Appraisal bias has been coined as another term for illegal discrimination within the property valuation process. This type of discrimination occurs when protected class factors are considered in the fair market value of the property. Forms of bias against protected class factors, such as race or gender, can significantly impact lending decisions, and may even lead to unfair practices. Unfair lending practices can lead to disparities in access to credit, hinder opportunities for marginalized applicants, and erode the public’s trust in the banking industry. Legal repercussions and reputational damage can follow in the wake of these practices.
The FDIC is working collaboratively with the other federal agencies on the Property Appraisal and Valuation Equity (PAVE) Task Force to address property appraisal bias that negatively affects wealth building opportunities for homeowners and communities of color. To help combat appraisal bias, the FDIC is expanding its consumer protection examination approach to include consideration of appraisal-related matters in their existing fair lending review process. Specifically, this includes enhancing the risk scoping process to evaluate a bank’s compliance management system for appraisals and the prevention of bias.
Examples of Appraisal Bias:
- In real estate appraisals, bias can occur if the appraiser is influenced by factors such as the neighborhood, the race or ethnicity of the residents, or the perceived quality of the schools in the area.
- Other indicators of appraisal bias could include discussions of the neighborhood’s racial and/or ethnic mix, comments about residents’ birthplace in neighborhood descriptions (indicating national origin), references to a common language spoken in the area, mentions of area businesses and amenities geared towards specific groups, and/or attributing rising housing prices to gentrification.
How Banks Can Avoid Appraisal Bias:
- Ensure all bank personnel involved in the appraisal process have undergone training to recognize and mitigate bias.
- Establish clear policies and procedures, and clearly relay the criteria for evaluating creditworthiness, collateral, and other relevant factors (objective and standardized criteria).
- Incorporate controls into lending processes to identify and prevent appraisal bias.
- Monitor and audit the appraisal process for fairness and accuracy.
- Require outside appraisers and appraisal management companies to provide evidence of their commitment and training around avoiding appraisal bias.
- Consider adding anti-bias language to all appraisal reports that are provided to applicants and provide a means for applicants to contact the bank to report any concerns or complaints.
- Diversify decision-making teams or committees to bring in varied perspectives.
- Review Reconsideration of Value (ROV) requests to identify possible appraisal bias as the reason for the request and look for whether the ROVs were accepted (or not) and in what areas, as well as differences from the original appraised value when an ROV is performed.
- Perform appraisal-related statistical analysis on mortgage loan files using HMDA data. Differentiate the review and analysis by loan purpose (such as purchases and refinancings). For purchases, determine if there are disparities based upon a prohibited factor where the appraised value is less than the contract price. For refinances, review situations where both AVMs and human-performed appraisals were performed on the same property and look for any differences in valuation. If any are identified, determine the reason for the difference as well as where the property is located.