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.