Protecting homeowners from discriminatory home appraisals
March 13, 2023 / Source: CFPB
Homeownership is one of the best paths to building intergenerational wealth, especially within communities historically shut out from fair access to the housing market. For families of all races and income levels to prosper and successfully pursue the American dream of homeownership, home appraisals must be accurate and free of bias.
The CFPB administers and enforces federal consumer financial protection laws like the Equal Credit Opportunity Act (ECOA), which is a landmark civil rights law that protects individuals against discrimination in accessing and using credit. These protections apply to every aspect of a credit transaction with a mortgage lender, including the important step of mortgage lenders relying on home appraisals before approving a loan.
The Department of Justice (DOJ) enforces both ECOA and the Fair Housing Act (FHA), which protects individuals from many forms of discrimination in housing, including discriminatory residential valuations conducted by appraisers and the use of those appraisals by mortgage lenders.
Connolly & Mott v. Lanham et al.
In May 2021, a Black couple living in Baltimore sought to refinance their home to take advantage of the historically low interest rates. The mortgage lender they applied to, loanDepot, conditionally approved the couple’s loan subject to an appraisal by an independent third party: 20/20 Valuations, owned by Shane Lanham.
The couple claims that when Mr. Lanham visited the home for the appraisal, the couple and their children—all of whom are Black—were present, and the home included family photos and other décor making it clear that a Black family lived there. A few days after the appraisal, the family received a call from loanDepot denying the application because the appraisal valued the home at only $472,000.
Some months later, the family applied for a new loan from a new mortgage lender. This time, they explained, they made the difficult decision to “whitewash” their home—replacing family photographs with photographs borrowed from white friends and colleagues, replacing their artwork with stock images featuring white subjects, and having a white colleague stand in for them during the appraisal. Just a few days later, the family learned that their home appraised at $750,000. While they were then able to refinance their loan based on that appraisal, the interest rates at the time were higher than when they first applied.
The family sued loanDepot, 20/20 Valuations, and Mr. Lanham under ECOA, the Fair Housing Act (FHA), and other federal and state civil rights laws. loanDepot is fighting the case by, among other things, suggesting that it can’t be held liable for making a lending decision based on a discriminatory appraisal because the alleged discrimination was committed by a third-party appraiser.
The Statement of Interest filed today by the CFPB and DOJ explains that, to the contrary, mortgage lenders can be liable under the FHA and ECOA for relying on discriminatory appraisals. The law is clear that mortgage lenders cannot take race, sex, or any other prohibited bases into account when evaluating the creditworthiness of an applicant. That means lenders can’t rely on an appraisal if they knew, or should have known, that the appraisal was discriminatory. A contrary result would directly undermine the purpose of the FHA and ECOA to guard against discrimination in housing and access to credit. The Statement of Interest also clarifies the pleading standard for FHA and ECOA claims.
The CFPB and DOJ’s commitment to ensuring fair and accurate appraisals
The CFPB and DOJ are committed to ensuring fair, equitable, and nondiscriminatory access to credit for individuals and communities.
Both agencies are members of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which was created by President Biden to evaluate the causes, extent, and consequences of appraisal bias and establish a transformative set of recommendations to root out racial and ethnic bias in home valuations. PAVE issued its in March 2022, and its member agencies are currently working to implement the commitments in the plan.
In January 2023, the CFPB hosted the first-ever public hearing of the Appraisal Subcommittee (ASC), which oversees regulation of real estate appraisals for federally-related transactions. The hearing, which featured a panel of expert witnesses, focused on the scope and impact of appraisal bias. Based on witness statements and public comments received following the hearing, the ASC will hold additional hearings to continue to its work to address appraisal bias.
Additionally, in February 2023, the CFPB, DOJ, and leaders from across the federal government submitted a joint letter to The Appraisal Foundation (TAF)–the private, nongovernmental organization that sets appraisal standards—expressing concerns about a draft Ethics Rule. The letter urged TAF to revise the rule to include a detailed statement of the federal prohibitions against discrimination. Afterward, TAF announced that it would issue a revised draft in the months ahead.
And most recently, given the growing role of algorithms and artificial intelligence in the financial sector, the CFPB and other federal agencies are developing a rule to minimize the risk of bias in algorithms used to estimate home values.
The CFPB and DOJ are committed to combatting discrimination in appraisals. If you believe a lender discriminated against you, including by using an improper appraisal, you can submit a complaint with the CFPB. You can also report housing discrimination, including discrimination involving appraisals, to DOJ by calling 1-833-591-0291, emailing [email protected], or submitting a report .
Zixta Q. Martinez is the Deputy Director of the CFPB.
Jon Seward is the Housing and Civil Enforcement Section, Civil Rights Division, Principal Deputy Chief of the DoJ.
Seth Frotman is the General Counsel of the CFPB.