WASHINGTON – The Consumer Financial Protection Bureau (CFPB) has provided an outline of options to ensure computer models used to help determine home valuations are “accurate and fair.”
The options will now be reviewed to determine their potential impact on small businesses, according to the Bureau.
The CFPB noted that while traditional appraisals are conducted in-person, many lenders also employ algorithmic computer models that collect massive amounts of data drawn from many sources to value homes, known as automated valuation models.
“Both in-person and algorithmic appraisals appear to be susceptible to bias and inaccuracy, absent appropriate safeguards,” the CFPB said. “Obtaining an accurate estimate of a home’s worth is one of the most important steps in the mortgage process for homebuyers. Inaccurate valuations, both too high and too low, can pose risks to consumers. Given their crucial role, the Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the CFPB and other regulators with implementing rules on these models.”
In releasing its new options, the Bureau said overvaluing homes can put “family wealth at-risk, create reselling challenges, and lead to higher rates of foreclosure. Homes can be overvalued for numerous reasons. For example, during the run-up to the 2008 collapse of the housing bubble, housing prices became inflated for reasons that included lenders extending mortgage credit—often with toxic or predatory terms—without regard to borrowers’ ability to repay. In other situations, supply can become constricted and unable to keep pace with demand.”
Exacerbating Disparities
The Bureau added that low valuations can jeopardize home sales and prevent homeowners from refinancing, which makes it harder to build wealth or make repairs.
“Systematically low valuations driven by biased appraisers may exacerbate existing disparities in the housing market,” the CFPB said.
“It is tempting to think that machines crunching numbers can take bias out of the equation, but they can’t,” said CFPB Director Rohit Chopra. “This initiative is one of many steps we are taking to ensure that in-person and algorithmic appraisals are fairer and more accurate.”
In addition, the CFPB said, automated valuation models can pose fair lending risks to homebuyers and homeowners. The CFPB stated it is “particularly concerned that without proper safeguards, flawed versions of these models could digitally redline certain neighborhoods and further embed and perpetuate historical lending, wealth, and home value disparities.”
The Federal Focus
The CFPB said that it and other federal agencies intend to:
- Ensure a high level of confidence in the estimates produced by automated valuation models
- 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 full CFPB outline can be found here: Small Business Advisory Review Panel for Automated Valuation Model (AVM) Rulemaking.
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