Alston & Bird Consumer Finance Blog

Fair Housing Act

Appraisal Bias Settlement: Potential Roadmap

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What Happened?

The lender and consumers reached a settlement in an appraisal bias case, Nathan Connolly and Shani Mott v. Shane Lanham, 20/20 Valuations, LLC, and loanDepot.com, LLC, filed in Maryland District Court, that gained the attention of the CFPB and DOJ. While some of the terms in the settlement are already industry standard, there appear to be some newer obligations that could be a template for other lenders to follow.

Why it Matters?

The settlement is important – both for what it does and what it doesn’t do. Unfortunately, the settlement does not address the question of whether a lender is responsible for the actions of an appraiser who is neither an employee nor an agent of the lender.

By way of background, in response to the Great Financial Crisis, the Dodd-Frank Act established new rules to ensure appraisal independence and address issues of inflated appraisals or overvaluation. More recently, however, partially due to changes in the market, consumers have lodged complaints of undervaluation, alleging that discrimination resulted in the appraisal coming in too low.

Given this increase in complaints and the Administration’s focus on racial equity, regulators have been grappling with how best to address and eliminate appraisal bias. Prior to the settlement, the CFPB and DOJ jointly made arguments in a statement of interest that would hold lenders liable for the actions of an appraiser who is neither an employee nor an agent of the lender.

In response, the MBA issued an amicus brief requesting that the Court recognize that there is no existing legal authority to hold a lender liable for the alleged actions of an independent appraiser. The resulting settlement is silent on this point.

The settlement does, however, impose several obligations on the lender and its and appraisal management companies (AMCs), providing insight into what the mortgage industry could do to combat appraisal bias.

In particular, the settlement requires mortgage loan applications be provided with information on how to raise concerns with a valuation sufficiently early in the valuation process so that issues or errors can be resolved before a final decision on the application is made, including:

  • The right to request a reconsideration of value (ROV) as soon as possible;
  • A description of the process to obtain an ROV (which may not create unreasonable barriers or discourage applicants from making ROV requests) and a description of the lender’s evaluation process;
  • If the ROV is denied or the value is unchanged, a written explanation of the lender’s evaluation of the submitted material;
  • The standards that trigger a second appraisal; and
  • The applicant’s right to file a complaint with the CFPB or HUD, as part of the ROV process.

Further, the settlement requires the lender to:

  • Conduct statistical analysis tracking appraisal outcomes by protected class and neighborhood demographics including whether the loan was denied, whether a second appraisal was ordered, and whether there was a change in the valuation as a result of the ROV process. Such analysis must track individual appraisers including appraisal outcomes, ROV requests, and bias complaints.
  • Not utilize appraisers who, according to the statistical analysis, received multiple complaints from minority applicants in minority neighborhoods alleging appraisal bias, or who have a pattern of undervaluing homes owned by minority applicants or homes in minority neighborhoods, or who have been found to have discriminated in an appraisal.
  • Clearly outline internal stakeholder roles and responsibilities for processing an ROV request.
  • Ensure that ROV requests of valuation bias or discrimination complaints across all relevant business channels are escalated to the appropriate channel for research or a response.
  • Adhere to ROV timelines for certain milestones.
  • Review appraiser response to ROV requests for completeness, accuracy, and indicia of bias and discrimination.
  • Establish standards for offering a second appraisal which at a minimum must include when the first appraisal has indicia of bias or discrimination is otherwise defective.
  • Ensure that the applicant’s interest rate will remain locked during the ROV process.
  • Ensure that ensure applicants are not charged for the cost of an ROV or second appraisal.
  • Include on its website educational information on how to understand an appraisal report and contact information for questions on the appraisal report.
  • Update its fair and responsible lending policy to explicitly prohibit discrimination in violation of state and federal fair lending laws on the basis of race, color, religion, sex, familial status, national origin, disability, marital status, or age.
  • Provide training annually and for new employees on discrimination in residential mortgage lending and appraisals, and on all policies related to the ROV process, appraisal reviews, and the use of value adjustments.
  • Not utilize appraisers who previously were found by a regulatory body or court of law to have discriminated in an appraisal.

