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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.

FHA and VA Announce New Loss Mitigation Options

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What Happened?

Both the FHA and VA have established new loss mitigation options to provide payment reduction to delinquent borrowers.  On February 21, 2024, the Federal Housing Administration (“FHA”) within the U.S. Department of Housing and Urban Development (“HUD”) issued a new mortgagee letter (ML 2024-02) which, among other things, establishes the Payment Supplement loss mitigation option for all FHA-insured Title II Single-Family forward mortgage loans (the “Payment Supplement”) and also extends FHA’s COVID-19 Recovery Options through April 30, 2025. The provisions of ML 2024-02 may be implemented starting May 1, 2024 but must be implemented no later than January 1, 2025. The Payment Supplement will bring a borrower’s mortgage current and temporarily reduce their monthly mortgage payment without requiring a modification.

And, on April 10, 2024 , the U.S. Department of Veterans Affairs (“VA”) announced the release of its much-anticipated Veterans Affairs Servicing Purchase (“VASP”) program, which is a new, last-resort tool in the VA’s suite of home retention options for eligible veterans, active-duty servicemembers, and surviving spouses with VA-guaranteed home loans who are experiencing severe financial hardship. The VASP program will take effect beginning on May 31, 2024.

Why Does it Matter?

FHA’s Payment Supplement

ML 2024-02 establishes the Payment Supplement as a new loss mitigation option to be added to FHA’s current loss mitigation waterfall. Specifically, if a servicer is unable to achieve the target payment reduction under FHA’s current COVID-19 Recovery Modification option, the mortgage must review the borrower for the Payment Supplement. The Payment Supplement is a loss mitigation option that utilizes Partial Claim funds to bring a delinquent mortgage current and couples it with the subsequent provision of a Monthly Principal Reduction (“MoPR”) that is applied toward the borrower’s principal due each month for a period of 36 months to provide payment relief without having to permanently modify the borrower’s mortgage loan. The maximum MoPR is the lesser of a 25 percent principal and interest reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins.

The Payment Supplement will temporarily reduce an eligible borrower’s monthly mortgage payment for a period of three years, without requiring modification of the borrower’s mortgage loan. At the end of the three-year period, the borrower will be responsible for resuming payment of the full monthly principal and interest amount. A borrower is not eligible for a new Payment Supplement until 36 months after the date the borrower previously executed Payment Supplement documents.

To be eligible for the Payment Supplement, servicers must ensure that:

  • that at least three or more full monthly payments are due and unpaid;
  • the mortgage is a fixed rate mortgage;
  • sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR;
  • the borrower meets the requirements for loss mitigation during bankruptcy proceedings set forth in Section III.A.2.i.viii of FHA Single-Family Handbook 4000.1;
  • the principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to a “Minimum MoPR” which must be equal to or greater than 5 percent of the principal and interest portion of the borrower’s monthly mortgage payment, and may not be less than $20.00 per month, as of the date the Payment Supplement period begins;
  • the MoPR does not exceed the lesser of a 25% principal and interest reduction for three years or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins; and
  • the borrower indicates they have the ability to make their portion of the monthly mortgage payment after the MoPR is applied (servicers are not required to obtain income documentation from the borrower).

Servicers are responsible for making monthly disbursements of the MoPR from a Payment Supplement Account, which is a separate, non-interest bearing, insured custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, and which must segregated from funds associated with the FHA-insured mortgage, including escrow funds, and any funds held in accounts restricted by agreements with Ginnie Mae. Neither the servicer nor the borrower has any discretion in how the Payment Supplement funds are used or applied.

Borrowers will be required to execute a non-interest-bearing Note, Subordinate Mortgage, and a Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of HUD, to secure the Partial Claim funds utilized and the amount of the MoPR applied toward the borrower’s principal during the 36-month period. The Note and Subordinate Mortgage do not require repayment until maturity of the mortgage, sale or transfer of the property, payoff of the mortgage, or termination of FHA insurance on the mortgage.

After the Payment Supplement is finalized, servicers must send borrowers written disclosures annually and 60-90 days before the expiration of the Payment Supplement period. ML 2024-02 also sets forth servicers’ obligations if a borrower defaults during the Payment Supplement period.

Contemporaneous with the publication of ML 2024-02, HUD published the following model documents necessary to complete a Payment Supplement: (1) Payment Supplement Promissory Note and Security Instrument, (2) Payment Supplement Agreement Rider, (3) Annual Payment Supplement Disclosure, and (4) Final Payment Supplement Disclosure. However, servicers will need to ensure these model documents comply with applicable state law.

Given that the Payment Supplement only provides temporary relief, it is likely that borrowers will experience “payment shock” at the end of the Payment Supplement period. HUD has indicated that it is aware of this risk and intends to assess this issue on an ongoing basis as borrowers begin to reach the end of their Payment Supplement period to help inform future updates to FHA loss mitigation.

