The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) have filed a Statement of Interest regarding the application of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) to a lender that allegedly denied a loan to the plaintiffs based on a home appraisal alleged to be discriminatory.
In Connolly, et al. v. Lanham, et al., a lawsuit currently pending in the U.S. District Court for the District of Maryland, the plaintiffs sought to refinance their home loan with the defendant lender. They allege that the appraiser hired by the lender significantly undervalued their home at $472,000 based on their race. They also allege that despite having told the lender that the appraisal was discriminatory, the lender denied the loan and, in retaliation, stopped answering or returning their calls once they challenged the appraisal on that basis. The plaintiffs further allege that (1) after they replaced their family photos with photos borrowed from white friends and enlisted a white colleague to be present instead of the plaintiffs when another appraiser came, the second appraiser valued their home at $750,000, and (2) they received a loan from another lender based on the second appraisal but that the interest rate on the loan was higher than the rate they would have received from the defendant lender. The defendants have moved to dismiss the case, and the plaintiffs have opposed the defendants’ motions.
In their Statement of Interest, the CFPB and DOJ address the following three legal issues raised by the lender’s motion to dismiss:
Pleading standard for disparate treatment claims under the FHA and ECOA. The lender has argued that to state a claim of disparate treatment under the FHA or ECOA, the complaint must either (1) allege direct evidence of discriminatory intent, or (2) plead a prima facie case under the McDonnell Douglas burden–shifting test. (McDonnell Douglas is a 1973 U.S. Supreme Court decision that created a three-part burden-shifting test through which a plaintiff alleging employment discrimination under Title VII can prove discriminatory intent.) According to the DOJ and CFPB, a plaintiff alleging intentional discrimination in violation of the FHA or ECOA is only required to plead sufficient facts establishing a plausible allegation of discriminatory intent. The agencies assert that a plaintiff need not offer direct evidence of discriminatory intent at any stage of a lawsuit but can demonstrate discriminatory intent either directly, through direct or circumstantial evidence, or indirectly through the McDonnell Douglas inferential burden-shifting test. They also assert that the McDonnell Douglas test is an evidentiary standard and not a pleading requirement and that the lender is attempting to transpose a summary judgment standard to the motion to dismiss stage.
Lender ECOA/FHA liability. In response to the lender’s “implied” argument that it can only be liable if it took discriminatory actions that were entirely separate from the appraiser’s actions, the DOJ and CFPB assert that a lender violates both the FHA and ECOA if it relies on an appraisal that it knows or should know to be discriminatory. According to the agencies, if a lender relies on a discriminatory appraisal to deny a loan (based on the inference that the insufficiency of the collateral makes the applicant uncreditworthy), the lender has taken a prohibited basis into account in its evaluation of the applicant’s creditworthiness. In response to the lender’s argument that pursuant to the Mortgage Reform and Anti-Predatory Lending Act (Mortgage Reform Act) it could only request that the appraiser reconsider his evaluation and provide an explanation, the agencies assert that the Mortgage Reform Act would have permitted the lender to consider additional property information or correct errors in the appraisal report. The agencies also assert that the lender would also have been permitted to obtain additional appraisals or take action “‘permitted or required by applicable Federal or state statute, regulation, or agency guidance,’ such as not relying on an appraisal that is inaccurate or violates the law.” (citation omitted).
Retaliation claims. Section 3617 of the FHA prohibits retaliation against “any person in the exercise or enjoyment, or on account of his having exercised or enjoyed,…any right granted or protected by section 3603, 3604, 3605, or 3606.” In response to the lender’s argument that for the plaintiffs to state a claim under Section 3617 they must also state a claim for an underlying FHA violation, the CFPB and DOJ assert that claims under Section 3617 are not dependent on the existence of another FHA violation. According to the agencies, the language of Section 3617 explicitly contemplates that a defendant might act unlawfully in response to the exercise or enjoyment of a right that has not been violated.
As noted in the Statement of Interest, the issue of appraisal bias has been identified by the Biden Administration as a priority issue. The Administration has created an Interagency Task Force on Property Appraisal and Valuation Equity, with the CFPB among the participants. In January 2022, the Federal Financial Institutions Examination Council’s (FFIEC) Appraisal Subcommittee issued a report entitled “Identifying Bias and Barriers, Promoting Equity: An Analysis of the USPAP Standards and Appraiser Qualifications Criteria.” In an October 2022 blog post, the CFPB warned mortgage lenders that they risk violating federal law if they “fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value.” In December 2022, the Federal Reserve hosted its annual Fair Lending Interagency Webinar at which appraisal bias was among the topics discussed. In January 2023, the CFPB hosted the first hearing of the FFIEC Appraisal Subcommittee on appraisal bias. In February 2023, the CFPB and other federal agencies with responsibility to enforce the ECOA and/or FHA sent a joint letter to The Appraisal Foundation expressing concerns that the proposed changes to the Uniform Standards of Professional Appraisal Practice do not give sufficient attention to appraisal bias.