Finally, the settlement requires that AMCs and appraisers doing business with the lender contractually agree to:

  • Represent that appraisers will receive fair lending training; and
  • Certify that appraisers have not been subject to any adverse finding related to appraisal bias or discrimination, or list or describe any findings.

What to do now?

Lenders should carefully review the settlement and compare it to existing policies and procedures. While the settlement is only binding on the parties to the agreement, others should take interest. Historically, lenders conduct fair lending statistical testing for underwriting, pricing, and redlining risk. It might be time to consider adding appraisal risk.

Appraisal Bias Focus Continues in 2024

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What Happened?

Building on the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”) and a series of federal agency actions in the intervening months, 2024 brings new efforts at the state and federal levels to address appraisal bias and promote fair valuations.  Notably, a new version of the Uniform Standards of Professional Appraisal Practice (“USPAP”) is in effect, prohibiting discrimination.

Why Is It Important?

USPAP:

As of January 1, the amended USPAP (the operational standards that govern real property appraisal practice) includes updates to the Ethics Rule that expressly prohibit appraisers from engaging in both unethical discrimination and illegal discrimination.  An appraiser cannot engage in illegal discrimination, which includes acting in a manner that violates or contributes to a violation of applicable anti-discrimination laws or regulations, including, but not limited to, the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and the Civil Rights Act of 1866.

The prohibition also encompasses unethical discrimination – developing an opinion of value based or with bias with respect on an actual or perceived protected characteristic of any person, “upon the premise that homogeneity of the inhabitants of a geographic area is relevant for the appraisal,” or using a characteristic to attempt to conceal a bias in the performance of an appraisal assignment.

OCC Hearing on Appraisal Bias:

On February 13, the Office of the Comptroller of the Currency (“OCC”) held the fourth of the Appraisal Subcommittee’s public hearing on appraisal bias.  Representatives of the Federal Financial Institutions Examination Council (“FFIEC”) regulatory agencies (the Federal Reserve Board, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, National Credit Union Administration, and OCC), the U.S. Department of Housing and Urban Development, and the Federal Housing Financial Agency took questions from individuals speaking on behalf of the Appraisal Foundation, the Mississippi and Texas state appraiser regulatory boards, and the appraisal profession.

The discussion focused on efforts to combat appraisal bias, including through diversification of the appraisal profession.

FFIEC Statement on Valuation Bias:

On February 14, the FFIEC on behalf of its member entities outlined consumer compliance and safety and soundness examination principles to “promote credible appraisals” and mitigate risk from valuation practices due to potential discrimination. Through this guidance, the FFIEC encourages institutions to establish a formal valuation program “to identify noncompliance with appraisal regulations, USPAP, inaccuracies, or poorly supported valuations.”

The guidance identifies: (a) ECOA, the FHA, the Truth in Lending Act, and the Federal Trade Commission Act as the applicable consumer protection laws; and (b) Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and USPAP as safety and soundness requirements.

Under the guidance, the consumer compliance examination principles focus primarily on compliance with consumer protection requirements and prohibitions on discrimination relating to valuation practices.  The FFIEC designed these principles to ensure that an institution’s board and management oversight, third party risk management and compliance management program (including policies and procedures, training, monitoring and/or audit, and consumer complaint handling) are commensurate with the size of the institution and appropriate to identify potentially discriminatory valuation practices or results.

Similarly, the FFIEC’s safety and soundness examination principles focus on financial condition and operations relating to the review and assessment of an “institution’s practices for identifying, monitoring and controlling the risk of valuation discrimination or bias.” Such assessments are similar to the consumer compliance examination principles, but also include an evaluation of the collateral valuation program and valuation review function, credit risk review function, and consideration of materiality in relation to the institution’s overall lending activities.

New Jersey Anti-Discrimination Initiative: 

Following other states (such as Texas) that have stepped up anti-discrimination efforts, the New Jersey Office of the Attorney General and Division on Civil Rights provided guidance on their enforcement of the state’s Law Against Discrimination (“LAD”) in home appraisals.

The guidance clarifies that LAD applies not only to appraisers, but also to “’any person’ who is involved in the ‘furnishing of facilities or services’ or ‘involved in the making or purchasing of any loan or extension of credit,” and thus encompasses bank and non-bank mortgage lenders, appraisal management companies (“AMCs”), insurance companies, and others.

The guidance also expressly prohibits subject individuals and entities from: (a) engaging in disparate treatment of individuals (e.g., borrowers) based on protected characteristics; (b) maintaining policies or practices that have unlawful disparate impacts; or (c) submitting or relying on an appraisal that is known (or should be known) to be discriminatory.

What Do I Need to Do?

While the above actions will impact lenders, appraisers, and AMCs differently, overall they indicate regulators’ continued (and increased) attention to fair valuations matters.  Lenders and AMCs should ensure that their in-house appraisal processes prohibit engagement in discriminatory valuations, their compliance management programs are well documented and working appropriately, and that they have escalation processes in place to address any alleged issues that may arise.  (We routinely provide compliance management system readiness reviews.)  Appraisers need to keep abreast not only of the new USPAP requirements, but also of changes to state continuing education requirements that implicate fair valuations.

New Florida Law Restricts Foreign Nationals’ Land Ownership

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What Happened?

In a development that is becoming a trend in state legislatures, effective July 1, 2023, the Florida Senate passed a bill that restricts certain foreign nationals from acquiring property in the state.

Why Is It Important?

Florida Senate Bill 264 (“SB 264”), codified at Florida Statutes 692.201-204, restricts the conveyance of real property in Florida to individuals and entities associated with certain foreign countries.  Notably, subject to limited exceptions, it prohibits the sale of any real property to Chinese nationals.

SB 264, which became effective on July 1, 2023, contains three primary components prohibiting the conveyance of real property in Florida.  First, subject to limited exceptions, SB 264 prohibits individuals and entities designated as “foreign principals,” from “foreign countries of concern,” from acquiring agricultural land in Florida.  The impacted countries are the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, and the Syrian Arab Republic.

Second, SB 264 prohibits foreign principals from owning or acquiring any interest in real property within 10 miles of any military installation or critical infrastructure in the state.  Third, subject to limited exceptions, SB 264 prohibits Chinese entities and nationals who are not citizens or lawful permanent residents of the U.S. from purchasing or acquiring any interest in real property in the state.

Notable Exceptions

SB 264 contains notable exceptions. First, foreign principals and Chinese nationals may continue to own real property acquired before the July 1, 2023 effective date; however, they had until January 1, 2024 to register the property ownership by with the designated Florida regulatory authority.  Second, a foreign principal or Chinese national may purchase up to one residential real property not exceeding two acres, as long as the parcel is not within five miles of any military installation.

SB 264 also creates exceptions for ownership through a publicly traded company that is either: (a) less than 5% interest, or (b) is a non-controlling interest in an entity controlled by a non-foreign entity registered with the SEC as an investment adviser.  Further, the legislation permits a “foreign principal” to acquire interest by devise or descent, enforcement of security interests, or collection of debt on or after July 1, 2023; however, the party must sell the property within three years of acquisition.

 Penalties

SB 264 requires the buyer of real property to sign an affidavit under penalty of perjury to his/her compliance with the law.  While a failure to obtain or maintain the affidavit does not affect the title or insurability of the title for the real property, SB 264 provides that “if any real property is owned or acquired in violation of this section, the real property may be forfeited to the state.“ Further, a foreign principal that fails to timely file a registration is subject to a civil penalty of $1,000 for each day that the registration is late.

Clarifying Regulations

SB 264 is self-implementing, but the legislation requires certain Florida regulatory agencies to adopt rules to implement certain sections of the legislation. On September 20, 2023, the Florida Department of Commerce released its initial set of proposed rules for implementing SB 264.   Shortly thereafter, the Florida Real Estate Commission followed suit with proposed rules containing the form buyer’s affidavits. Further, the Florida Department of Agriculture and Consumer Services is drafting rules related to the interests of foreign ownership of agricultural land in Florida.

What Do You Need to Know?

In May 2023, litigation challenging the constitutionality of the legislation was brought in the U.S. District Court for the Northern District of Florida.  The plaintiffs contend that SB 264 violates the Fourteenth Amendment’s Equal Protection and Due Process Clauses, the Supremacy Clause, and the Fair Housing Act.  It is unclear whether this and other possible litigation challenging the enforceability of the law will be meritorious.

In addition to Florida, nearly 20 other states (including Missouri ,Pennsylvania, Tennessee, Virginia, and Wisconsin) have adopted or are considering foreign ownership restrictions which are similar but generally less onerous.

