The Consumer Financial Protection Bureau (CFPB) expressed in a February 4, 2022, blog post its concern that some appraisers may not be aware of the non-discriminatory laws affecting the appraisal industry. Further, the CFPB opined that The Appraisal Foundation (TAF), a non-governmental entity that sets appraisal standards, has not sufficiently addressed discriminatory prohibitions in its standards and training procedures. The CFPB urged TAF to “provide clear guidance on the existing legal standards as they relate to appraisal bias.”
The CFPB, with other federal regulators, submitted a joint letter to TAF that commented on proposed changes to the 2023 edition of the Uniform Standards of Professional Appraisal Practices. Joining regulators included the U.S. Department of Housing and Urban Development, Office of the Comptroller of the Currency, Federal Reserve Board, National Credit Union Administration, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, and the Department of Justice. Specifically, the letter referred to the guideline that an appraiser:
“…may not rely on ‘unsupported conclusions’ relating to characteristics such as race, color, religion, national origin, sex, sexual orientation, gender, marital status, familial status, age, receipt of public assistance income, disability, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.”
The letter noted that these guidelines do not exclude “supported conclusions” relating to those same characteristics, thereby leaving open the possible impression that relying on supported conclusions based on prohibited bases may be permissible. The letter provided Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) citations and stated the importance of including legal requirements in the revised standards.
In the blog post, the CFPB criticized the TAF for possibly undermining fair and competitive market conditions, free of bias and discrimination. The Bureau also referred to several recent reports from agencies such as the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac.
Fannie Mae’s research was designed to “isolate valuation differences at the property and borrower level, along with further analyses that focused on the racial composition of neighborhoods.” Findings from the Fannie Mae research included that:
- Black borrowers refinancing their homes, on average, received a slightly lower appraisal value relative to automated valuation models;
- Homes owned by white borrowers were more frequently overvalued than homes owned by Black borrowers; and,
- The frequency of “undervaluation” did not have a notable racial pattern.
Freddie Mac’s study attempted to determine whether minorities are more likely to receive an appraisal value that is lower than the contract price during purchase transactions. Freddie Mac concluded from this study that:
- Appraisers’ opinions of values are more likely to fall below the contract price in Black and Latino census tracts;
- The extent of this gap increases as the percentage of Black or Latino people in a tract increases; and,
- These gaps occur not just with a small percentage but a large portion of appraisers.
Freddie Mac did not determine the full root cause of the gap and committed to continuing research.
The FHFA study observed that even though racial and ethnic composition should never be a factor influencing home values, commentary on the racial and ethnic composition of a neighborhood was sometimes included in appraisals. The study cited the following statements found in some of the appraisals reviewed:
- A neighborhood described as “predominately Hispanic” and that the residents have “assimilated their culture heritage” into the neighborhood.
- A neighborhood populated by African Americans characterized as leaving an “overcrowded” area for “greater housing opportunity” in the neighborhood.
- Noting that “there is more Asian influence of late” buying the market.
- Noting the area’s first Asian mayor.
- Noting an area’s “decline in population, which transitioned from being predominately Eastern European to having a substantial amount of Black and Hispanic people.”
- Describing that the subject property was in a “racially integrated neighborhood” but “the community has no large institutional anchor” comparable to other racially integrated neighborhoods noted in the city.
- An area that was “originally founded as a whites-only city or sundown town” but had become “fairly diverse” with a “diverse school system.”
- An area that was “‘not especially-diverse’ ethnically, with a high percentage of white people.”
- A property being in a “homogenous neighborhood with good schools.”
The Department of Justice (DOJ) further demonstrated its commitment to Fair Lending in the appraisal process on February 14, when it filed a “Statement of Interest of the United States” (Statement) in an appraisal-related lawsuit in the Northern District of California. In that lawsuit, the plaintiffs alleged that the consideration of their race led to a lower appraised value of their home. A licensed appraiser visited their home and determined the value to be $995,000; a few weeks later, a different appraiser valued the house substantially higher at $1,482,500. The plaintiffs stated that they “erased any evidence of their racial identities” inside their house and asked a white friend to pose as the homeowner during the second inspection. The DOJ clarified in its statement that the Fair Housing Act (FHA) clearly applies to residential appraisers and that “combatting housing discrimination, including bias in appraisals, is a high priority across the federal government.” The DOJ stated that the Plaintiffs need only “plausibly allege” that the Defendants’ conduct constituted a discriminatory housing practice in stating a claim for relief.
Appraisal valuation is a key Fair Lending focus of regulators, and recent activity indicates that the scrutiny will continue to increase. ADI advises lenders to ensure their appraisers have received proper Fair Lending training and that they attest to adhering to the federal laws prohibiting discrimination on any prohibited factor. Lenders should:
- Provide appraisers with their Fair Lending Policy or some other description of the legal Fair Lending requirements and discriminatory prohibitions applied to appraisals;
- Require appraisers to sign a statement attesting to their commitment to comply with all Fair Lending regulations; and,
- Provide training materials on the FHA, ECOA and other applicable Fair Lending regulations.