VA’s VASP Program

Effective May 31, 2024, VASP will be added as the final home retention option on the VA Home Retention Waterfall where the VA may elect to purchase a loan from the servicer under an expediated basis after the servicer evaluates the loans and certain criteria are met.  Unlike a traditional VA Purchase, a trial payment period may also be required before VA purchases the loan.

Importantly, a borrower cannot elect to use the VASP program. Rather, servicers must follow the VA’s home retention waterfall to determine the most appropriate home retention option. If the waterfall leads to VASP, then the servicer must determine if certain qualifying loan criteria are met, including:

  • the loan is between 3 to 60-months delinquent on the date the servicer submits to VALERI either the VASP TPP event or VASP with No TPP event;
  • the property is owner-occupied;
  • none of the obligors are in active bankruptcy at the time of the applicable VASP event;
  • the reason for default has been resolved and the borrower has indicated they can resume scheduled payments;
  • the loan is in first-lien position and is not otherwise encumbered by any liens or judgments that would jeopardize VA’s first-lien position;
  • the borrower has made at least six monthly payments on the loan since origination;
  • the borrower is the property’s current legal owner of record; and
  • the borrower and all other obligors agree to the terms of the VASP modification.

After determining that a loan qualifies for VASP, the servicer must determine the appropriate terms that may be offered to the borrower. Until further notice, all VASP loans will be modified at a fixed rate of 2.5% interest, with either a 360-month term or, if this does not realize at least a 20% reduction in the principal and interest payment, a 480-month term. Borrowers who cannot afford to resume monthly payments at the 480-month term are to be evaluated for and offered any appropriate alternatives to foreclosure. A three-payment trial payment plan will be required if (i) the loans is 24 months or more delinquent, or (ii) the principal and interest portion of the monthly payment is not reduced by at least 20%. Borrowers who fail three trial payment plans during a single default episode are no longer eligible for VASP.

Once VA has certified the VASP payment, servicers have 60 days to complete a standard transfer to VA’s contractor, after which the servicer must report the transfer event in VALERI.

Importantly, servicers that fail to properly evaluate the loan in accordance with VA’s requirements may be subject to enforcement action and/or refusal by VA to either temporarily or permanently guarantee or insure any loans made by such servicer and may bar such servicer from servicing or acquiring guaranteed loans. The risk of enforcement is exacerbated by the VASP program’s technical requirements, which may cause operational challenges for servicers.

What Do I Need to Do?

FHA’s Payment Supplement and VA’s VASP programs both have relatively short implementation timelines but will likely require substantial effort to operationalize given their technical requirements.  Therefore, servicers of FHA-insured and/or VA-guaranteed mortgage loans should begin reviewing the requirements of both programs now, as applicable, and ensure that they make any necessary updates to policies, procedures, systems, training, and other controls to ensure compliance with these programs once they take effect. Alston & Bird’s Consumer Financial Services team is well-versed in these programs and is happy to assist with such a review.

Fannie Mae Issues Guidance in Response to New York Foreclosure Abuse Prevention Act

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What Happened?

On March 13, 2024, Fannie Mae issued Servicing Guide Announcement (SVC-2024-02) (the “Announcement”), which announced, among other things, updates to Fannie Mae’s Loan Modification Agreement (Form 3179), with additional instructions in response to the New York Foreclosure Abuse Prevention Act (“FAPA”). Specifically, for all Loan Modification Agreements (Form 3179) sent to a borrower for signature on or after July 1, 2024, servicers are required to amend the modification agreement to insert the following as new paragraphs 5(e) and (f) for a mortgage loan secured by a property in New York:

(e) Borrower promises to pay the debt evidenced by the Note and Security Instrument.  Further, Borrower acknowledges and agrees that any election by Lender to accelerate the debt evidenced by the Note and Security Instrument and the requirement by Lender of immediate payment in full thereunder is revoked upon the first payment made under the Agreement; and, the Note and Security Instrument, as amended by the Agreement, are returned to installment status and the obligations under the Note and Security Instrument remain fully effective as if no acceleration had occurred.

(f) Borrower further agrees to execute or cause to be executed by counsel, if applicable, a stipulation (to be filed with the court in the foreclosure action), that the Lender’s election to accelerate the debt evidenced by the Note and Security Instrument and requirement of immediate payment in full thereunder is revoked upon the first payment made under the Agreement and the debt evidenced by the Note and Security Instrument is deaccelerated at that time pursuant to New York General Obligations Law § 17-105, or other applicable law.

Fannie Mae encourages servicers to implement these changes immediately but requires that servicers do so for all modification agreements sent to the borrower for signature on and after July 1, 2024. Freddie Mac does not yet appear to have issued similar guidance.

Why Is It Important?

As we previously discussed in a prior blog post, FAPA reversed judicial precedent that permitted a lender, after default, to unilaterally undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or de-acceleration letters. For more than a year following FAPA’s enactment, the mortgage industry has grappled with how to address certain of the risks created by FAPA, including whether certain language could be adopted and incorporated into servicers’ loss mitigation documents to mitigate FAPA risk.

