A bank plans to have its mortgage loan officers perform ongoing validation of the AVM used in their own lending. Under Appendix B of the Interagency Guidelines, how should this plan be judged?
Correct Answer
C) Flawed, because validators should be independent of loan production
Persons who validate an AVM on an ongoing basis should be independent of the loan production and collection processes and have the requisite expertise and training. Loan officers fail the independence test however well they know the market. Validation may be done internally or with a third party, so outsourcing is not required.
Why This Is the Correct Answer
Option C is correct because the guidelines state that persons who validate an AVM on an ongoing basis should be independent of the loan production and collection processes and have the requisite expertise and training. Loan officers validating the model used in their own lending are not independent. The plan should assign validation to qualified staff or a third party outside production.
Why the Other Options Are Wrong
Option A: Appropriate, because loan officers know the local market best
Option A approves the plan because loan officers know the local market best. Market knowledge does not satisfy the independence requirement, and loan officers have an interest in the model's results supporting their loans.
Option B: Appropriate, if the vendor's validation report is also kept on file
Option B approves the plan if the vendor's validation report is also kept on file. The guidelines say institutions should not rely only on vendor validation representations, and the vendor report does not cure the lack of independence.
Option D: Flawed, because validation has to be outsourced to a third party
Option D says validation has to be outsourced to a third party. The guidelines allow validation to be performed internally or with third-party help, provided qualified, independent individuals do it.
Lenders lend, validators validate
The people who make loans with the model should not be the people who judge whether the model works.
How to use: Use this phrase when a question assigns model validation to staff with a stake in loan volume.
Exam Tip
Independence questions often include a distractor that overcorrects; internal validation is acceptable when the validators are independent and qualified.
Common Mistakes to Avoid
- -Treating market familiarity as a substitute for independence
- -Assuming validation must be outsourced
Concept Deep Dive
Analysis
The question applies the independence standard for AVM validators. Loan officers have an interest in the model supporting their loans, which the guidelines address by requiring independence from loan production and collection. The other options either ignore independence or overstate what the guidelines require.
Background Knowledge
Independence in validation keeps those who benefit from a model's output from judging its performance. The guidelines also call for validation procedures that specify sample size, geographic analysis, testing frequency, performance measures and acceptable result ranges.
Real-World Application
A regional bank moves AVM validation from its retail lending division to its model risk group, which reports to the chief risk officer. The group tests the model quarterly against later sales and reports results to the credit committee.
More Emerging Methods Questions
A loan is eligible for Fannie Mae's value acceptance + property data option, and the lender elects that option. What does the lender obtain in place of an appraisal?
An appraiser uses a building-permit file to investigate an addition. What is an important limitation of that source?
A real estate salesperson, acting solely in a brokerage role, prepares a CMA to help a listing client choose an asking price. Which statement is best?
An appropriately credentialed appraiser is offered a desktop assignment on an unfamiliar property type. A necessary competency gap is known before agreement. If the appraiser elects to proceed, what is required?
How should an appraiser identify potentially distressed transactions in a data set?
Why should an appraiser identify the data sources used in the report?
How should an appraiser treat a value estimate found on a consumer real estate website?
An appraiser builds a spreadsheet regression to support adjustments. How is it treated?
May an appraiser use data from a prior assignment for a different client?
The intended lender’s applicable assignment conditions require an interior inspection. The client asks the appraiser to deliver a desktop appraisal instead, and the inspection condition has not been authorized for modification. What should the appraiser do?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam