The CFPB recently hosted the first hearing of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council (“ASC”) on appraisal bias. The hearing was led by CFPB Deputy Director Zixta Martinez and ASC Executive Director Jim Park. HUD Secretary Marcia L. Fudge, CFPB Director Rohit Chopra, and FHFA Director Sandra Thompson also participated in the hearing. Panel witnesses included: Dr. Junia Howell, Visiting Assistant Professor of Sociology at the University of Illinois Chicago; Paul and Tenisha Tate-Austin, homeowners from Marin, California; Michael Fratantoni, Senior Vice President of Research and Technology and Chief Economist, the Mortgage Bankers Association; and Craig Steinley, President, the Appraisal Institute.

HUD Secretary Fudge began the hearing by sharing her concern with ongoing bias and discrimination in the housing market. She stated that owning a home should provide a clear path to stability and equity, but many times this is not the case for minority borrowers and homeowners. She also expressed excitement about the Property Appraisal and Valuation Equity (PAVE) task force, which is the first of its kind. She touched on PAVE’s work in researching appraisal bias and working with stakeholders to create streamlined processes for borrowers seeking recourse. Lastly, Secretary Fudge spoke about her own experiences with facing bias in the mortgage industry throughout her homeownership journey.

During the hearing, witnesses explained the impact of appraisal bias and historic discrimination on minority communities and the importance of collecting data to monitor these trends. Dr. Howell explained that through years of studying appraisal bias, she has found homes in majority-white neighborhoods are consistently valued significantly higher than homes in majority-minority neighborhoods, even after controlling for factors such as lot size, crime rates, and access to schools. She also noted that the disparity seems to have increased over the past few years. Dr. Howell emphasized that although these trends are not favorable to the industry, having access to appraisal data puts the industry in a position to identify issues and start to remedy them.

Mr.  Fratantoni agreed with Dr. Howell that the use of publicly available data is essential to efforts to study and quantify the disparities in home valuations. He went on to explain that automated valuation models (AVMs) can be used not only to track and analyze historical valuation data, but to flag and address ongoing disparities. FHFA Director Thompson encouraged the panelists to continue to study publicly available data and send suggestions to the FHFA for building the appraisal dataset and creating tools that would be helpful to industry stakeholders. (See our discussion of the FHFA’s Uniform Appraisal Dataset (UAD).

The panel went on to discuss strategies for increasing diversity and decreasing bias in the home appraisal industry. Executive Director Park and Mr. Steinley remarked on the lack of diversity among appraisers and expressed excitement about the new initiates to address this issue. For example, the Appraisal Institute has created a diversity scholarship that provides funding to traditionally excluded communities and applicants for appraiser training and education. The goal is to remove some of the financial barriers that exist for entering the appraiser industry. Additionally, Mr. Steinley discussed the implementation of the Practical Applications of Real Estate Appraisal (PAREA) training program, designed to provide online training opportunity as a supplement or replacement to the traditional supervisor or apprenticeship model of obtaining the required training hours. The goal of this program is to expand opportunities to those who may be interested in appraiser licensure, but lack access to an in-person network of qualified appraiser supervisors, a challenge that is especially faced by those in rural, tribal, or other underserved areas.

In addition to industry professionals, the witness panel included Mr. and Mrs. Tate-Austin, a Black couple who made headlines when they accused their appraiser of discrimination in undervaluing their home. In 2020, the couple received a surprisingly low appraisal when they sought to refinance their home. After removing all family photos, they asked a white friend to stand in as the homeowner for a second appraisal, which came back almost $500,000 higher than the first. The Tate-Austins discussed this experience, and suggested that regulators step in on behalf of consumers and hold appraisers accountable for discrimination. They also suggested rulemaking that would require lenders and appraisers to provide notice to borrowers about their recourse options if they suspect an issue with their appraisal. Currently, ECOA and Regulation B require borrowers be provided with a copy of their appraisal, but there is no requirement to include information about options for recourse.  HUD plans to increase consumer awareness of the ability to obtain a reconsideration of value in connection with FHA loans, and has issued draft guidance on reconsiderations of value in connection with such loans.

The panelists remarked on the hypothetical implications of using a valuation system not dependent on comparable home purchase sales as a metric for determining the fair value of a listed home. Dr. Howell remarked that the use of sales records only serves to perpetuate the disparities between white and non-white neighborhoods, and that the industry should consider an entirely new framework for valuation. Mr. Fratantoni explained that the use of comparable home sales is a reasonable strategy, but that the information being used must be accurate and free of bias. He noted that using AVMs will produce much more accurate estimates of value because many homes can be compared at once, in contrast to the handful that can be compared by a single appraiser. Additionally, he noted that AVMs can be used as a quality control measure to flag particularly high or low valuations and provide information that can be used in addition to notes made by an appraiser. Mr. Steinley commented on the difficulty of valuing a property, and noted the need for better training and more guidance for appraisers, to decrease the level of variation between how appraisers choose comparable homes. He also agreed with the Tate-Austins that there should be a uniform process for explaining to borrowers how to request a reconsideration of value.

All of the panelists agreed that appraisal bias is harmful to consumers, and that the industry would benefit from rules or guidance for borrowers seeking a reconsideration. The CFPB addressed this issue, stating that responsible lenders will provide borrowers with “clear, actionable information about how to raise concerns about the accuracy of an appraisal.” CFPB rulemaking on this topic does not appear to be imminent, but the CFPB has asserted that “lenders that fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value risk violating federal law.”  However, the CFPB is participating in a joint rulemaking on the use and quality control standards of AVMs. The hearing was recorded and is available on the Bureau’s events archive page. On the event page, the Bureau has requested that public comments on personal or industry experience with appraisal bias be submitted to by February 8, 2023.