By Lynn Woosley

Bias in appraisals and valuations continues to be a regulatory hot topic. Several recent developments relate to reconsiderations of value (ROV)and discrimination charges alleging valuation bias.

Reconsiderations of Value

Interagency Guidance on Reconsiderations of Value of Residential Real Estate

In recent months, federal regulators have taken steps to reduce discriminatory bias in appraisals and valuations. On July 18, 2024, the Consumer Financial Protection Bureau (CFPB), the Board of Governors of the Federal Reserve (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of The Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA) (jointly, the Federal Financial Institutions Examination Council, or FFIEC) issued final Interagency Guidance on Reconsiderations of Value of Residential Real Estate (ROV Guidance).[1]

The ROV Guidance begins by noting that, “Credible collateral valuations, including appraisals, are essential to the integrity of the residential real estate lending process” and that “Collateral valuations may be deficient due to prohibited discrimination; errors or omissions; or valuation methods, assumptions, data sources, or conclusions that are otherwise unreasonable, unsupported, unrealistic, or inappropriate.”

Several federal consumer protection laws address the use of deficient collateral valuations. First, the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) forbid discrimination on a prohibited basis in residential real estate transactions, including appraisals and valuations. Second, the Consumer Financial Protection Act (CFPA)[2] and the Federal Trade Commission Act (FTCA)[3] prohibit unfair or deceptive acts and practices.[4] Finally, while requiring appraisal independence, the Truth in Lending Act (TILA) and Regulation Z, also permit consideration of additional, appropriate information about the property and comparable properties and correction of errors in valuations.[5] Reconsiderations of value (ROVs) are one way to incorporate such additional information.

The ROV Guidance covers appraisals, evaluations, written estimates of market value, and other methods of determining the value of a single 1- 4 family residential real estate property securing a mortgage. Highlights of the ROV Guidance include:

• As noted in the Interagency Appraisal and Evaluation  Guidelines,[6] financial institutions’ appraisal and valuation review processes must include processes for addressing deficiencies in appraisals or evaluations and set forth documentation standards for reviewing and resolving deficiencies.
• The use of third parties in the valuation review process does not absolve the lender of its responsibility to comply with applicable laws and regulations.
• Lenders may initiate an ROV based on its valuation review or after consideration of consumer-provided information, including complaints.

When providing examples of policies, procedures, and control systems, the ROV Guidance notes that lenders may consider developing risk-based ROV policies, procedures, controls, and complaint resolution processes to identify and mitigate risks associated with deficient valuations, including discriminatory valuations. In developing such systems of controls, lenders may consider:

• Using ROVs as a possible resolution to consumer complaints regarding residential property valuations while maintaining existing institutional processes to respond to allegations of discrimination;
• Determining whether their ROV processes discourage consumers from, or create unreasonable barriers to, consumer requests for ROVs;
• Informing consumers how to raise a concern regarding property valuations before the lender makes final credit decisions;
• Identifying stakeholders, roles, and responsibilities before receiving and processing ROV requests, including incorporation of appropriate legal, compliance, and appraisal review staff when the lender receives allegations of discrimination;
• Standardizing processes to increase consistency in receiving and processing requests for ROVs:Plain language notices to consumers regarding how to request ROVs;
  • Consistent processes for consumers, appraisers, and internal stakeholders;
  • Establishing timelines and milestones for ROVs;
  • Developing guidelines regarding ordering and paying for second appraisals; and
  • Creating communication protocols; and
• Training lending and valuation staff, including third parties, to identify valuation deficiencies, including discrimination.

Fannie Mae and Freddie Mac ROV Requirements

Fannie Mae[7] and Freddie Mac[8] also implemented ROV requirements for lenders selling loans to Freddie Mac or Fannie Mae (Sellers). These requirements, which are designed to promote consistency in resolution of perceived or actual appraisal deficiencies, require Sellers to establish review and resolution processes for ROV requests, processes for disclosing the ROV procedures to borrowers, and a requirement that appraisers include specific commentary addressing their conclusions in a revised appraisal report resulting from an ROV request. The Fannie Mae and Freddie Mac requirements include borrower disclosures that must be required at the time of loan application and upon delivery of the appraisal. In addition, Sellers must maintain all documentation and communication related to initiating and resolving an ROV request. Sellers must forward the appraisal report and a summary of findings to the appropriate regulatory board or appraisal licensing agency if there is a suspected overt violation of antidiscrimination law, evidence of unacceptable appraisal practices, or if material appraisal deficiencies remain uncorrected after a request for correction. Sellers must also ensure that valuation staff, including third parties, are trained to identify prohibited discriminatory practices and appraisal deficiencies through both valuation reviews and ROV practices.

HUD Appraisal Review and ROV Requirements

Similarly, the U. S. Department of Housing and Urban Development (HUD) has established ROV requirements. Mortgagee Letter 2024-07[9] includes:

• Revisions in the definition of appraisal material deficiencies,
• Changes in required communications related to ordering a second appraisal,
• Incorporation of processing requirements for borrower-initiated ROVs, and
• Establishment of quality control standards for appraisal reviews and ROVs.