Affirmative Action in Lending: The Implications of the Harvard Decision on Financial Institutions

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Early this summer, the U.S. Supreme Court’s ruling in Students for Fair Admissions v. President and Fellow of Harvard College effectively ended race-conscious admission programs at colleges and universities across the country. Specifically, the Supreme Court held that decisions made “on the basis of race” do nothing more than further “stereotypes that treat individuals as the product of their race, evaluating their thoughts and efforts—their very worth as citizens—according to a criterion barred to the Government by history and the Constitution.”

In particular, the Supreme Court reasoned that “when a university admits students ‘on the basis of race, it engages in the offensive and demeaning assumption that [students] of a particular race, because of their race, think alike.’” Such stereotyping purportedly only causes “continued hurt and injury,” contrary as it is to the “core purpose” of the Equal Protection Clause. Ultimately, the Supreme Court reminded us that “ameliorating societal discrimination does not constitute a compelling interest that justifies race-based state action.”

In the context of lending, federal regulatory agencies expect and encourage financial institutions to explicitly consider race in their lending activities. While the Community Reinvestment Act has required banks to affirmatively consider the needs of low-to-moderate-income neighborhoods, regulatory enforcement actions over the last few years have required both bank and nonbank mortgage lenders to explicitly consider an applicant’s protected characteristics such as race and ethnicity—conduct plainly prohibited by fair lending laws.

Could the impact of the Supreme Court holding extend beyond education to lending and housing? Will the Harvard decision serve to undercut federal regulators’ legal theories for demonstrating redlining and present a challenge for special purpose credit programs that explicitly consider race or other protected characteristics?

Fair Lending Laws Prohibit Consideration of Race

The Equal Credit Opportunity Act (ECOA) prohibits a creditor from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). Similarly, the Fair Housing Act prohibits discrimination against any person in making available a residential real-estate-related transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.

In March 2022, the Consumer Financial Protection Bureau (CFPB) went as far as to update its Examination Manual to provide that unfair, deceptive, or abusive acts and practices (UDAAPs) “include discrimination” and signaled that the CFPB will examine whether companies are adequately “testing for” discrimination in their advertising, pricing, and other activities. When challenged by various trade organizations, the U.S. District Court for the Eastern District of Texas ruled that the CFPB’s update exceeded the agency’s authority under the Dodd–Frank Act. This decision is limited, however, and enjoins the CFPB from pursuing its theory against those financial institutions that are members of the trade association plaintiffs. It is also unclear if the verdict will be appealed by the CFPB.

Despite federal prohibitions, regulators such as the CFPB and the U.S. Department of Justice (DOJ) expect, and at times even require, lenders to affirmatively target their marketing and lending efforts to certain borrowers and communities based on race and/or ethnicity.

Race-Based Decisions Are Encouraged and Even Required by Regulators

CFPB examiners often ask lenders to describe their affirmative, specialized efforts to target their lending to minority communities. If there have been no such explicit efforts by the institution, the CFPB penalizes these lenders for not explicitly considering race in their marketing and lending decisions. For example, in the CFPB’s redlining complaint against Townstone Financial, the CFPB alleged that “Townstone made no effort to market directly to African-Americans during the relevant period,” and that “Townstone has not specifically targeted any marketing toward African-Americans.”

What’s more, if enforcement culminates in a consent order, the CFPB and DOJ effectively impose race- based action by requiring lenders to fund loan subsidies or discounts that will be offered exclusively to consumers based on the predominant race or ethnicity of their neighborhood. In the CFPB/DOJ settlement with nonbank Trident Mortgage, the lender was required to set aside over $18 million toward offering residents of majority-minority neighborhoods “home mortgage loans on a more affordable basis than otherwise available.”

And in the more recent DOJ settlement with Washington Trust, the consent order required the lender to subsidize only those mortgage loans made to “qualified applicants,” defined in the settlement as consumers who either reside, or apply for a mortgage for a residential property located, in a majority-Black and Hispanic census tract. Such subsidies are a common feature of recent redlining settlements, which have been occurring with increased frequency since the DOJ announced its Combating Redlining Initiative in October 2021.

