Alston & Bird Consumer Finance Blog

#appraisalbias

Appraisal Bias Settlement: Potential Roadmap

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

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.