New Rule Targets AI-Powered Mortgage Lending: Ensuring Fair and Accurate Home Valuations
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Mortgage Lenders Face Checks on Automated Valuation Models
(Bloomberg) -- Home mortgage lenders will have to meet a new set of standards designed to ensure that their tech-fueled appraisals don't build in flaws that might produce faulty estimates or discriminate against borrowers. The Federal Reserve and five other federal agencies announced the new demands in a final rule on Wednesday, saying they're intended to "help ensure the credibility and integrity" of models used in home valuations for certain mortgages. The regulation will introduce quality-control standards for automated-valuation models used by mortgage originators and secondary-market issuers, the agencies said in a statement. The rule is very similar to the June 2023 proposal and was mandated as part of the Dodd-Frank Act that followed the 2008 global financial crisis. Regulators under the Biden administration have stepped up efforts to address potential abuses as artificial intelligence and other technologies become more prevalent in lending. In January, three top US regulators warned banks that they can't escape responsibility if their outsourced artificial-intelligence tools violate consumer-protection and fair-lending laws. Automated valuation models can rely on machine learning or artificial intelligence. Lenders are increasingly using automated valuation models to gauge what a property is worth, according to the agencies' statement Wednesday. Although this can help cut costs and turnaround times, lenders need to make sure that the valuations are accurate and don't result in discrimination, the regulators said. Consumer groups and regulators have complained for decades that figures used by many home lenders to make decisions are biased against credit-worthy minorities because of flaws embedded in commercial databases. 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 Wednesday's rule. (Updates to include background beginning in third paragraph.)
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AI in Mortgage Lending: New Rule Ensures Accurate, Fair Home Valuations
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: The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Federal regulators in the United States have proposed a new rule to oversee automated valuation models (AVMs) used in mortgage lending. The rule aims to ensure fairness and accuracy in home valuations, addressing potential biases in AI-driven systems.
Federal Regulators Propose New Rule for Automated Valuation Models
In a significant move to address concerns in the mortgage lending industry, federal regulators in the United States have proposed a new rule to oversee automated valuation models (AVMs) used in determining property values
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. This proposal comes as part of an effort to ensure fairness and accuracy in home valuations, particularly in light of the increasing use of artificial intelligence (AI) in the lending process.The Rise of AI in Mortgage Lending
The mortgage industry has increasingly turned to AI-powered AVMs to streamline the property valuation process. These models use complex algorithms and vast amounts of data to estimate property values quickly and efficiently. While this technology has brought significant advancements to the industry, it has also raised concerns about potential biases and inaccuracies
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.Key Aspects of the Proposed Rule
The proposed rule, put forth by six federal agencies including the Federal Reserve and the Consumer Financial Protection Bureau, outlines several key requirements for mortgage lenders using AVMs:
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Quality Control: Lenders must implement a quality control process to ensure the models produce accurate and reliable valuations
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Compliance: The AVMs must comply with applicable laws and regulations, including fair lending laws
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Security and Protection: Adequate security and data protection measures must be in place to safeguard consumer information
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Regular Evaluation: Lenders are required to regularly evaluate and monitor their AVM systems for potential issues or biases
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Addressing Bias and Promoting Fairness
One of the primary goals of the new rule is to address potential biases in AI-driven valuation models. Historically, certain communities, particularly those of color, have faced discrimination in property valuations. The proposed rule aims to ensure that AVMs do not perpetuate or exacerbate these biases
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Impact on the Mortgage Industry
The implementation of this rule is expected to have far-reaching effects on the mortgage lending industry. While it may increase compliance costs for lenders, it is also anticipated to enhance the overall reliability and fairness of the lending process
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. Lenders will need to carefully review and potentially adjust their AVM systems to meet the new requirements.Public Comment Period and Next Steps
The proposed rule is currently open for public comment, allowing industry stakeholders and the general public to provide feedback. This period is crucial in shaping the final version of the rule, which could have significant implications for both lenders and borrowers in the mortgage market
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.As the mortgage industry continues to evolve with technological advancements, this new rule represents a proactive step by regulators to ensure that innovation in lending practices aligns with principles of fairness and accuracy. The outcome of this regulatory effort could set a precedent for how AI-driven financial tools are governed in the future.
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