities and potentially reduce the use of AVMs, causing consumers to pay for more costly appraisals. As discussed above and below, in an effort to minimize the economic impact on small entities, the agencies considered and rejected a number of alternatives while drafting the final rule that otherwise would have resulted in greater costs to small entities than would the final rule. The CFPB recognizes that small entities will experience some new costs to comply with the final rule, but the CFPB does not believe that the burden of the rule is excessive. Furthermore, the CFPB believes that the rule will not reduce the availability of AVMs, and that it will benefit consumers by ensuring the quality and accuracy of the valuations provided.

Nondiscrimination quality control factor. Advocacy stated that the agencies should exclude the nondiscrimination quality control factor from the regulation. Advocacy stated that the statute does not specifically state that quality control standards for AVMs must address the issue of discrimination. In addition, Advocacy noted that at the SBREFA Panel outreach meeting, the SERs uniformly raised concerns regarding how they could assess fair lending issues in AVMs or know that they are violating the law. Moreover, Advocacy stated that there are other mechanisms to address the issue of discrimination. Advocacy explained that small entities are already required to comply with nondiscrimination and fair lending laws, and making small entities responsible for assessing fair lending issues in AVMs adds an extra layer of burden. As explained above, the agencies have the authority to account for any other such factor that the agencies determine to be appropriate. Moreover, while existing nondiscrimination law applies to an institution's use of AVMs, the CFPB believes that it is important to specify a fifth factor relating to nondiscrimination to heighten awareness among lenders of the applicability of nondiscrimination laws to AVMs. Given the existing obligation, the CFPB does not believe that the burden of the rule is excessive. Furthermore, as discussed above, the agencies believe that financial institutions, including small financial institutions, will be able to work with AVM providers to assist them with their compliance obligations under the rule, including compliance with the nondiscrimination factor, as they do with other third-party vendors in order to comply with relevant regulatory requirements.

Exemption, certification or safe harbor. Advocacy suggested that small entities be exempt from the rule and, if that was not possible, that they should be allowed to rely on third-party certification of AVM providers or be provided a safe harbor for compliance. The CFPB notes that section 1125 does not provide for exemption authority and the CFPB does not believe that an exemption is necessary or appropriate. Section 1125 requires quality controls for AVMs, and the CFPB believes that consumers who patronize small entities should benefit from the consumer protections that the rule provides, and the CFPB does not believe that the burden of the rule is excessive. In regard to the request for third-party certification, as explained above, the CFPB recognizes that third-party certification could be beneficial to effective implementation of the AVM rule and, as long as financial institutions meet the obligations stated in the rule, they are free to work with third parties to assist them with their compliance obligations. Finally, the CFPB does not believe that a safe harbor is warranted, as the burden on small entities will not be such that a simplified compliance method, which might be less protective of consumers, would be needed.

Clear guidance. Finally, Advocacy asked that the agencies provide clear guidance to small entities to aid in compliance with the rule. As explained above, the rule's quality control standards are consistent with the existing guidance described in part I of this SUPPLEMENTARY INFORMATION and institutions that are not regulated by the agency or agencies providing the guidance may still look to the guidance for assistance with complying with this final rule. In addition, the CFPB will consider issuing further guidance in the future, as implementation of the rule is carried out, depending on the need.

4. Description of and an estimate of the number of small entities to which the final rule will apply.

A “small business” is determined by application of SBA regulations in reference to the North American Industry Classification System (NAICS) classification and size standards.^[123] Under such standards, the CFPB identified three categories of small nondepository entities that may be subject to the proposed provisions: (1) real estate credit companies; (2) secondary market financing companies; and (3) other activities related to credit intermediation (which includes mortgage loan servicers).

The following table summarizes the CFPB's estimate of the number and industry of entities that may be affected by the final rule:

Table A—Estimated Number of Small Entities by Industry

NAICS	Industry	SBA small entity threshold (m)	Est. total entities in 2017	Est. number of small entities in 2017	Est. number of small entities in 2023
522292	Real Estate Credit	$470	3,289	2,904	3,881
522294	Secondary Market Financing	470	115	106	142
522390	Other Activities Related to Credit Intermediation	28.5	566	566	756
Column Total			3,970	3,576	4,779
Note: See footnote 124 for methodology to extrapolate 2017 numbers to 2023.
Source: 2017 County Business Patterns and Economic Census (Release Date: 5/28/2021).

