CFPB Considers Proposed Changes to the FIRREA

According to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Congress directed the Consumer Financial Protection Bureau (“CFPB”), along with other federal agencies, to take regulatory action to establish quality control standards for automated valuation models (“AVMs”).

AVMs are defined under Section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), which was added to the Dodd-Frank Act, as “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.”

In satisfaction of the Dodd-Frank Act, FIRREA requires that “AVMs meet quality control standards designed to: (1) ensure a high level of confidence in the estimates produced by automated valuation models; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate.”

On February 23, 2022 ,the CFPB held a Small Business Advisory Review Panel for Automated Valuation Model Rulemaking to discuss the following proposals for implementation of FIRREA. In addition, the CFPB has provided questions under each section relating to each proposal that it encourages the public to answer.

A.      Defining AVMs used to “Determine” the Collateral Worth

1.       AVMs used for making underwriting decisions

• Section 1125 provides that AVM models may be “used by mortgage originators and secondary market issuers to determine the collateral worth” of certain mortgages. The CFPB is considering redefining this coverage of AVMs used to determine collateral worth to include any underwriting decisions being made and not all AVMs used to produce any valuation estimates.

• Questions Posed:

  • “Q2: Please provide feedback and information, including supporting data, on the options we are considering for implementation of the statutory phrase “to determine the collateral worth”? Besides the options discussed in parts III.A.1 through 5 below, are there any alternative approaches we should consider?”

  • “Q3. Does your small entity currently have quality control processes in place for AVMs? If so, please describe those processes, including how they function, what costs (one-time or fixed, and variable) are associated with their implementation and oversight, and whether they differ based on AVM use, e.g., making underwriting decisions versus portfolio monitoring. Are there specific complexities or costs that are different for AVMs used in making underwriting decisions versus for other AVM uses?”

  • “Q4. How often does your small entity use AVMs in making underwriting decisions? Does your small entity use AVMs for other purposes, such as monitoring the quality or performance of mortgage loans or mortgage-backed securities? If so, how often are AVMs used for those other purposes?”

  • “Q5. Please provide feedback and information, including supporting data, on the option to potentially focus on AVMs used for making underwriting decisions. Besides making underwriting decisions, does your use of AVMs have a direct impact on consumers?”

2.       Reviews of already completed determinations

• Where a completed collateral value determination has been made, the CFPB is considering limiting Section 1125 so that it does not cover AVMs being used in subsequent reviews of that determination.

• The CFPB is considering not covering the use of AVMs where a mortgage originator or secondary market issuer, such as a certified or licensed appraiser, utilize AVMs to review a completed determination. The justification for this proposal is that these entities are already subject to quality assurance objectives and standards from federal and state regulation.

• Questions Posed:

  • “Q6. Please provide feedback and information, including supporting data, on the option of expressly not covering AVMs used in subsequent reviews of completed determinations.”

  • “Q7. How often does your small entity use AVMs to subsequently review completed determinations? Does your small entity have quality control processes for that type of AVM use? If so, do they differ from AVM quality control processes when AVMs are used for other purposes?”

  • “Q8. What are the advantages and disadvantages for small entities of using AVMs to review completed determinations versus using other non-AVM methods of review?”

  • “Q9. What compliance costs would cause your small entity to stop or decrease your use of AVMs to perform quality control reviews of completed determinations?”

  • “Q10. From your experience, how often are AVMs used by certified or licensed appraisers to develop appraisal valuations? What would the impact of the rule be on small entities if it did not cover AVMs when used by certified or licensed appraisers to develop appraisal valuations?”

  • “Q11. Would coverage of appraisers’ use of AVMs potentially discourage use of AVMs by small entities as a valuation tool?”

3.       Post-origination

• There are two proposals regarding loan modifications and other changes to an existing loan:

  • Having the rule cover AVMs that are used in transactions resulting in the consumer receiving a new mortgage origination; or

  • Having the rule cover AVMs used to determine whether the terms of an existing mortgage should be changed, even if a new mortgage origination does not occur, if the AVMs are used “to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling."

• There are two proposals regarding credit line reductions or suspensions:

  • Expressly excluding from coverage AVMs used to make a reduction or suspension decision for a home equity line of credit (“HELOC”), so long as the decision is made according to the initial agreement and no new mortgage origination is required;

  • Broadly cover all reduction or suspension decisions if the AVM is used “to determine the collateral worth” of a mortgage secured by a consumer’s principal dwelling.

• The CFPB is considering a proposal to exclude secondary market issuers using AVM in the offer and sale of residential mortgage-backed securities (“securitization”).

• Questions Posed:

  • “Q12. What would be the advantages and disadvantages for small entities of the first alternative (i.e., covering AVMs in transactions like refinancings but not in loan modifications that do not result in a new mortgage origination) versus the second alternative (i.e., broadly covering changes to the terms of an existing mortgage so long as a covered institution or its service provider uses the AVM to determine the collateral worth)? Please also provide any alternatives for consideration.”

  • “Q13. What are the advantages and disadvantages for small entities of the option to exclude decisions to reduce or suspend a HELOC as provided in an initial credit agreement from the scope of section 1125 versus the alternative option that covers reduction or suspension decisions more broadly?”

  • “Q14. What would be the impact of the rule on small entities if securitization was excluded from the scope of the eventual rule?”

  • “Q15. Does your small entity offer and sell mortgage-backed securities? If so, does your small entity use AVMs to produce any estimates of the collateral worth of a mortgage secured by a consumer’s principal dwelling in connection to the securitization process? What quality control standards does your small entity already have in place for AVMs used in securitization?”

