Federal regulators have introduced new rules to ensure the quality and reliability of automated valuation models (AVMs) used in mortgage lending. These rules, required by the Dodd-Frank Act, are set to impact how AVMs are used in the industry. Here’s a breakdown of what you need to know about these changes and how they’ll affect hiring in GRC:
What are AVMs and Why Do They Matter?
Automated valuation models (AVMs) are computer programs that estimate a property’s value using data and mathematical models. They are crucial in mortgage lending because they provide quick and cost-effective property valuations. Ensuring their accuracy is vital for maintaining trust in the mortgage process.
1. Broad Scope Captures a Wide Range of Institutions
The new rules aren’t just for big banks. They apply to various lenders, including credit unions, community banks, and non-bank lenders. This means everyone involved in mortgage lending needs to check and possibly update their AVM practices. The rules apply to AVMs used in making credit decisions and some securitization processes, but they don’t cover AVMs used for portfolio monitoring or appraisal reviews.
Because the rules are so broad, many institutions will need to review their AVM practices across all lending activities, not just new loans. Risk managers should list how they use AVMs to ensure they comply with the new standards.
2. Flexibility in Implementation Allows for Tailored Approaches
Instead of giving strict rules, regulators have chosen a flexible, principles-based approach. This allows institutions to create policies and procedures that fit their size, complexity, and risk profile. While this flexibility is great for larger institutions with established risk management systems, smaller lenders might find it more challenging.
Risk managers should document why they chose specific quality control methods to show they’ve considered their approach carefully. Looking at existing guidance on model risk management can help justify these choices.
A large bank might integrate AVM-specific controls into its existing risk management system, while a small community bank might need to develop new protocols from scratch, possibly with help from external consultants.
3. Nondiscrimination Focus Highlights Fair Lending Concerns
One key addition to the rules is the requirement for AVMs to comply with nondiscrimination laws. This is because there are concerns that AVMs could be biased. Lenders will need to carefully check their AVM inputs, methods, and outputs to ensure they’re fair and don’t disproportionately affect any group.
Compliance teams need to create ways to test for and identify any discriminatory patterns in AVM outputs. This might involve using advanced statistical analyses to ensure fairness in valuations.
Institutions could implement regular bias audits and use machine learning techniques to adjust models and reduce bias, ensuring that AVMs treat all borrowers fairly.
4. Third-Party Oversight Takes Center Stage
Many lenders use external vendors for their AVM technology. The new rules clarify that even if you outsource, you’re still responsible for compliance. Financial institutions will need to improve how they manage third-party risks, which might include renegotiating contracts and enhancing due diligence.
Vendor management teams need to ramp up their due diligence and continuous monitoring of AVM suppliers. Contracts may require updates to ensure vendors help meet the new standards.
Effective oversight could include regular vendor audits, detailed performance metrics, and compliance checks. It’s also important to ensure that vendors have strong data security and privacy measures.
5. Extended Implementation Period Acknowledges Complexity
Understanding that these changes are complex, regulators have given a 12-month timeline for implementation. This gives institutions time to develop or improve their AVM governance frameworks.
Institutions should start preparing now. Risk managers should set up cross-functional teams to review current practices, find gaps, and create implementation plans well before the deadline.
Implications for Hiring in Governance, Risk, and Compliance
Introducing these new AVM rules is expected to increase the demand for professionals in governance, risk, and compliance (GRC). Here’s how it might affect hiring:
Increased Demand for Specialized Roles: Institutions will need experts in model risk management, fair lending analytics, and third-party oversight. Roles such as AVM Governance Specialists, Compliance Officers, and Risk Analysts will become crucial.
Skills in Demand: Professionals with experience in developing and implementing risk management frameworks, conducting bias testing, and managing third-party relationships will be highly sought after. Data scientists and statisticians with expertise in machine learning and fair lending practices will also be in demand.
Opportunities for Career Growth: The emphasis on tailored policies and procedures opens up opportunities for individuals skilled in creating and operationalizing these frameworks. As institutions navigate these new regulations, leadership in these areas will be needed.
Hiring Strategy: Recruitment companies should focus on sourcing candidates with a strong background in GRC and specific experience with AVMs. Continuous professional development and compliance and risk management training will be key to attracting top talent.