In developing these estimates, the CFPB chose assumptions that would likely overcount the number of small entities and explains this reasoning in detail herein. Thus, the true number of small entities is likely to be less than the estimates reported. The following paragraphs describe the categories of entities that the CFPB expects will be affected by the final rule.

Real Estate Credit companies (NAICS 522292). This industry encompasses establishments primarily engaged in lending funds with real estate as collateral, including mortgage companies and real estate credit lenders. Economic Census data states that there were 3,289 nondepository institutions (nondepositories) in 2017 that engaged in real estate credit and whose use of AVMs may be covered by the final rule. The SBA established a revenue threshold for small entities of average annual receipts of less than $47 million. The Economic Census provides data for the number of small entities with less than $40 million and less than $50 million in revenue, but not less than $47 million in revenue. Using the conservative threshold of $50 million, the CFPB estimates that about 2,904 of these 3,289 institutions were small entities in 2017. This estimate is most likely an overcount because this NAICS industry also includes firms involved in construction lending, farm mortgages, and Federal land banks, which will not be covered by the final rule if such credit is not secured by a consumer's principal dwelling. Lastly, due to a lack of more recent data in the Economic Census, the CFPB scales up the 2017 estimate by a factor of 1.3363 to obtain a 2023 estimate of 3,881 small entities.^[124]

Secondary market financing companies (NAICS 522294). This industry encompasses establishments primarily engaged in buying, pooling, and repackaging loans for sale to others on the secondary market, including collateralized mortgage obligation issuers and real estate mortgage investment conduits. Economic Census data states that there were 115 nondepository secondary market financing companies in 2017 whose use of AVMs may be covered by the final rule. This industry has a size standard threshold of less than $47 million in average annual receipts. However, the Economic Census only reports breakdowns in number of firms with less than $15 million and less than $100 million in revenue. Using the more conservative threshold of less than $100 million, the CFPB estimates that 106 secondary market financing companies were small entities in 2017. This estimate is most likely an overcount because this NAICS industry also includes firms involved in secondary market financing of student loans and other debt products, which will not be covered by the AVM rule. Lastly, due to a lack of more recent data in the Economic Census, the CFPB scales up the 2017 estimate by a factor of 1.3363 (same as before) to obtain a 2023 estimate of 142 small entities.

Other Activities Related to Credit Intermediation (NAICS 522390). This industry encompasses establishments primarily engaged in facilitating credit intermediation (except mortgage and loan brokerage; and financial transactions processing, reserve, and clearinghouse activities), and includes loan servicing firms. NAICS 522390 is a broader category than the previous two categories discussed in this section. Some examples of business activity in this NAICS industry are check cashing services, loan servicing, money transmission services, payday lending services, and traveler's check issuance services, but only loan servicing will fall under the final rule. To account for this broader categorization, using Economic Census data on number of establishments in this NAICS industry broken down by the North American Product Classification System (NAPCS), the CFPB filtered NAICS 522390 by the relevant NAPCS collection codes: (1) Residential Mortgage Loans, and (2) Other Secured or Guaranteed Home Loans to Consumers. The filtered count of the number of establishments is 566. However, these data do not provide the number of firms, each of which may consist of one or more establishments. Thus, the CFPB uses the most conservative assumption—that each firm has only one establishment—to estimate the number of firms covered by the final rule to be (at most) 566 in 2017. Furthermore, data broken down by firm/establishment size are unavailable, so the CFPB assumes the most conservative extreme that all 566 of these firms are small entities. Lastly, due to a lack of more recent data in the Economic Census, the CFPB scales up the 2017 estimate by a factor of 1.3363 (same as before) to obtain a 2023 estimate of 756 small entities.

Finally, only small entities that themselves, or through or in cooperation with a third-party or affiliate, utilize AVMs in credit decisions or covered securitization determinations will be covered by the final rule. The remaining small entities may opt for alternative valuation methods not involving AVMs. Due to the lack of data on the usage of AVMs by small entities in credit decisions or covered securitization determinations, the CFPB follows the FDIC and makes the following assumption: the range of AVM usage lies between 10 percent (lower bound) and 100 percent (upper bound). Applying this assumption to the estimated total number of small entities results in the estimated range of covered small entities shown in the following table:

Table B—Estimated Lower and Upper Bounds of Covered Small Entities in 2023

	Lower bound	Upper bound
Est. Number of Covered Small Entities	478	4,779
Assumed Proportion of Small Entities Using AVMs	10%	100%