A small credit union that originates mortgages asks what specific testing methods and accuracy thresholds the 2024 interagency AVM quality control rule prescribes. Which answer is most accurate?
Correct Answer
C) None in detail; controls fit the institution's size, complexity and risk profile
The rule sets the quality control factors but leaves institutions the flexibility to design their policies, practices, procedures and control systems based on their size, complexity and risk profile and the transactions involved. Commenters suggested a standard-setting organization, but the agencies only noted that institutions are free to work with third parties. The compliance duty sits with mortgage originators and secondary market issuers, not vendors, and no uniform testing schedule or threshold is set.
Why This Is the Correct Answer
Option C is correct because the agencies chose a flexible approach that lets each institution set its AVM quality controls according to its size, complexity and risk profile and the transactions in which it uses covered AVMs. The agencies said this approach allows implementation to evolve with AVM technology and limits compliance costs. A small credit union therefore designs controls that fit its own risk.
Why the Other Options Are Wrong
Option A: Annual testing by an agency-approved standard-setting organization for AVMs
Option A describes annual testing by an agency-approved standard-setting organization. Commenters recommended such an organization, but the rule does not create one; the agencies said institutions are free to work with third parties as long as they meet the rule's obligations.
Option B: Quarterly random sample testing measured against one uniform accuracy threshold
Option B describes quarterly random sample testing against one uniform accuracy threshold. Random sample testing and reviews are a required factor, but the rule sets no schedule and no uniform threshold for all institutions.
Option D: The AVM vendor's own testing, since the vendor carries the rule's compliance duty
Option D says the vendor's own testing suffices because the vendor carries the compliance duty. The rule places the duty on mortgage originators and secondary market issuers, which remain responsible for their third-party providers.
Factors fixed, methods flexible
The rule fixes what controls must be designed to achieve, while each institution decides how to achieve it based on its own size, complexity and risk.
How to use: Use this phrase when an option claims the AVM rule sets a specific testing frequency, threshold or outside testing body.
Exam Tip
Be cautious of options that attach precise schedules or numeric standards to the AVM rule; check whether the rule itself sets them.
Common Mistakes to Avoid
- -Believing the rule sets a uniform accuracy threshold
- -Assuming a standard-setting organization certifies AVMs under the rule
- -Placing the compliance duty on AVM vendors
Concept Deep Dive
Analysis
The question tests whether the candidate understands that the 2024 rule is principles-based. It names the factors the controls must be designed to meet but does not prescribe methods, frequencies or numeric thresholds. Each distractor imports a prescriptive feature that commenters suggested or that sounds regulatory but that the rule does not contain.
Background Knowledge
Federal regulators often adopt principles-based rules for evolving technology so that requirements do not become outdated. In the AVM rule, existing guidance on model risk management, third-party risk and AVM testing remains available to help institutions design their controls.
Real-World Application
A community lender with a small mortgage book adopts a modest AVM control program using periodic sample testing against later sales and simple conflict rules. A large secondary market issuer builds a far more extensive program; both can satisfy the same rule.
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