NCUA, federal agencies study next steps in appraisal-bias reform

Credit unions and their regulators are weighing next steps in a federal-agency push to tackle biases in the housing appraisal and valuation process known to discriminate against people of color.

Appraisal processes, from the valuation to the loan-making stage, are rife with race-based biases that favor white-majority neighborhoods and disadvantage minority-majority ones, according to a report published earlier this year. 

That inequity has been labeled a critical barrier to home access among people of color — exacerbating racial wealth gaps and even spurring some minority families to engage in practices like "white-washing," where all signs of prior Black residents are removed to vie for a higher property valuation.

The National Credit Union Administration is working with five other federal agencies to propose quality control standards that safeguard against bias in the home appraisal and valuation process. 

Under rules proposed this month, credit unions will have to adhere to new quality control processes for computer-generated appraisals and changes to when and how financial institutions and consumers can challenge them. 

The moves come as part of the White House's property appraisal and valuation equity, or PAVE, task force, which was organized in 2021 to address racial, ethnic and sex-based biases in the appraisal process.

"The NCUA and other task force agencies work jointly to draft guidance and propose actions that will guarantee a safe and sound financial system and protect consumers," said Shameka Sutton, special assistant to the executive director of the NCUA, in a Wednesday webinar on the federal government's efforts to combat biases in home valuations and increase opportunities for homeownership.

Mortgage loans generally have faltered as the market is caught in the crosshairs of low home inventories and rising interest rates. But credit unions' mortgage momentum has been more resilient, with mortgages for the credit union industry increasing 16.5% to $669.6 billion in the last quarter, according to NCUA data. That beats expectations as rate hikes have raised caution among other underwriters.

Appraisal bias persists across the mortgage industry, though, according to preliminary research from government-regulated secondary mortgage investors Fannie Mae and Freddie Mac this year. 

Fannie used an automated valuation model (AVM) as a benchmark to find that refinance appraisals tend to be undervalued for Black borrowers and overvalued for white borrowers, while Freddie found that appraisals for homebuyer loans are more often below purchase-contract-prices in Black- or Latino-majority areas than white ones. 

The Federal Housing Finance Agency has released the first public statistics on appraisal data that may help credit unions understand how existing biases influence appraisal, added James Wylie, associate director for fair lending at the FHFA, during the NCUA webinar. 

"As part of our role as regulator for Fannie and Freddie, we have access to a tremendous amount of appraisal data," Wylie said, noting that the public appraisal data and analysis is available on its website.

Certain data points indicating racial discrimination in appraisal references had not been challenged during the many steps to secure a mortgage loan, Wylie said.

"The fact that they existed at all in the present day and age was troubling to us and indicated a compliance breakdown," Wylie said. 

The NCUA, along with the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Consumer Financial Protection Bureau have shored up new guidelines on how to use AVMs, which have become popular for offering automated valuations on mortgage securing loans without a bias. 

"Some advanced [AVM] models include an automated selection of comparable properties to remove any human discretion in the selection of cost," Sutton said, noting that AVMs have the potential to automate out biases in appraisals, including by incorporating zip code forecasts that predict future home values and purchasing activity within a given area.

Proposed quality controls for AVMs include safeguards against data manipulation, conflicts of interest and nondiscrimination violations, plus requirements for random sample testing and reviews.

The NCUA will monitor the AVM quality controls for federally insured credit unions and ensure that they are weighed against a credit union's resources and capabilities and the risk and size of the transactions they make, Sutton added.

The public is invited to comment on proposed AVM rulemaking until July 31.

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The task force has also spearheaded an effort to offer new guidelines for financial institutions and other mortgage lenders to consider when home appraisals are challenged in reconsiderations of value (ROVs), which often leave customers at a disadvantage, Sutton said.

Collateral valuations may contain errors that result in both over- and under-valued real estate collateral after failing to list square footage, features or a selection of comparable properties, she said. 

"The latter is stated as the leading indicator for victims of appraisal bias," Sutton said.

The task force draft has proposed guidelines that will help lenders craft ROV policies and flag deficiencies that could initiate an ROV, including discrimination based on race, religion, sex, familial status and other aspects of identity.  

Credit unions can improve the ROV process by offering to provide third-party appraisal reviews and second appraisals or evaluations, as well as by providing more robust information and more streamlined complaint procedures, Sutton said. 

The public may comment on ROV guidance until Aug. 7.