Interagency Initiative spotlights fair lending compliance in home appraisals

On June 1, 2021, the Biden Administration announced that it was convening an Interagency Initiative – comprised of HUD, the CFPB, and other federal agencies – to address inequity in home appraisals. This announcement followed prominent news reports that a Black homeowner had obtained an appraisal that more than doubled the value of her home compared with previous appraisals, after she removed pictures of her family and had a White person pose as her brother when the appraisal was conducted. See Newsweek, Black Woman Says House Appraisal Increased After Removing Family Photos, May 6, 2021.  Given the creation of the Interagency Initiative, and in light of recent statements by the CFPB and other regulators emphasizing racial equity initiatives, lenders should expect increased scrutiny of their appraisal compliance practices.

Discrimination in appraisals is not new.  The National Fair Housing Alliance (NFHA) recently highlighted disparities in home values based on race dating back to federal housing policies that were implemented during the New Deal.  NFHA, Letter to Mark A. Calabria, Feb. 26, 2021.  And a study published by the Brookings Institution in 2018 found that homes in majority Black neighborhoods were appraised for 23 percent less than properties in mostly White neighborhoods, even after controlling for differences in home and neighborhood quality.  Perry, Rothwell, and Harshbarger, The Devaluation of Assets in Black Neighborhoods, Brookings Institution Metropolitan Policy Program (Nov. 2018).

Federal law prohibits discrimination in mortgage appraisals

Although the NFHA letter links appraisal discrimination to historic federal policies, federal law explicitly prohibits discrimination in mortgage loan appraisals and the use of discriminatory appraisals by lenders.  For example, the Fair Housing Act (FHA) prohibits discrimination against any person because of race, color, religion, sex, handicap, familial status, or national origin ("prohibited bases") in any real estate-related transaction, which is defined to include appraisals.  Likewise, regulations implementing the FHA by HUD specifically prohibit "[u]sing an appraisal of residential real property in connection with the sale, rental, or financing of any dwelling where the person knows or reasonably should know that the appraisal improperly takes into consideration [any prohibited basis]."  24 C.F.R. 100.135(d)(1). 

In furtherance of this prohibition against discrimination in appraisals, the Interagency Fair Lending Examination Procedures include specific factors that examiners are expected to apply to assess fair lending compliance involving appraisals.  Among these factors is a redlining risk factor to assess whether policies by lenders relating to the receipt and processing of appraisals "varies between areas with relatively high concentrations of residents of a particular racial or national origin group and those areas with relatively low concentrations of residents of such racial or national origin group."  Interagency Fair Lending Examination Procedures (Aug. 2009), R.8.  Recently, the CFPB dedicated a two-hour, interagency webinar to discussing home appraisal bias, during which CFPB Interim Director Dave Uejio stressed the need for lenders and appraisers to change their practices and the potential for additional enforcement in this space.  Virtual hearing on home appraisal bias | Consumer Financial Protection Bureau (consumerfinance.gov). 

Assessing fair lending compliance management: points to consider

While the industry waits for developments from the Interagency Initiative, lenders would be well served to assess the adequacy of their fair lending compliance management systems relating to appraisals.  Among other things, lenders might consider:

• Refreshing training for underwriters and other relevant personnel regarding fair lending requirements relating to appraisals and indicators of potential discrimination.
• Establishing a formal review process of appraisals that is targeted to identifying language, terms or practices that reflect potential discrimination.
• Periodically reviewing appraisals made in majority-minority communities to assess whether properties are being mis-valued, either within a specific community or by individual appraisers.
• Limiting (or eliminating) discretion by underwriters in deciding whether an appraisal is necessary.  For example, lenders may consider requiring underwriters to follow AUS appraisal waivers.
• Obtaining a second appraisal automatically upon notice by an applicant of concerns relating to potential discrimination or redlining in the appraisal.
• In cases where two appraisals have been obtained for any reason, obtaining a third appraisal (at no cost to the applicant) if the appraised values differ by more than a specified percentage.
• To increase diversity among appraisers, "seeking qualified independent fee appraisers from local minority appraisal organizations." OCC, Comptroller’s Handbook for Compliance, Fair Lending (Jan. 2010), at p. 169.

Regulatory actions may be swift and severe

In announcing the Interagency Initiative, the Administration stated that the effort would "utilize, quickly, the many levers at the federal government’s disposal, including potential enforcement under fair housing laws, regulatory action, and development of standards and guidance… to root out discrimination in the appraisal and homebuying process."  As with many other fair lending focal points, regulatory actions to address discrimination in appraisals are likely to be swift and severe, and lenders who have taken appropriate steps to review and address any weaknesses in their appraisal management systems will be in the best position to withstand the coming regulatory scrutiny and mitigate reputation and litigation risk.

To learn more about the implications of this development, please contact any of the authors.