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It's been my experience that credit unions fervently attempt to comply with new and emerging regulations, almost to a fault. Conversely, it has been my experience that credit unions often neglect to document just how much they are doing. So, consider this a gentle nudge about the steps you should be taking to document your appraisal processes.
First, why is this an issue? Because the Biden Administration has made addressing appraisal bias the top priority of its housing reform agenda. In 2021, it created the PAVE Taskforce under the direction of former Congresswoman Fudge turned Secretary of HUD. The working assumption is that appraisal bias is a persistent and ongoing problem in housing which has contributed to a lack of equity in the minority community. Federal regulators have put lenders on notice that they are scrutinizing this area. We are now starting to see a somewhat stringent regulatory framework proposed. For instance, NCUA's webinar on the subject is titled "Combatting Appraisal Bias." As these regulations are proposed, here are some simple things you should consider integrating into your policies and procedures, if you haven't done so already.
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As the CFPB pointed out in this blog, homeowners have the right to request a second opinion which is now referred to as a "Reconsideration of Valuation" (ROV). You should have a formalized process for documenting the criteria you use when determining whether to agree to a second appraisal request.
There are some risks to consider in being too inflexible when it comes to these requests. For instance, Wells Fargo was slapped with a lawsuit after a Black couple was able to demonstrate a $60,000 difference between a valuation performed by appraisers retained by Wells Fargo who knew the couple was Black and a separate appraisal conducted by another bank in which the appraiser did not know the couple's race (Washington v Wells Fargo (MD NC, Jan 25, 2023)). Had Wells Fargo only agreed to the couple's request for a reevaluation, they may have avoided litigation and, at the very least, curtailed damages.
Chances are you already have a detailed framework for assuring appraiser independence. Now you should consider what additional steps you may want to take to ensure that your appraiser will not be accused of bias. Regulators now have a database of appraisals which allows them to look for red flags of bias. In addition, starting 2021 regulators have a list of keywords indicative of potential bias. You can review a list of some of the phrases that Fannie Mae looks for by going to Section B4-1.1-04 of its Selling Guide. Red flag phrases include terms such as "good neighborhood," "pride of ownership," or "poor area."
As explained by the Senior Vice President of Single-Family Collateral Risk Management at Fannie Mae, "the use of the subjective phrases or terms may be evidence of a non-objective valuation process and indicate the possibility of discriminatory bias in determining a property's value."
Is there anything your credit union should be doing to protect itself against appraisal anomalies? In the same blog, it was noted that there is now a free web-based application that enables lenders to spot potential appraisal red flags.
Finally, regulators and policymakers are concerned with more than the potential biases of appraisers. On Thursday, federal regulators, including the NCUA, issued a joint proposed regulation stipulating that mortgage originators who use automated valuation models to make underwriting decisions must adopt and maintain policies and procedures to ensure that automated valuation models adhere to quality control standards designed to ensure a high level of confidence in estimates produced, protect against the manipulation of data, avoid conflict of interest, require random sample testing and reviews and comply with anti-discrimination laws.
While assuming no one would disagree with these goals, it is always dangerous to dress up aspirations as regulatory mandates. Given the increasing use of technology and advanced algorithms to make appraisal determinations, it may well be impossible for any bank or credit union, irrespective of its size or sophistication, to be able to assure itself that all the criteria incorporated by the model won't have the effect of undervaluing property in some subtle way. This is one of the conundrums lenders and regulators must face as artificial intelligence is incorporated into all aspects of the mortgage lending process. Does this mean that regulators intend to discourage the use of increasingly sophisticated and large datasets in the appraisal process? I hope not, but only time will tell.
Henry Meier, Esq. Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at [email protected].
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