Not only do the CFPB and DOJ encourage, and in certain cases, even require, race-based lending in potential contravention of fair lending laws, but federal regulators also expect some degree of race-based hiring by lenders. This expectation is based on the stereotypical assumption that lenders need racial and ethnic minorities in their consumer-facing workforce to attract racial and ethnic minority loan applicants. In the Townstone complaint, for example, the CFPB chastised the lender for failing to “employ an African-American loan officer during the relevant period, even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group.”

Ultimately, all the recent redlining consent orders announced by the CFPB and DOJ impose at least some race-based requirement, which would seem to run afoul of fair lending laws and Supreme Court precedent.

Racial Quota-Based Metrics Used by Regulators

Further, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas, specifically majority-minority census tracts (MMCTs). Then the regulators compare such rates or percentages of the lender’s loan applications or originations in MMCTs to those of other lenders. For example, in its complaint against Lakeland Bank, the DOJ focused on the alleged “disparity between the rate of applications generated by Lakeland and the rate generated by its peer lenders from majority-Black and Hispanic areas.” The agency criticized the bank’s “shortfalls in applications from individuals identifying as Black or Hispanic compared to the local demographics and aggregate HMDA averages.”

Undoubtedly, this approach utilizes nothing more than a quota-based metric, which the Supreme Court in Harvard squarely rejected. Indeed, the Supreme Court reasoned that race-based programs amount to little more than determining how “the breakdown of the [incoming] class compares to the prior year in terms of racial identities,” or comparing the racial makeup of the incoming class to the general population, to see whether some proportional goal or benchmark has been reached.

While the goal of meaningful representation and diversity is commendable, the Supreme Court emphasized that “outright racial balancing and quota systems remain patently unconstitutional.” And such a focus on racial quotas means that lenders could attempt to minimize or even eliminate their fair lending risk simply by decreasing their lending in majority-non-Hispanic-White neighborhoods—without ever increasing their loan applications or originations in majority-minority neighborhoods. Of course, this frustrates the essential purpose of ECOA and other fair lending laws.

Potential Constitutional Scrutiny of Race-Based Lending Efforts

If race-based state action, including the use of racial quotas, violates the Equal Protection Clause, it is possible that the race-based lending measures recently encouraged and even required by federal regulators may be constitutionally problematic. In addition to racially targeted loan subsidies and racially motivated loan officer hiring, regulators continue to encourage lenders to implement special purpose credit programs (SPCPs) to meet the credit needs of specific racial or ethnic groups. As the CFPB noted in its advisory opinion, “[b]y permitting the consideration of a prohibited basis such as race, national origin, or sex in connection with a special purpose credit program, Congress protected a broad array of programs ‘specifically designed to prefer members of economically disadvantaged classes’ and ‘to increase access to the credit market by persons previously foreclosed from it.’”

While SPCPs are explicitly permitted by the language of ECOA and its implementing regulation, Regulation B, as an exception to the statute’s mandate against considering a credit applicant’s protected characteristics, it is uncertain whether these provisions, if challenged, would survive constitutional scrutiny by the current Supreme Court.

Takeaways for Lenders

For the time being, lenders that offer SPCPs based on a protected characteristic should ensure that their written plans continue to meet the requirements of Section 1002.8(a)(3). As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs. And if faced with a fair lending investigation or potential enforcement action, lenders should consider presenting to regulators any alternate data findings or conclusions that demonstrate the institution’s record of lending in MMCTs rather than focusing on the rates or percentages of other lenders in the geographic area.

Moving to Address Appraisal Bias, Agencies and the Appraisal Foundation Issue Updates

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A&B ABstract:

 A year and a half after President Biden’s announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”), the past weeks have seen a flurry of activity from federal agencies and the Appraisal Foundation to address issues of bias in residential property appraisal.  What should lenders, servicers, and appraisers know?

Background:

In June 2021, President Biden announced the formation of the PAVE Task Force, comprising 13 federal agencies, including the White House Domestic Policy Council.  He tasked the group with identifying and evaluating “the causes, extent, and consequences of appraisal bias and to establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.”

