Fair lending and housing discrimination have been thrust to the regulatory forefront, and the Consumer Financial Protection Bureau (CFPB) has ramped up its enforcement actions against redlining, pricing discrimination, and religious discrimination in mortgage transactions.1 What’s more, appraisal misconduct is increasingly being scrutinized by regulatory agencies, presenting yet another risk to banks originating and refinancing mortgage loans.
Appraisal Discrimination
Mortgage interest rates reached historic lows during the COVID-19 pandemic, resulting in record numbers of mortgage loan and refinance transactions (refinance volumes more than doubled from 2019 to 2020).2 Unfortunately, within these record numbers was a troubling increase in allegations by African American homeowners that their home appraisals presented undervalued opinions of market value.3
In one instance, an African American homeowner in Florida who suspected her initial appraisal was undervalued redecorated her home to conceal the fact that an African American family lived in the home; a subsequent appraisal was $135,000 above the initial appraisal. Another African American couple in California took similar action and saw the opinion of market value increase from $995,000 to $1,482,400. Recently, the Department of Housing and Urban Development (HUD) approved a conciliation agreement that resolved an African American homeowner’s claim against a financial institution for alleged racial discrimination in its undervaluation of her home.4
In the summer of 2021, President Biden announced the formation of the Property Appraisal and Valuation Equity (PAVE) Interagency Task Force. The task force’s goals are to ensure practices that support valuation equity, curtail valuation bias through education and training, provide quality data to ensure appraisal equity, and combat valuation bias through enforcement and other efforts.5 A final report proposing policy recommendations and consumer-facing actions is expected early this year. However, with fair lending and housing discrimination top-of-mind for regulatory agencies, there is no time like the present for banks and financial institutions to ensure that best practices are being followed to reduce the risk of appraisal discrimination.
Managing the Risk of Appraisal Discrimination
Appraisal discrimination presents significant risk to a financial institution’s mortgage loan origination and refinancing lines of business. Even with a single allegation of discrimination, financial institutions find themselves exposed to regulatory, operational, legal, reputational, and even strategic risk, which could be detrimental to business plans and performance. To assist in effectively controlling these types of risk, consider a management approach that includes the features discussed below.
Policies and Procedures
One of the first requests regulators make when conducting a regulatory examination is for a financial institution to provide its policies and procedures. Given the recent regulatory enforcement actions and resulting media attention, it should be no surprise that topics related to equality and fairness are at the forefront of examinations. Financial institutions should carefully scrutinize whether their policies, procedures, and controls are effective in addressing discriminatory practices as part of the appraisal process. Additionally, and as part of their third-party vendor management programs, financial institutions should consider whether policies and procedures sufficiently address the oversight of individual appraisers. While these topics require more than broad, overarching policy statements, it is important not to overstate the financial institution’s practices. As with all policy and procedure documentation, it is important to state what you do and do what you state.
Training
While a robust compliance training program should be part of every financial institution’s compliance management system, it is equally important that employees in consumer-facing or oversight roles receive diversity and inclusion training. These types of training help employees identify and spot various forms of bias. They may also uncover unconscious bias that could impact professional judgment or conduct and, in the appraisal context, result in an unfair estimate of market value for the residential real estate of certain homeowners on a prohibited basis. Employees who are trained to identify situations in which unconscious bias may arise are better prepared to recognize potential discriminatory conduct or disparate treatment. Note that training does not apply only to internal employees. To the extent that a financial institution uses a third party to conduct appraisals, the training issued by the third party related to fairness and discrimination should be reviewed as part of the institution’s vendor management oversight.
Appraiser Scorecards
Fannie Mae’s Selling Guide requires lenders to “ensure that the appraiser … was objective and unbiased in the development of the opinion of market value in the appraisal report.”6 Unacceptable appraisal practices include valuation conclusions that are based, in whole or in part, on the race of either the current or prospective property owners, but also extend to “the present owners or occupants of the properties in the vicinity of the subject property.” State and federal laws and regulations may require banks to report appraiser misconduct or violations of professional standards.
As part of the appraiser oversight regimen, financial institutions should consider using scorecards to document and track appraiser performance. Additionally, financial institutions should pay careful attention to the appraiser’s comments related to the neighborhood description, market conditions, and sales comparison approach, which should not include assumptions or personal opinions. For example, the financial institution should determine whether the appraiser’s comments or opinions of market value raise concerns of potential bias, apparent or otherwise. Finally, a financial institution should document all findings, subsequent discussions with the appraiser, and any corrective actions taken. Such corrective actions should also be included in the financial institution’s quality control/quality assurance program.
