Department News COMPLIANCE
Are You Reviewing Appraisals for Fair Lending Implications? By Bryan Bradley, Vice President of Compliance Services
Appraisal and valuation inequities related to residential real estate lending are capturing the attention of lawmakers and federal regulatory agencies. Stories nationwide continue to arise where borrowers are encountering such inequities and where the affected borrowers are oſten part of a protected class.
In May 2021, a Black homeowner was identified as a victim of appraisal discrimination. Two initial appraisals of the borrower’s home came back unusually low. Aſter doing her own research, she requested a third appraisal. Before the last appraisal, the borrower staged her home to remove any indications of her race and asked a friend’s white husband to stand in during the appraisal. Te result — the third appraisal’s value increased 107% to 135% above the first two appraisals. Tis is just one of many such examples in recent years.
Recent studies have shown a market value gap between majority-Black and majority-white neighborhoods for decades. On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents. Freddie Mac research in 2021 revealed that appraisals for home purchases resulted in a value below the contract price in majority-Black and majority-Latino neighborhoods 12.5 percent and 15.4 percent, respectively.
To address this issue, President Biden announced in June 2021 he was launching an interagency initiative to combat bias in home appraisals, resulting in the creating of the Interagency Task Force on Property Appraisal and Valuation Equity. Te Action Plan of PAVE includes the following. • outlines the historical role of racism in the valuation of residential property
• examines the various forms of bias that can appear in residential property valuation practices
• describes how government and industry stakeholders will advance equity through concrete actions and recommendations
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mobankers.com More information can be found at
https://pave.hud.gov/.
To internally address this issue, banks should consider employing or enhancing the following. • enhance appraisal and valuation reviews with a focus on fair lending based on the bank’s knowledge of its market area
• consider a more in-depth review of appraisals through sampling
• enhance vetting and ongoing communications with appraisers
In addition, the American Bankers Association issued a “Mitigating Fair Lending Risk in the Appraisal Process” staff analysis in September 2022. As noted in the staff analysis, ABA reiterates that regulators will hold banks “accountable for discrimination in the appraisals that they use.” Te staff analysis provides several processes and procedures for banks to consider to reduce fair lending risk in the appraisal process.
Lastly, the Consumer Financial Protection Bureau recently posted a blog titled “Mortgage Borrowers Can Challenge Inaccurate Appraisals Trough the Reconsideration of Value Process.” Te blog discusses the process lenders offer to borrowers allowing them to request a reconsideration of value related to the accuracy of an appraisal. Te blog goes further to warn lenders that failing to provide borrowers with clear and actionable information on making such a request risk violating federal law. Given this topic and the regulatory environment, we would suggest that banks revisit their processes relating to reconsideration of value requests.
This article is for information purposes and does not contain or convey legal advice. The information should not be used or relied upon in regard to any particular situation without consultation with your bank attorney. MBA Compliance Services and its Compliance Force program offer various programs to aid banks with compliance needs. For more information, call 573-636-8151.
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