Consistent with the Interagency ROV Guidance, Mortgagee Letter 2024-07 includes potential violations of fair housing laws and professional standards related to nondiscrimination as material deficiencies in an appraisal. Potential violations of fair housing laws include statements related to protected characteristics unless fair housing laws permit consideration of the characteristic. Two permissible examples in Mortgagee Letter 2024-07 are age-restricted housing and housing with accessibility features.

Mortgagee Letter 2024-07 also requires that appraisal reviewers receive training in identifying and remediating appraisal deficiencies, including deficiencies resulting from discrimination.

However, there are crucial differences between Mortgagee Letter 2024-07 and the ROV Guidance. Mortgagee Letter 2024-07 requires relevant alternative comparable sales to have closed before the appraisal’s effective date, while the ROV Guidance offers lenders the flexibility to determine the closing dates of relevant comparables.

A second significant difference is that Mortgagee Letter 2024-07 specifies that no costs associated with an ROV may be charged to the borrower, while the ROV Guidance only recommends that lenders establish guidelines to determine who assumes the costs associated with ROVs.

Enforcement Activity

A recent enforcement action initiated by HUD indicates the importance of robust ROV processes. On July 15, 2024, the HUD’s Fair Housing Enforcement Division charged an appraiser, an appraisal management company (AMC), and a lender with illegal discrimination in the provision of housing services.[10] The charges stem from allegations of discriminatory appraisal bias on the basis of race and color.

Although the charges have not been litigated yet, HUD is only authorized to issue a Charge of Discrimination when HUD’s investigation determines that “reasonable cause exists to believe that a discriminatory housing practice has occurred.”[11] The HUD Charge of Discrimination alleges both appraiser bias and inappropriate conduct by the lender and the AMC. The borrower’s complaint alleges that the appraiser’s 2021 valuation significantly undervalued the home through an improper choice of comparable sales, errors in the square footage of the subject property, omission of recent renovations to the property, and excessive adjustments to the property value for lot size, as well as errors in rating the condition of comparables.

The borrower’s complaint noted that the appraised value was approximately 25 percent lower than an appraisal completed eight months prior, despite improvements and updates made to the property. The history of appraised values for the subject property included appraisals of $750,000 in 2018 and $860,000 in 2020, but only $640,000 in 2021.

The Charge of Discrimination alleges that the appraiser selected only comparables in neighborhoods with higher concentrations of Black residents, despite closer comparables in a nearby neighborhood with a higher concentration of White residents. Further, the Charge of Discrimination claims the same appraiser considered comparables in the more predominantly White area when appraising a White homeowner’s property located in the same neighborhood as the complainant’s property.

The Charge of Discrimination also alleges that both the lender and the AMC erred in their appraisal reviews and their handling of the complaint of appraisal bias. First, the appraiser made value adjustments that exceeded the maximum size permitted by the policies of both the AMC and the lender. Still, neither the lender nor the AMC detected or corrected the excessive adjustments. Second, the Charge of Discrimination alleges that both the AMC and the lender failed to recognize the deficiencies in the appraisal.

In addition, the Charge of Discrimination claims the lender retaliated against the borrower by refusing to process a complaint of appraisal bias unless the loan application was canceled or denied and further by denying the loan application before investigating the claims of appraisal bias.

Conclusion

It is clear that appraisal and valuation bias remains a concern for federal regulators. Mortgage lenders, AMCs, and appraisers should ensure robust controls exist to prevent and detect appraisal bias, including antidiscrimination training and appropriate ROV, appraisal review, third party risk management, and complaint processes. When establishing or reviewing appraisal and valuation processes, carefully consider differences in the requirements of the ROV Guidance, Mortgagee Letter 2024-07, and the Fannie Mae and Freddie Mac Seller rules. If your institution needs assistance assessing or enhancing your processes in this area, Asurity Advisors can help.

ABOUT THE AUTHOR
Lynn Woosley is a Managing Director with Asurity Advisors. She is a member of Case Western Reserve University’s Women in Finance Advisory Board. Lynn has more than 30 years of risk management experience in both financial services and regulatory environments. She is an expert in consumer protection, including fair lending, fair servicing, community reinvestment, and UDAAP.

Before joining Asurity Advisors, Lynn led the fair banking practice for an advisory firm. She has also held multiple leadership positions, including Senior Vice President and Fair and Responsible Banking Officer, within the Enterprise Risk Management division of a top 10 bank. Prior to joining the private sector, Lynn served as Senior Examiner and Fair Lending Advisory Economist at the Federal Reserve Bank of Atlanta. Reach her at lwoosley@asurity.com.

[1] https://www.occ.gov/news-issuances/news-releases/2024/nr-ia-2024-81a.pdf

[2] 12 U.S.C. 5531, 5536

[3] 15 U.S.C. 45(a)(1)

[4] The CFPA also forbids abusive practices.

[5] 12 CFR 1026.42(c)(3)(iii)

[6] https://www.fdic.gov/sites/default/files/2024-03/fil10082a.pdf

[7] https://singlefamily.fanniemae.com/media/39081/display

[8] https://guide.freddiemac.com/app/guide/bulletin/2024-6

[9] https://www.hud.gov/sites/dfiles/OCHCO/documents/2024-07hsgml.pdf

[10] https://www.hud.gov/sites/dfiles/FHEO/documents/Charge_08-21-3530-8.pdf

[11] 42 U.S.C. §3610(g)(1)-(2)