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Combatting Bias in Appraisals

As those in the financial services industry are aware, the discussion of combatting bias in appraisals has been on the rise over the last couple of years. It’s another component of fair lending that is a risk institutions need to manage.  

So how did we get where we are today?

A primary resource for the industry, FAQs on Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines, contains policy and interpretations that were issued in 2018. This resource, along with supervisory agency regulations, serves as a platform for appraisal standards in connection with transactions.

However, it was in 2021 when a variety of issuances and occurrences really paved the way to communicating the importance of this topic. 

• It was in March 2021, when HUD announced its agreement with JPMorgan Chase that resolved claims of discrimination in appraisals. While the respondent (Chase) denied any violation, the conciliation agreement reflected $50,000 in relief to the complainant. Chase also agreed to additional staff training, a re-review of their process, and changes to their appraisal transmittal letter and adverse action notices.
• In August 2021, the White House launched its first Interagency Task Force Meeting on Property Appraisal and Valuation Equity (PAVE). The Task Force discussed how “current appraisal practices are a significant contributor to the disparity in housing values.” They also agreed that their scope of action will be to:
• ensure that government oversight and industry practice further valuation equity;
• combat valuation bias through educating the consumer and training the practitioner;
• ensure equity in valuation by making available high-quality data; and
• create a comprehensive approach to combating valuation bias through enforcement and other efforts.

Subsequently, PAVE issued its Action Plan to Advance Property Appraisal and Valuation Equity in March 2022. While the 58-page action plan includes background history, progress, and commitments; agency actions include, but are not limited to, the following:

• issue guidance to improve the processes by which a valuation may be reconsidered,
• address potential bias in the use of technology-based valuation tools, i.e., automated valuation models,
• strengthen coordination among supervisory and enforcement agencies to identify discrimination in appraisals,
• advance diversity in the appraiser workforce,
• incorporate appraisal bias information into first-time homebuyer education, and
• give researchers and enforcement agencies better data to monitor valuation bias.

In its most recent step to elevate this issue, this month the CFPB, along with other federal government leaders, issued a letter to The Appraisal Foundation (TAF). TAF is a private organization that sets appraisal standards. In the letter, the CFPB and other agencies provided comment on proposed changes of the Uniform Standards of Professional Appraisal Practice (USPAP). The comments provided were aimed at further clarifying support of the ban on discrimination under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA).

So what's a financial institution to do?

While the discussion of appraisal bias might be considered to be in its “infancy,” discrimination standards of the FHA and ECOA have been around for decades. As the scrutiny of fair lending continues to grow and the aperture of the lens in which we look through widens, it is important for institutions to recognize that this is a risk to be managed. 

Institutions should consider ways in which they can mitigate this risk. Considerations can include: 



• discussion of this risk with appropriate stakeholders,
• incorporation of this risk into your fair lending program,
• adjustments to appraisal-related policies that clarify the bank’s stance on this topic,
• enhanced fair lending training for staff,
• implementation of an appraisal review process that is sensitive to bias, and
• an enhanced complaint review process that elevates appraisal bias concerns.

Institutions should also remain cognizant of ongoing developments in this area. 

New "Cyber Incident" Rule for Credit Unions

Earlier this month, the NCUA Board approved a new final rule impacting federally insured credit unions. The rule requires credit unions to provide notification to the NCUA of certain cyber incidents. 

“Each of us in the financial system has an obligation to protect our nation’s economic and financial infrastructure. And, credit unions must be included in conversations about critical infrastructure, as a whole. This final rule will facilitate such dialogue,” Chairman Todd M. Harper said. “Through these high-level early warning notifications, the NCUA will be able to work with other agencies and the private sector to respond to cyber threats before they become systemic and threaten the broader financial services sector. This final rule will also align the NCUA’s reporting requirements with those of the federal banking agencies and the Cyber Incident Reporting for Critical Infrastructure Act.”

The final rule amends NCUA regulation 12 CFR 748. Highlights of the final rule include:



• the filing of a report for a “reportable cyber incident,” and
• the establishment of a notification timeframe that a report must be received by the NCUA as soon as possible, but no later than 72 hours of when the credit union believes that a reportable incident has occurred.

With regard to the timing requirement, the NCUA announcement provided the following clarification: “The 72-hour notification requirement provides an early alert to the NCUA and does not require credit unions to provide a full incident assessment to the NCUA within the 72-hour timeframe.”

The NCUA has stated that they will provide additional reporting guidance before the final rule goes into effect, on September 1, 2023. Appropriate credit union staff should familiarize themselves with the rule, be on the lookout for additional guidance from the NCUA, and prepare themselves for supporting the requirements when effective. Interested persons may find the final rule posted on the NCUA’s website here. 

FinCEN Alert on CRE & Sanctioned Russians

At the end of January, FinCEN issued an alert regarding the potential of sanctioned Russian elites, oligarchs, and their proxies to invest in U.S. commercial real estate (CRE). FinCEN believes that the referenced Russian activity is tied to an attempt to evade sanctions by exploiting vulnerabilities in the market. 

The alert reminds institutions of their BSA reporting obligations and references a list of potential typologies related to this activity. Those typologies include:

• the use of pooled investment vehicles in CRE,
• the involvement of shell companies, trusts, and third parties, and
• inconspicuous CRE investments that provide stable returns.

The alert contains a list of 9 financial red flags involving CRE that institutions should consider as part of this effort; for example, the use of a private investment vehicle that is based offshore to purchase CRE and that includes PEPs or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors.

BSA Officers and staff are encouraged to review the alert and incorporate the filing instructions and due diligence guidance noted therein. Interested persons may find FinCEN’s Alert on their website here.

As industry professionals are aware, the FFIEC has online tools for verifying specific federal disclosure computations. At the end of 2022, the FFIEC announced improved functionality of one of their computational tools, their Annual Percentage Rate (APR) tool. 

The FFIEC’s APR tool can be used for verifying APRs and reimbursement adjustments, related to Truth in Lending and Reg. Z. Of note, the tool can also be used for verifying Military Annual Percentage Rates (MAPRs) for loans covered by the Military Lending Act. 

The FFIEC has announced that their updated tool provides for an improved user experience by: 

• including a clear/cancel button to allow the removal of certain information,
• including notifications of potential data entry errors, and   
• implementation of a new feature which allows the entry of a “Total of Payments” (a regulatory requirement), which permits the user to compare information disclosed by the institution to the amount calculated by the tool.  

Interested persons may find the FFIEC’s updated APR tool on their website here.