In March 2022, the member agencies of the PAVE Task Force published an action plan, announcing a series of concrete commitments to address appraisal bias in five broad categories:

  • strengthening guardrails against discrimination in all stages of residential valuation;
  • enhancing fair housing and fair lending enforcement, and driving accountability in the appraisal industry;
  • building a diverse, well-trained, and accessible appraiser workforce;
  • empowering consumers to take action against bias; and
  • giving researchers and enforcement agencies better data to study and monitor valuation bias.

While the Task Force’s activity is ongoing, federal agencies in the past few weeks have announced a series of steps that are in line with the PAVE goal of addressing real property appraisal bias.

FHA: Draft Mortgagee Letter on Reconsiderations of Value and Appraisal Review

On January 3, 2023, the Federal Housing Administration (“FHA”) published for public comment a draft mortgagee letter, Borrower Request for Review of Appraisal Results, that would permit a second appraisal to be ordered if a Direct Endorsement underwriter determines that an original appraisal contains a material deficiency.  The letter would expressly identify as a material deficiency – one that would directly impact value and marketability of the underlying property – either indications of unlawful bias in the appraisal or of a violation of applicable federal, state, or local fair housing and non-discrimination laws.

Further, the draft mortgagee letter would require the underwriter in a transaction involving an FHA-insured loan to “review the appraisal and determine that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.”  Among other criteria, this would require the underwriter to make a determination of whether the appraisal is materially deficient – that is, whether the appraisal contains indications of unlawful bias or of a violation of applicable fair housing and non-discrimination laws.  Providing a “credible analysis” exceeds the scope of a quality control review.  If included in a finalized mortgagee letter, it would require lenders to determine whether underwriters must be state-licensed or -certified appraisers.

The draft mortgagee letter also sets forth standards for the submission and consideration of a borrower’s request for a review of appraisal results, including the submission of a reconsideration of value request to the appraiser.

VA: Enhanced Oversight Procedures to Combat Appraisal Bias

On January 18, the Department of Veterans Affairs (“VA”) issued Circular 26-23-05, detailing the enhanced oversight procedures that the VA has adopted “to identify discriminatory bias in home loan appraisals and act against participants who illegally discriminate based on race, color, national origin, religion, sex (including gender identity and sexual orientation), age, familial status, or disability.”

In the Circular, the VA indicated that it will review all appraisal reports submitted in connection with VA-guaranteed home loans to identify any potential discriminatory bias.  The VA will: (a) conduct an escalated review of any suspected incidents of bias; and (b) remove from its panel of approved appraisers any individual who is confirmed to have provided a biased appraisal as the result of such a review.

The VA also reminded panel appraisers that in submitting a Fannie Mae Form 1004 (Uniform Residential Appraisal Report), they certify that they have not based the opinion communicated in an appraisal report on discriminatory factors (e.g., the race) of either the property applicants or the residents of the area in which the property is located.

Appraisal Foundation: Proposed Revision of Appraisal Standards

In mid-December, the Appraisal Standards Board (“ASB”) of the Appraisal Foundation released its fourth exposure draft of proposed changes to the Uniform Standards of Professional Appraisal Practice (“USPAP”), the operational standards that govern real property appraisal practice.

In response to comments received in response to the last draft, the ASB proposes to add to the USPAP Ethics Rule a section expressly discussing non-discrimination.  The proposed section would prohibit appraisers from engaging in both unethical discrimination and illegal discrimination, and would provide guidance as to the type of conduct constituting each form.

Unethical Discrimination:

First, the ASB proposes to include an express statement that an appraiser must not engage in unethical discrimination.  First, that prohibition would preclude an appraiser from developing and/or reporting an opinion or value that is based, in whole or in part, on the actual or perceived protected characteristics of any person.

Second, the rule would prohibit an appraiser from performing an assignment with bias with respect to the actual or perceived protected characteristics of any person – meaning that the appraiser may not engage in any discriminatory conduct (regardless of whether it arises in the course of developing and/or reporting an opinion of value). For purposes of this prohibition, the rule would utilize the USPAP definition of bias: “a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment.”

The rule would make a limited exception for activity that qualifies with “limited permissive language,” permitting an appraiser to use or rely upon a protected characteristic in an assignment only where:

  • laws and regulations expressly permit or otherwise allow the consideration of a protected characteristic;
  • use of or reliance on that characteristic is essential to the assignment and necessary for credible assignment results; and
  • consideration of the characteristic is not based upon bias, prejudice, or stereotype.

