Recent actions by regulators indicate a growing concern about fair lending risk, specifically as it pertains to appraisals and valuations used to make credit decisions. Based on the increased interest in this area, banks may want to ensure that their management of fair lending risk includes a detailed look at their valuation process. The focus on this issue kicked off with the creation of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) in 2021, but federal agencies are also taking independent actions. For example, in March 2023, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) filed a Statement of Interest in a case alleging that the appraised value of a black consumer’s home increased by nearly $300,000 after the owners “whitewashed” their home by removing photos of themselves from the home and being absent during the second appraisal. More recently, in July 2024, the U.S. Department of Housing and Urban Development (HUD) announced a lawsuit against an appraiser and a lender, alleging racial bias in the appraisal of another black consumer’s home. In that case, HUD alleges that the appraiser used comparable sales from a nearby majority-minority area rather than those from the predominantly white neighborhood where the property was located. The lender and the appraiser did not revise the appraisal when the consumer challenged the valuation. In July 2023, the agencies proposed guidance on Reconsiderations of Value (ROV) that was finalized in July 2024. This broad guidance will apply to all situations where there may be concerns about the accuracy of an appraisal or valuation, but it specifically emphasizes fair lending concerns. “Prohibited discrimination” is the first item listed in the guidance as a possible cause of deficiencies in valuations. The guidance states that appraisal bias, if not remedied, would be considered a violation of the Equal Credit Opportunity Act (ECOA) and Regulation B. The ROV Guidance also reiterates, as the agencies have asserted in other contexts, that financial institutions are responsible for monitoring the compliance of third parties, including appraisers. The agencies also recently published a final rule on the use of automated valuation models (AVMs) in credit decisions, explicitly requiring that banks ensure that the AVMs they use “comply with applicable nondiscrimination laws.” While the AVM guidance expresses regulator concern about automation and artificial intelligence — another recent focus — it also is targeted at the issue of discrimination in valuations and builds on both the ROV guidance and the lawsuits in which federal agencies are participating. Taken together, these regulator actions demonstrate that bank reviews of appraisals and valuations should be calibrated to detect discriminatory bias, and the lawsuits suggest a few items that may be worth extra scrutiny. One of these is the selection of comparable properties or “comps,” as they are often called by appraisers and lenders. Lawsuits have alleged that the comps selected for an appraisal have reflected the race or ethnicity of the homeowner more than the specifics of the property itself. For banks, the takeaway is that when the selected comps are not the recently sold properties closest to the appraised property, the bank should examine the reason that more distant properties were used. The general trajectory of property values in the area may also be worth a careful look. If area property values have generally increased since the subject property was last sold or appraised, a valuation that shows a smaller increase or a decrease in value as compared to the last Looking at the Big Picture BY JESSICA D. LAMOREUX, JD, Assistant Vice President and Associate General Counsel, Compliance Alliance Fair Lending Concerns on Valuations Utah Banker 8
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