Preventing appraisal bias

Fair lending risks continue escalating as regulators focus on appraisal bias. The regulatory agencies, the White House and others are committed to reducing appraisal bias and continue to issue fact sheets, statements, bulletins, blogs and proposed rules.

On June 1, 2021, President Biden announced the interagency initiative to combat bias in home appraisals, which became the Interagency Task Force on Property and Valuation Equity (PAVE). Since this announcement, appraisal bias and reconsideration of valuation (ROV) have become hot topics for regulators and others.

Appraisal bias and ROV, explained

What is valuation bias?

• Valuation bias is bias based on race, ethnicity or national origin in the residential valuation process performed as part of mortgage origination, regardless of the valuation method.
• Appraisal bias is a channel of valuation bias.

Why is appraisal bias a concern?

• Independent, fair and objective valuations are a critical element of the home buying and lending process.
• Home ownership is a big driver of the racial and ethnic wealth gap.
• Bias limits the ability of some families, such as Black and Latino families, to benefit fully from the financial returns of home ownership.

Why is valuation discrimination a concern?

• Causes consumer harm
• Leads to violations of law
• Has a detrimental impact on communities
• Results in deficient and unreliable collateral valuations

What is a reconsideration of value?

• Reconsideration of value is a process for appealing a property appraisal or evaluation so consumers can seek an accurate and fair property valuation.
• Consumers can ask the financial institution to reassess the analysis and conclusions of the initial appraisal or evaluation.
• The consumer must provide additional information that may affect the value conclusion.

What are your next steps regarding ROVs?

Ensure you have a procedure for ROVs, including:

• Determining the process for requesting a ROV.
• Enhancing written policies or procedures.
• Training applicable lending personnel and other consumer-facing staff members, if needed.

What is the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) and what are they responsible for?

On June 1, 2021, the Biden–Harris Administration announced its interagency initiative to address inequity in home appraisals, which consists of 13 federal agencies and offices, including your regulator.

Scope areas included:

• Combatting valuation bias through educating the consumer and training the practitioner.
• Empowering consumers to take action and building a well-trained, accessible and diverse appraisal workforce.
• Creating a comprehensive approach to combat valuation bias through enforcement and other efforts.
• Strengthening guardrails against unlawful discrimination in all states of the valuation process, enhancing fair housing/lending enforcement and driving accountability in the industry.
• Ensuring equity in valuation by making available high-quality data.
• Give researchers better data to study, monitor for valuation bias and share with the public.
• Ensuring government oversight and industry practice further valuation equity.
• Give enforcement agencies better data results to further develop industry practices

Examinations

The FFIEC issued a statement to relay the examination principles regarding residential property appraisal and evaluation (valuation) practices. These practices mitigate potential appraisal discrimination or bias and promote credible valuations.

Examination principles:

• Assess risk management processes for lending activities for both consumer compliance and safety and soundness exams.
• Compliance exams focus on compliance with consumer protection laws and regulations.
• Safety and soundness exams focus on the bank’s financial condition and operations.
• Both exams may focus on the review and assessment of the bank’s practices for identifying, monitoring and controlling the risk of valuation discrimination or bias.

Consumer compliance exam principles: During the compliance examination the following compliance pillars may be evaluated or assessed to determine the level of appraisal bias risk.

• Board and senior management oversight — ensure the financial institution implements and maintains a compliance management system (CMS) commensurate with the financial institution’s risk profile, including information provided to the board that communicates the strength of the consumer compliance program.
• Third-party risk management (e.g., third parties that prepare valuation reports, third-party appraisers appraisal management companies) — financial institution’s oversight of the third-parties consumer compliance-related policies, procedures, internal controls and training and evaluate the financial institution’s due diligence and ongoing monitoring.
  • Do you know if your third parties have mitigating controls in place regarding potential appraisal discrimination or bias?
• Policies and procedures — assess collateral valuation review function for identifying potentially discriminatory valuation practices or results.
  • Did you expand your policies and procedures to include mitigating controls you have implemented, such as the appraisal review process related to looking for catchphrases and words as well as ROV practices?
• Training program — assess to ensure it appropriately addresses identification of potential discrimination in residential real estate lending and collateral valuation programs (including consumer inquiries and complaints) .
  • Did you train applicable staff members on any implemented mitigating controls, and did you retain documentation to support such?
• Monitoring and audit — assess adherence to policies and procedures designed to identify and address potential discrimination.
  • Did you expand your monitoring and audit program to include appraisal bias?
• Consumer complaints — evaluate systems or processes for reviewing, documenting, tracking, addressing, monitoring and handling collateral valuation complaints, including those that allege potential discrimination.
  • Do staff members know what may be considered a complaint regarding potential appraisal discrimination or bias versus an applicant being dissatisfied (in general) with the value of the property?

Safety and soundness exam principles: During the safety and soundness examination the following areas may be evaluated or assessed to determine the level of appraisal bias risk. 

• Consumer protection issues — consider consumer compliance exam findings, including feedback through discussions with examiners and reviewing planning information, to identify consumer complaints, litigation and other matters related to valuation discrimination or bias, as applicable.
• Risk assessment — consider the materiality of residential real estate lending in relation to the overall lending activities, size, complexity and risk profile.
• Governance — assess the policies, processes, staff organization and resources, control systems and management information systems for residential real estate collateral valuations, as well as the bank’s ability to identify and resolve incidences of potential valuation discrimination or bias.
• Collateral valuation program — evaluate practices for selecting, retaining and overseeing independent, qualified and competent individuals, and applicable valuation models, which have the ability to render unbiased and credible opinions of collateral value.
• Third-party risk management — evaluate oversight of valuation-related third parties and their review functions, including the financial institution’s understanding of how the third parties identify, monitor and manage the risks related to valuation discriminatory or biased valuations.
• Valuation review function — assess review function for identifying potentially discriminatory or biased valuation results.
• Credit risk review function — assess if the review function appropriately considers potential discrimination or biased valuations
• Training program — assess if the program provides staff with the knowledge and skills to identify and resolve valuation discrimination and bias.

Published information on appraisal bias

The following information has been published since the PAVE task force was implemented and are valuable resources to consult as you gain an understanding of appraisal bias and what protective measures you may want to put in place.