Secondary Lookbacks
Guidance from regulatory agencies indicates that financial institutions should review appraisals to ensure compliance with the financial institution’s policies and applicable appraisal regulations.7 While a preliminary review of an appraisal addresses this guidance, conducting a broader secondary lookback enhances a financial institution’s ability to identify potentially discriminatory conduct. For example, reviewing a sample of appraisals for a common market area may identify isolated or even thematic instances of discrimination. Are there valuations that notably stand out? These outlier valuations may present appraisal discrimination risk and warrant a deeper review.
Complaints
Financial institutions must review complaints that are logged internally and with the CFPB. Are there any complaints alleging bias, unfairness, or discrimination on behalf of the appraiser or institution? How were these complaints managed and resolved? Any unresolved complaints should be prioritized considering the current regulatory scrutiny and media attention surrounding these topics.
Documentation
The concept is simple but bears repeating: Document, document, document. Any instances of potential appraisal discrimination must be carefully documented, to include how the event was identified, handled, and resolved. Any conversations or actions taken by the bank with an appraiser should be detailed and include the reasons why such actions were taken. Should a regulator inquire about how a potential instance of appraisal discrimination was handled or how a complaint was resolved, it will not be satisfactory to indicate that a verbal warning or discussion took place.
All Things Being Equal
The current regulatory environment is focused on housing discrimination in all its forms, and appraisal discrimination is in the regulatory spotlight. To better manage the risk of appraisal discrimination, banks should remember the following:
- Shore up appraisal review and oversight practices. Although the standards for appraisal equality may be in flux until the PAVE task force issues its final report, financial institutions can act now by shoring up their policies, procedures, and controls for the appraisal process.
- There is no such thing as overcompliance. A financial institution is either compliant or it is not. While technical compliance with applicable guidelines, laws, and regulations may be sufficient to pass regulatory muster, banks should not shy away from “tightening up” compliance by enhancing operational practices and oversight regimens related to appraisals.
- Unconscious bias is just that. It arises unconsciously, without knowledge or intent. However, that does not insulate banks from the risk of appraisal discrimination. Banks should ensure proper training for unconscious bias, and employees should closely follow established polices and procedures to avoid potential discriminatory pitfalls.
1 See, e.g., Department of Justice, Office of Public Affairs, “Justice Department Announces New Initiative to Combat Redlining,” at https://www.justice.gov/opa/pr/justice-department-announces-new-initiative-combat-redlining; Consumer Financial Protection Bureau, “Supervisory Highlights, Issue 25, Fall 2021,” https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-25_2021-12.pdf.
2 Freddie Mac Research Note, “Refinance Trends in 2020,” March 5, 2021. Available at http://www.freddiemac.com/research/insight/20210305_refinance_trends.page.
3 The New York Times, “Black Homeowners Face Discrimination in Appraisals, August 25, 2020, available at https://www.nytimes.com; The Tennessee Tribute, “For Black Homeowners, Unfair Appraisals Are All Too Common,” October 29, 2020, available at https://tntribune.com/for-black-homeowners-unfair-appraisals-are-all-too-common/; USA Today, “Home appraisal increased by almost $100,000, after Black family hid their race,” September 13, 2021, available at https://www.usatoday.com/story/money/nation-now/2021/09/13/home-appraisal-grew-almost-100-000-after-black-family-hid-their-race/8316884002/; HousingWire, “California couple sues appraiser for race discrimination,” December 6, 2021, available at https://www.housingwire.com/articles/california-couple-sues-appraiser-for-race-discrimination/.
4 HUD Press Release, HUD No. 21-037, “HUD Approves Agreement With JPMorgan Chase Resolving Claims Of Race Discrimination In Appraisals,” March 8, 2021, available at https://www.hud.gov/press/press_releases_media_advisories/hud_no_21_037.
5 White House Briefing Room, “Readout of the First Interagency Task Force Meeting on Property Appraisal and Valuation Equity (PAVE),” August 5, 2021, available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/08/05/readout-of-the-first-interagency-task-force-meeting-on-property-appraisal-and-valuation-equity-pave/. The PAVE Interagency Task Force webpage is available at https://pave.hud.gov/home.
6 FNMA Single Family 2021 Selling Guide B4-1.1-02, Lender Responsibilities (11/03/2021)available at https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-1-Appraisal-Requirements/Section-B4-1-1-General-Appraisal-Requirements/1032987331/B4-1-1-02-Lender-Responsibilities-09-04-2018.htm#:~:text=The%20lender%20is%20responsible%20for,and%20marketability%20of%20the%20property.
7 FDIC, Board of Governors of the Federal Reserve System, OCC, Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines (October 16, 2018) available at https://www.federalreserve.gov/supervisionreg/srletters/sr1809a1.pdf.