  • “Q16. How might coverage of AVMs used in securitization by the eventual rule change the secondary mortgage market for small entities? In particular, would covering AVMs used in securitization have the potential to affect the cost or availability of credit for small entity consumers?”

  • “Q17. If the eventual rule covered AVMs used in securitization, how might the potential impacts on small entities be mitigated by one or more of the other options we are considering in this Outline? Besides the options discussed in this Outline, are there any alternative approaches we should consider for mitigating potential impacts on securitization for small entities?”

B.      Defining “mortgage originators”

1.        General definition of mortgage originator

• Under the proposed new definition, a “mortgage originator” would include:

  • persons who are “loan originators” for purposes of Regulation Z §1026.36;

  • persons who are “creditors” for purposes of Regulation Z §1026.2(a)(17); and

  • under limited circumstances, persons who are “servicers” for purposes of Regulation Z §1026.36(c).

• Questions Posed:

  • “Q19. Please provide feedback and information, including supporting data, on the advantages and disadvantages to small entities of defining the term “mortgage originator” in section 1125 to cover persons who are “loan originators” for purposes of Regulation Z 15 § 1026.36(a)(1). Please also provide any alternatives for consideration and explain the advantages and disadvantages of such alternatives.”

  • “Q20. Please provide feedback and information, including supporting data, on the advantages and disadvantages to small entities of defining the term “mortgage originator” in section 1125 to cover persons who are “creditors” for purposes of Regulation Z § 1026.2(a)(17). Please also provide any alternatives for consideration and explain the advantages and disadvantages of such alternatives.”

2.       Defining mortgage originator to cover servicers under limited circumstances

• The CFPB is considering a definition of “mortgage originator” covering persons who are “servicers” for purposes of Regulation Z § 1026.36(c). 

• Questions Posed:

  • “Q21. Please provide feedback and information, including supporting data, on the advantages and disadvantages to small entities of defining the term “mortgage originator” in section 1125 to cover persons who are “servicers” for purposes of Regulation Z § 1026.36(c) to the extent that they perform loan origination activities for purposes of Regulation Z § 1026.36(a)(1) with respect to transactions (i) that constitute refinancings under Regulation Z § 1026.20(a) or (ii) that change an obligor on an existing debt. Please also provide any alternatives for consideration and explain the advantages and disadvantages of such alternatives.”

C.      Defining “secondary market issuers”

• Under the proposed definition, “secondary market issuer” would be defined to include only entities that issue residential mortgage-backed securities (“RMBS”), or the definition would be broadly expanded to mean issuer, guarantor, insurer, or underwriter of RMBS.

• Questions Posed:

  • “Q22. Please provide feedback and information, including supporting data, on whether one of the “secondary market issuer” definitions under consideration would be less burdensome for small entities to implement and to administer than the other?”

D.      Defining “mortgage”

• Under the proposed definition, “mortgage” would be defined as either:

  • an extension of credit that is secured by a consumer’s dwelling, or

  • a transaction in which a mortgage, deed of trust, purchase money security interest under an installment sales contract, or equivalent consensual security interest is created or retained in a dwelling.

• Questions Posed:

  • “Q23. Please provide feedback and information, including supporting data, on whether one of the “mortgage” definitions under consideration would be less burdensome for small entities to implement and to administer than the other? Please also provide any alternatives for consideration and explain the advantages and disadvantages of such alternatives.”

  • “Q24. Are AVMs commonly used with installment sales contracts or similar transactions? How often are they used and in what way? On what are you basing your answer?”

E.       Defining “consumer’s principal dwelling”

• The CFPB is considering a definition of “consumer’s principal dwelling” that is generally consistent with their provisions on valuation independence under Regulation Z §1026.42; a definition of “dwelling” that is generally consistent with how the TILA term is implemented in Regulation Z; and a definition of “principal” that is consistent with Regulation Z.

• Questions Posed:

  • “Q25. Please provide feedback and information, including supporting data, on whether the term “consumer” should extend to individuals who are not a party to whom credit is offered or extended, but who have an ownership interest in and use the secured property as their principal dwelling. Please also provide feedback and information, including supporting data, about additional costs or benefits, if any, that would result for small entities from a more inclusive designation of who is a “consumer.””

  • “Q26. From your experience, is there a difference between consumer-purpose and business-purpose mortgage lending regarding the relative prevalence of AVMs and inperson appraisals used to determine the worth of the collateral? Do you expect this relative usage to change in the next five years and, if so, how? Please provide any supporting feedback and information, including supporting data.”

  • “Q27. Please provide feedback and information, including supporting data, on the approach we are considering in defining “dwelling” along with an explanation and supporting data for any alternative approaches we should consider.”

  • “Q28. Would limiting coverage of the AVM requirements to dwelling loans secured by real property be significantly less burdensome for small entities than extending coverage to all dwelling-secured loans? Please provide any feedback and information, including supporting data, to support your response.”

F.       Scope of eventual rule requirements

1.       Quality control standards generally

• Section 1125(a) outlines a list of quality control standards. To ensure compliance with these standards, the CFPB is proposing either:

  • requiring regulated institutions to adopt and maintain their own policies and procedures that would outline compliance with the quality control standards, while not proposing specific requirements for those policies or procedures; or

  • implementing a prescriptive rule with more specific requirements for meeting the standards.

• Questions posed:

• “Q31. Would small entities be assisted by the CFPB adapting the Guidelines for use by CFPB-regulated institutions and adopting them as guidance rather than adopting specific requirements to implement the statutory quality control factors?”

• “Q32. Would a more prescriptive rule be helpful to small entities? Would it present heightened regulatory burden? Why?”

G.      Implementation Period

• The CFPB is considering a 12-month implementation period after a final rule is issued.