The exposure draft provides as an example of activity that might qualify for the exception the completion of an appraisal review in order to determine whether the initial appraisal was discriminatory.

The ASB proposal makes clear that because “an appraiser’s ethical duties are broader than the law’s prohibitions,” an appraiser may commit unethical discrimination without violating any applicable law; however, an act that “constitutes illegal discrimination … will also constitute unethical discrimination.”

Illegal Discrimination:

Complementing the prohibitions discussed above, the ASB proposes to include an express statement that an appraiser must not engage in illegal discrimination – conduct that violates the minimum standards of anti-discrimination set forth in the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and Section 1981 of the Civil Rights Act of 1866 (“Section 1981”).  The rule would impose on appraisers a duty to understand and comply with such laws as they apply to the appraiser and the appraiser’s assignments, including the concepts of disparate treatment and disparate impact.  Further, the rule would prohibit an appraiser from using or relying on a non-protected characteristic as a pretext to conceal the use of or reliance upon protected characteristics when performing an assignment.

Further Guidance:

 The exposure draft indicates that the ASB would follow the adoption of the new non-discrimination section of the ethics rule with detailed guidance on the scope of these prohibitions, including:

  • Background on federal, state, and local anti-discrimination laws;
  • Guidance on the application of FHA, ECOA, and Section 1981 to appraisals of residential real property;
  • Explanation of the disparate treatment and disparate impact theories of discrimination, including examples relating to appraisal practice;
  • Guidance on neighborhood discrimination in real property appraisals; and
  • Clarification on acceptable uses of protected characteristics, in connection with the “limited permissive language” exception for the prohibition against unethical discrimination.

OMB: AVM Rule on Regulatory Agenda

 Automated valuation models  (“AVMs”) are considered a useful tool to help mitigate appraisal discrimination.  On January 4, the Office of Management and Budget (“OMB”) released its Fall 2022 Regulatory Agenda.  Among other topics, OMB indicated that an interagency proposed rule addressing quality control standards for AVMs is expected in March 2023. The Dodd-Frank Act’s amendments to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) require the federal banking regulatory agencies to undertake this rulemaking.

 ASC: Hearing on Appraisal Bias

 On January 24, the Appraisal Subcommittee (“ASC”) of the Federal Financial Institutions Examination Council held a hearing on appraisal bias.  Of note, Consumer Financial Protection Bureau Director Rohit Chopra ended the hearing by articulating the objective that the “lodestar” of appraisals is an appraisal that neither too high nor too low, but rather is accurate.    Director Chopra then questioned the regulatory structure governing appraisals, calling it “byzantine.”  His remarks focused on the funding mechanism between the Appraisal Institute and the Appraisal Foundation, implying that there may be a conflict of interest.

To understand Director Chopra’s comment requires knowledge of the current regulatory framework, which Title XI of FIRREA established in 1989.   It includes three principal parties: the ASC, the Appraisal Foundation, and the Appraisal Institute:

  • The ASC is a federal agency with oversight responsibility of the state appraisal regulatory structure for real property appraisers as well as to monitor activities of the Appraisal Foundation.
  • The Appraisal Foundation is a private non-profit educational organization. Through the ASB and the Appraiser Qualifications Board (“AQB”), the Appraisal Foundation sets the ethical and performance standards of appraisers in the USPAP.  The AQB establishes the minimum education, experience, and examination requirements for real property appraisers, which are then enforced by state regulatory agencies.  The Appraisal Foundation is funded through sales of publications and services, as well as by its sponsoring organizations.
  • The Appraisal Institute is a private professional organization of appraisal professionals, and is one of the sponsoring organizations of the Appraisal Foundation.

Takeaway

 Viewed through the lens of the overall PAVE Task Force efforts, actions by the FHA and the VA show early and concrete action to address residential appraisal bias.  Because they implicate government insurance and guarantee programs, the focus is particularly important for lenders and appraisers to take heed of – such that documentation submitted to the agencies is accurate.

Appraisers should also take note of the updated USPAP exposure draft as it moves toward final adoption, so that they are aware of their responsibilities with respect to avoiding bias in appraisal reports. Finally, with regulators scrutinizing the appraisal framework – as seen in the OMB and ASC announcements – more significant changes are expected.