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?
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.
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.”
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.
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.
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.