Regulators outline policies for challenging property appraisals

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Federal bank regulators have taken another step to address suspected bias in the residential appraisal profession. 

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration and Consumer Financial Protection Bureau have proposed guidelines for how banks and other mortgage lenders should consider challenges to home appraisals. 

The joint guidance, released for public comment on Thursday, gives lenders direction on how to craft policies for initiating an appraisal review process known as a reconsideration of value, or ROV, for collateral valuation. The proposal flags a number of deficiencies that could be used to trigger an ROV, including discrimination on the grounds of race, color, religion, sex, disability, familial status or national origin.

"Deficient collateral valuations can keep individuals, families, and neighborhoods from building wealth through homeownership by potentially preventing homeowners from accessing accumulated equity, preventing prospective buyers from purchasing homes, making it harder for homeowners to sell or refinance their homes, and increasing the risk of default," the joint proposal reads. "Valuations that are not credible may pose risks to the financial condition and operations of a financial institution. Such risks may include loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation."

The proposal is the latest government action to emerge from the White House's property appraisal and valuation equity, or PAVE, task force, which was assembled in 2021 to address potential discriminatory practices that have contributed to racial wealth disparities. Last week, the same agencies proposed guidance on how to deal with automated valuation models. 

On Thursday, regulators also noted that an ROV should be initiated when appraisal reports are compiled using incomplete or inaccurate information, poor valuation models, inaccurate assumptions or conclusions that are "otherwise unreasonable, unsupported, unrealistic, or inappropriate."

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The guidance states that a financial institution can request an ROV based on its own review process or based on information provided by a consumer, loan officer or other lending official. Notably, this process allows for prospective borrowers to request the consideration of other comparable properties not included in the initial appraisal. 

Comparable properties, also known as comps, are the backbone of property valuation. Appraisers are tasked with finding similar properties based on factors such as size, number of rooms and other attributes that have been sold recently in the area immediately surrounding a subject property. 

Appraisers say the mechanisms of this process prevent personal bias from creeping into property valuation. Critics say limiting the use of comps to the immediate proximity of a subject property perpetuates long-standing biases, with the historically majority-minority neighborhoods being permanently disadvantaged compared to their majority-white counterparts.

ROVs are not a new concept — lenders and consumers have long been able to appeal property valuations. But, as the joint proposal notes, there have been questions about when and how these processes can and should be initiated, and how to do so without hindering the independence of appraisers. The concern is that making the process too expansive could pressure appraisers to value properties closer to contract value than they might otherwise.

The proposal notes that the Truth in Lending Act and its implementing statute, Regulation Z, prohibits lenders from compensating, coercing, extorting, bribing or taking other steps to encroach upon an appraiser's independent valuation of a property. But, the proposal notes that the same regulation enshrines the right for lenders to challenge appraisals that include critical errors.

The public will have 60 days to weigh in on the proposal, which will be posted to the Federal Register.