The housing industry stands at a critical juncture, facing both immense opportunity and increasing regulatory scrutiny. As the largest asset class for many consumers, the valuation of homes demands accuracy, reliability, and freedom from bias, not just speed. The recent Interagency Automated Valuation Models (AVM) Final Rule, issued on July 17, 2024, by six federal regulatory agencies, marks a new era of oversight for AI-powered valuation tools. See our Full Guide

This landmark regulation, stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandates rigorous quality control standards for AVMs used in credit decisions related to a consumer's primary dwelling. Effective October 1, 2025, financial institutions are required to implement and maintain policies, practices, procedures, and control systems that ensure AVMs adhere to specific quality control standards, effectively ending the era of "black box" algorithms in consumer finance. This necessitates a commitment to transparency and robust model governance, prompting a significant shift in how these models are developed, tested, and deployed.

Understanding the Five Key Objectives

The Interagency AVM Final Rule focuses on five critical objectives:

  1. Statistical Accuracy: Ensuring AVMs produce statistically sound and reliable valuations. This involves rigorous testing and validation to confirm that the models accurately predict property values under various market conditions.

  2. Model Validation and Ongoing Monitoring: Mandating continuous monitoring of AVM performance to identify and address any potential drift or degradation in accuracy over time. This includes regular re-calibration and refinement of the models.

  3. Data Integrity: Guaranteeing the quality and reliability of the data used to train and operate AVMs. This requires stringent data governance practices to prevent errors, omissions, or biases from compromising valuation accuracy.

  4. Independence and Conflicts of Interest: Establishing safeguards to prevent undue influence or conflicts of interest from affecting AVM outputs. This includes ensuring that the model development and validation processes are independent of any commercial pressures.

  5. Compliance with Nondiscrimination Laws: Addressing algorithmic bias in AI to ensure AVMs do not discriminate against protected classes. This is a particularly important objective, demanding sophisticated fair lending counsel and model governance review processes to audit models for any prohibited bias input variables that could lead to disparate impact.

Beyond the Algorithm: A Holistic Approach to Compliance

Navigating these regulations requires more than just tweaking algorithms. It demands a holistic approach encompassing data quality, model governance, independent testing, and ongoing monitoring. Financial institutions and their partners must prioritize building trust and confidence in their valuation models.

The ruling’s explicit focus on non-discrimination demands careful consideration of input variables. Beyond obvious factors like race or religion, indirect proxies, such as income, credit score, or public assistance status, can unintentionally create a disparate impact. Companies must proactively audit their models, leveraging sophisticated statistical techniques to identify and mitigate any unintended biases.

Cotality's Approach: Exceeding Regulatory Mandates

Accurate and reliable valuations are the foundation of sound risk management and regulatory compliance. At Cotality, we understand the significance of the new AVM Final Rule and have designed our Total Home Valueˣ (THVx) estimates to not only meet but exceed the mandates, focusing on delivering high-confidence estimates and unparalleled model integrity.

Our commitment to rigorous testing and ongoing monitoring is central to this approach. The Final Rule explicitly mandates random sample testing and reviews, and we support clients in meeting this objective through three comprehensive methods, all backed by massive datasets:

  1. Blind, Out-of-Sample Testing: This involves evaluating the model's performance on data it has never seen before, providing an unbiased assessment of its predictive capabilities. We employ sophisticated statistical techniques to analyze model outputs and identify any areas where performance may fall short.

  2. Adverse Action Review: By focusing on testing specifically where the AVM results in an adverse action against a consumer, this process directly demonstrates that the AVM is not unfairly hindering access to homeownership or other related financial services. It is a focused demonstration of fairness and compliance.

  3. Regular Performance Benchmarking: Continuous monitoring of AVM performance against industry benchmarks and alternative valuation methods. This allows us to identify and address any potential drift or degradation in accuracy over time.

Furthermore, we collaborate with independent third-party testers whom clients may engage for professional, unbiased testing and monitoring services, adding an additional layer of external accountability and confidence.

The Future of AI in Property Valuation

The 2024 Federal AVM Ruling represents a pivotal shift, elevating AI governance and model integrity from best practice to a regulatory mandate across the housing industry. This change reaffirms the necessity of Cotality's core methodologies, especially blind, out-of-sample testing, ensuring the valuations underpinning America's largest asset class are accurate, reliable, and fully compliant with non-discrimination laws.

The new regulatory landscape presents both challenges and opportunities. By embracing transparency, robust model governance, and independent validation, financial institutions can build trust in their AI-powered valuation models and ensure compliance with evolving regulatory requirements.

At Cotality, we are committed to helping our clients navigate this complex landscape. Using our network, scale, and technology, we deliver faster, smarter, more human-centered experiences to strengthen your business, fostering true trust in the technology we build.

Don't navigate this new landscape alone. Learn more about Total Home Valueˣ (THVx) and how we can help you achieve regulatory compliance and unlock the full potential of AI in property valuation.