Fannie Mae’s Announcement is significant because it represents the first piece of guidance from a federal agency or government-sponsored enterprise (i.e., Fannie Mae or Freddie Mac) that provides some clarity as to what language may be appropriate to mitigate certain of the risks engendered by the New York FAPA.

What Do I Need to Do?

Servicers of Fannie Mae-backed mortgage loans (secured by property in New York) should evaluate their loss mitigation processes and make appropriate updates to ensure compliance with the Announcement.  Servicers should also continue to monitor for additional guidance or caselaw as this issue remains in flux.

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.

A Friendly Reminder of the Importance of Robust Consumer Complaint Handling Processes

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What Happened?

On February 27, 2024, the California Department of Financial Protection and Innovation (the Department) entered into a public consent order with a company that provides consumer financial services to California residents. The consent order alleges that between January 2020 and September 2022, the Department received complaints from consumers raising concerns about their accounts and customer service interactions with the company, which the Department forwarded to the company for investigation and response. The Department also investigated the company’s handling of those consumer complaints.

The Department found that the company’s complaint handling was deficient in that “occasional mistakes” that occurred in the Company’s responsiveness to consumer complaints were substantial enough to have violated the California Consumer Financial Protection Law (CCFPL). The Department alleged that as between the company and the consumer, the company was in the better position to accurately evaluate the available information in most cases and to respond to consumers’ complaints in a timely manner and while the number of mistakes during the Department’s investigation period was relatively small in comparison to the overall number of consumer complaints received, the Department concluded that the mistakes were important to the affected consumers.

To resolve these allegations, the company agreed to (1) desist and refrain from violating the CCFPL through its complaint handling processes, (2) pay a penalty of $ 2.5 million, (3) enhance existing customer service procedures or processes, (4) establish, implement, enhance, and maintain testing policies, procedures, and standards reasonably designed to, at a minimum, ensure compliance with the law, and (5) report to the Department annually for two years on these standards. These standards require the company to:

  • Ensure customer service support 24 hours a day, seven days a week;
  • Ensure sufficient customer service support staffing;
  • Ensure sufficient customer service support training; and
  • Investigate and implement policies and procedures to maintain the accurate, prompt and proper handling of consumer complaints.

Why is it Important?

The CCFPL was enacted in September 2020 and grants the Department expanded authority over persons engaged in offering or providing a consumer financial product or service in California and their affiliated service providers. Notably, under the CCFPL, it is unlawful for a “covered person” or “service provider,” to do any of the following:

  • Engage, have engaged, or propose to engage in any unlawful, unfair, deceptive, or abusive act or practice (UDAAP) with respect to consumer financial products or services.
  • Offer or provide to a consumer any financial product or service not in conformity with any consumer financial law or otherwise commit any act or omission in violation of a consumer financial law.
  • Fail or refuse, as required by a consumer financial law or any rule or order issued by the Department thereunder, to do any of the following:
    • Permit the Department access to or copying of records.
    • Establish or maintain records.
    • Make reports or provide information to the Department.

The CCFPL defines a “covered person” to mean, to the extent not preempted by federal law, any of the following:

  • Any person that engages in offering or providing a consumer financial product or service to a resident of California.
  • Any affiliate of a person described above if the affiliate acts as a service provider to the person.
  • Any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service.

A “servicer provider” includes any person that provides a material service to a covered person in connection with the offering or provision by that covered person of a consumer financial product or service, including a person that either:

  • Participates in designing, operating, or maintaining the consumer financial product or service.
  • Processes transactions relating to the consumer financial product or service, other than unknowingly or incidentally transmitting or processing financial data in a manner that the data is undifferentiated from other types of data of the same form as the person transmits or processes.

The term “service provider” does not include a person solely by virtue of that person offering or providing to a covered person either a support service of a type provided to businesses generally or a similar ministerial service, or time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media.

Notwithstanding the broad definition of “covered person,” the CCFPL contains numerous exemptions, including for banks; licensed escrow agents; licensees under the California Financing Law; licensed broker-dealers or investment advisers; licensees under the Residential Mortgage Lending Act; licensed check sellers, bill payers, or proraters; and licensed money transmitters, among others.

The Department is authorized to impose civil money penalties for any violation of the CCFPL, rule or final order, or condition imposed in writing by the Department in an amount not to exceed the greater of $5,000 for each day during which a violation or failure to pay continues, or $2,500 for each act or omission. Reckless violations are subject to increased penalties not to exceed the greater of $25,000 for each day during which the violation continues, or $10,000 for each act or omission. For knowing violations, the Department is authorized to assess penalties not to exceed the lesser of one percent of the person’s total assets, $1 million for each day during which the violation continues, or $25,000 for each act or omission.

What Do You Need to Do?

It is always important to take consumer complaints seriously and to respond timely and accurately. Now is the time to review your company’s complaint management procedures to make sure they are robust. It is always important to mine your consumer complaints so that you can learn from them and correct errors timely to ensure mistakes don’t recur, and the Department’s latest settlement is a reminder that companies subject to the CCFPL also have a legal obligation to do so.