Appraisal bias and questions related to fair lending practices have received heightened attention in high-profile media in the last several years. Recognizing the significance of the issue, both public and private organizations have recently intensified their efforts to tackle appraisal bias. On February 13, 2024, The Office of Comptroller of Currency (OCC) is hosting a public hearing of the Appraisal Subcommittee (ASC) on the topic. Other federal agencies, including the Department of Justice (DOJ), Consumer Financial Protection Bureau (CFPB), Housing and Urban Development (HUD), and others, are tightening regulations for lenders and appraisers to combat this problem.
In addition, several states, such as Massachusetts, North Carolina, New Jersey, Oregon, and California, have either enacted or are contemplating legislative measures to further regulate appraisal and valuation practices.
Many acknowledge that the effort to eradicate appraisal bias requires a collaborative approach that includes appraisers and lenders.
What is “appraisal bias”?
According to the federal government’s Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), appraisal bias refers to a valuation based on race, ethnicity, or national origin that may adversely affect the property’s contract value.
Appraisal bias traces its history to the creation of the Home Owners’ Loan Corporation (HOLC) in 1933. HOLC developed color-coded maps categorizing lending risks in different neighborhoods, incorporating racial and ethnic information to determine “credit worthiness.” This discriminatory practice continued with the Federal Housing Administration (FHA) in 1934, resulting in “redlining” maps that deemed certain areas, predominantly housing Black and Hispanic households, too risky for federally backed loans.
Studies done in 2021 and 2022 by Freddie Mac and the Brookings Institution, respectively, offered alarming measures of both scope and impact to minority (Black and Latino) loan applicants. Estimates were that lower values tied to minority applicants cost tens of billions of dollars in losses to homeowners.
What are the risks for appraisers and lenders?
Appraisal bias or discrimination presents many risks to appraisers and lenders. Property appraisers found to violate professional standards or the rules and laws governing their license by demonstrating bias in their work can be fined, disciplined, lose their license, or potentially go to jail.
Lending institutions similarly face potential financial, legal, and reputational risks if there is appraisal discrimination. Lawsuits accusing lenders of redlining could seriously damage their reputation and business. The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) have both announced that they will pursue litigation against lenders that practice appraisal bias.
In March of 2023, the CPFB and the DOJ filed a joint statement of interest resulting from a court claim of racial discrimination in Connolly et. al. Lanham et al. Of interest to both appraisers and lenders is that “the statement explains that it is illegal for a lender to rely on an appraisal that it knows or should know to be discriminatory…” The Maryland District Court agreed and issued an opinion that lenders, as well as appraisers could be liable under the Fair Housing Act.
How are appraisers and lenders working to address appraisal bias?
Appraisers Creating Clearer Standards, Training, and Recruitment Diversity
Effective January 2, 2024, the Appraisal Standards Board (ASB), which is responsible for the Uniform Standards of Appraisal Practice (USPAP), implemented modifications to existing requirements that improved the clarity regarding the appraiser’s ethical obligations under fair housing laws and regulations. The new USPAP clearly states that discrimination is prohibited citing federal laws — the Federal Housing Act, the Equal Credit Opportunity Act, and the Civil Rights Act.
The Appraisal Institute, the global professional association of real estate appraisers, has supported the laws and regulations that promote education and training on valuation bias and discrimination as part of continuing education for license renewal. In January of 2024, New Jersey’s attorney general launched an initiative that included anti-bias training for appraisers that will be mandatory in 2026. Mandatory anti-bias training is already required in the states of California, New York, Minnesota, and Virginia.
In addition to training, appraisers are working to diversify their ranks. One example of this, RSDS, created RSDS Appraisal Diversity to create appraisal jobs for underrepresented groups. The organization says “it is on track to hire, train, and employ 500 diverse appraisers over the next 5 years in the 75 most populated markets. This will better serve the housing market, preserve the profession, bring a fresh take with new technology and a drive to advance valuation to limits not seen before.” Another example is the Appraiser Diversity Initiative started by The Appraisal Institute.
Lenders Seeking Policy and Practical Solutions
Mortgage Bankers Association (MBA), the trade association for lenders, stated in a 2023 MReport article that “the organization and its members have made improving the valuation process and reducing the risk of appraisal bias a top policy issue, and have prioritized it both as part of an initiative to promote more sustainable, affordable housing for minority and low- to moderate-income families and communities.” MBA’s CONVERGENCE initiative seeks to narrow the racial homeownership gap by working with industry partners – many of them lenders – to strengthen ties with communities and increase minority homeownership.
Some of the largest banks in the country are actively working to improve hiring practices aimed at increasing diversity in their appraisal trainee pool.
- Wells Fargo Newsroom – National Urban League Partnership With Wells Fargo Aims To Diversify Home Appraisal Industry (wf.com)
- JPMorgan Chase commits $3 million to appraiser diversity – HousingWire
- Flagstar gives $1 million to fix appraisal industry’s lack of diversity | American Banker
Other solutions lenders are weighing include procedural recommendations such as:
- Establishment of quality control standards and mechanisms for computer-generated appraisals.
- Using standardized forms to eliminate subjective terms and phrases that may unintentionally engender bias.
- Implementing policies and procedures for Reconsideration of Value (ROV) to allow consumers to provide relevant information that may have not been considered during an appraisal.
- Conducting first-and second-level appraisal reviews with the second level review with a more senior appraisal reviewer.
Secondary Lending Changes
Government sponsored entities Freddie Mac and Fannie Mae, who buy mortgages from direct lenders have rolled out processes to eliminate unacceptable appraisal practices. As of January 26, 2024 appraisals that contain certain prohibited, unsupported, subjective or potentially biased words or phrases will be flagged as “FATAL” and prevent submission of the loan to the GSE through the Uniform Collateral Data Portal (UCDP).
State Lawmakers Get Involved
A network of states is also addressing appraisal discrimination with a combination of regulations and requirements. In California, appraisal licenses are asked to identify their race, ethnicity, sexual orientation, gender, or gender identity. New York requires every licensed or certified appraiser to complete an approved course of study in fair housing and fair lending every two years.
Illinois and Maryland have each created a Task Force to review specifics in appraiser laws and regulations that might contribute to unfair and inequitable appraisals. Oregon requires all appraisers to take periodic training on implicit and explicit bias and how each may become part of an appraiser’s work. And New Jersey’s civil rights division said appraisers who discriminate could be liable under the New Jersey Law Against Discrimination as well as face penalties under the New Jersey Fraud Act.
Stay Informed on Appraisal Bias
Learn more about what’s been done to address appraisal bias — and what still needs to happen. Check out the key takeaways blog from our first webinar with Suzy Gardner, former FDIC examiner and appraisal specialist, and stay tuned for more steps you can take.