Fair lending and appraisal bias remain a continued focus for financial regulators. Creating a strong compliance framework in this area is paramount for mortgage lenders. This year, a national mortgage lender settlement in an appraisal bias lawsuit and the Federal Financial Institutions Examination Council’s (FFIEC) publication of an examination framework for valuation bias provide actionable guidance for lenders as they develop internal controls to prevent, identify, and address appraisal bias claims.

The FFIEC issued a statement in February 2024 on Examination Principles Related to Valuation Discrimination and Bias in Residential Lending, outlining how institutions will be examined in compliance examinations and safety and soundness examinations when it comes to appraisal bias. Mortgage lenders can utilize principles from the FFIEC’s compliance framework to develop best practices as further discussed below.

Moreover, in March 2024, national mortgage lender loanDepot settled an appraisal bias lawsuit filed with the U.S. District Court for the District of Maryland (“Settlement”). The DOJ and CFPB had filed a statement of interest in the case asserting, among other things, that a mortgage lender violates both the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) if it relies on an appraisal that it knows or should know to be discriminatory. LoanDepot agreed to enhance its practices around reconsideration of value (ROV) and internal compliance controls. These requirements can be instructive for mortgage lenders looking to create a compliance framework in this area. In addition to having a fair lending policy that specifically prohibits appraisal discrimination, the settlement terms require: (1) establishing reconsideration of value (ROV) practices and policies; (2) internal review of appraisals for indicia of discrimination; (3) regular fair lending and ROV training for credit, valuation and customer services staff; (4) statistical analysis of HMDA data for appraisal practices by protected class including ROV outcomes by protected class and data at the individual appraiser level; (5) establishing appraisal standards prohibiting the use of appraisers previously found to have engaged in appraisal bias or flagged for problematic practices in statistical analysis, and requiring in appraisal management company (AMC) contracts that appraisers receive fair housing training and certify they have not been the subject of an adverse bias or discrimination finding.

Though expectations in this area continue to evolve, the FFIEC compliance framework and recent settlement provide a blueprint for mortgage lenders to establish a comprehensive internal compliance framework to prevent, identify, and address appraisal bias issues. Mortgage lenders can mitigate appraisal bias by implementing a compliance management system that includes the following elements:

ROV Process

Lenders should establish a ROV framework that is documented in policies and procedures. It should emphasize clear consumer communication of the right to an ROV, adherence to required timelines in the process, and identification of roles and responsibilities and regular training for key internal stakeholders.

Training

All relevant stakeholders in the organization, including credit, valuation, loan originators, and customer service staff should receive training on fair lending principles and the ROV process.

Appraiser Monitoring And Testing

Lenders should develop testing to ensure that the ROV process is implemented as outlined in its policies and procedures, including an analysis of HMDA data to review whether ROV outcomes are statistically different based on protected class designations. In addition, the organization should establish a process for reviewing, tracking, addressing, monitoring, and handling collateral valuation complaints, including discrimination complaints, across all channels (letters, phone calls, in-person, through regulators, through third party service providers, via email and social media).

Third Party Risk Management And Oversight

Lenders should establish standards for engaging with appraisers and AMCs, including prohibiting future engagement with appraisers that have been flagged during the appraiser monitoring and testing process. Regulators require lenders to have effective processes to manage third party risks, including performing due diligence and monitoring third parties such as AMCs or appraisers for compliance with anti-discrimination laws. In contracting with AMCs, lenders should set clear expectations around the prohibition of appraisal bias, ensure AMCs are requiring appraisers to take state-mandated bias training, and prohibit them from hiring an appraiser that has been found to have engaged an appraisal bias (or even someone that has a pending appraisal bias claim). Lenders should require the AMC to promptly report to the lender any complaints regarding appraisal bias.

Board And Senior Management Engagement

As with an institution’s overall compliance management system framework, documenting the board of directors and senior management’s involvement in a lender’s compliance program and third-party oversight practices related to appraisal bias demonstrates a commitment to advance equity in the appraisal process.