A mortgage lender subject to the 2024 AVM rule uses a third-party vendor's AVM for credit decisions on principal dwellings. Who is responsible for ensuring that the vendor's AVM activities comply with nondiscrimination laws?
Correct Answer
B) The lender, which remains responsible for its providers' compliance
The agencies reminded institutions that use third-party providers that they remain responsible for ensuring those providers comply with applicable laws, including nondiscrimination laws. The rule applies to lenders that make credit decisions themselves or through or in cooperation with a third party, so outsourcing the model does not shift the duty to the vendor. The rule creates no agency registration of AVM vendors and does not assign the duty to appraisers.
Why This Is the Correct Answer
Option B is correct because the agencies stated that institutions using third-party providers remain responsible for ensuring those providers comply with applicable laws, including nondiscrimination laws. The rule's requirements apply to lenders that use AVMs directly or through a third party. The lender therefore needs third-party risk management and controls covering the vendor's model.
Why the Other Options Are Wrong
Option A: The vendor alone, because the lender did not design or build the model
Option A places responsibility on the vendor alone because the lender did not build the model. Commenters raised this point, but the agencies kept the duty with the lender and reminded institutions that they remain responsible for their providers.
Option C: The federal agencies, through registration of approved AVM vendors
Option C says the federal agencies take responsibility through registration of approved AVM vendors. The rule contains no vendor registration or approval system; it requires the lender to maintain its own policies, practices, procedures and control systems.
Option D: The appraiser assigned to each loan, who must review the AVM estimate
Option D assigns responsibility to the appraiser on each loan. AVM-based credit decisions may involve no appraiser at all, and the rule places the quality control duty on mortgage originators and secondary market issuers.
Outsource the model, keep responsibility
A lender can buy an AVM from a vendor, but it cannot hand off its legal responsibility for how that AVM performs in its lending.
How to use: Use this phrase when a question asks who is accountable for a vendor-supplied model used in lending decisions.
Exam Tip
When a regulated institution relies on a third party, expect the regulator to hold the institution responsible for the third party's compliance.
Common Mistakes to Avoid
- -Assuming the model developer bears the lender's regulatory duty
- -Believing regulators certify AVM vendors under the rule
Concept Deep Dive
Analysis
The question tests where accountability sits when a lender relies on an outside AVM. The rule covers lenders that make credit decisions themselves or through or in cooperation with a third party, and the agencies stated that institutions remain responsible for third-party compliance. The candidate must reject the intuitive idea that the model's builder carries the legal duty.
Background Knowledge
Bank regulators consistently hold institutions accountable for activities they outsource. In the AVM rule this principle applies to the nondiscrimination factor and to the other quality control factors, supported by existing guidance on third-party risk and fair lending.
Real-World Application
A lender's fair lending team asks its AVM vendor for documentation on data sources and testing across neighborhoods. When the vendor's answers are thin, the lender adds its own outcome testing before continuing to use the model.
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
Previous Question
An appraiser relies on a published capitalization rate survey. What must be considered?
Next Question
An appraiser uses generative AI to draft a report narrative and signs the completed appraisal. Who remains responsible under USPAP for ensuring the appraiser’s report is accurate, supported, and not misleading?