On February 12, 2024, the FFIEC on behalf of its member entities, issued a statement related to valuation discrimination and bias for member entities to consider in their consumer compliance and safety and soundness examinations. The statement provides principles for the examination of supervised institutions’ residential property appraisal and evaluation (valuation) practices to mitigate risks that may arise due to potential discrimination or bias in those practices, and to promote credible valuations.
According to the FFIEC, deficiencies in real estate valuations, including those due to valuation discrimination or bias, can lead to increased safety and soundness risks, as well as consumer harm and have an adverse impact on borrowers and their communities. For an institution, the failure of internal controls to identify, monitor, and control valuation discrimination or bias could negatively affect credit decisions and could result in legal and compliance risks.
Examiners assess risk management processes of institutions’ residential lending activity during both consumer compliance and safety and soundness examinations, as applicable. Because both examination disciplines review an institution’s credit functions, including valuation practices, the member entities have provided examination principles tailored for each discipline. These principles focus on the review and assessment of institutions’ practices for identifying, monitoring, and controlling the risk of valuation discrimination or bias.
Consumer Compliance Examination Principles. The member entities’ consumer compliance examination procedures include consideration of whether an institution’s compliance management system is commensurate with the institution’s risk profile. Consistent with the member entities’ risk-focused consumer compliance examination approach, examiners should assess an institution's board and senior management oversight, which includes third-party risk management, and consumer compliance program.
Safety and Soundness Examination Principles. Examiners review institutions’ residential real estate collateral valuation programs as a component of safety and soundness examinations. The examination process should consider an institution’s consumer protection issues, risk assessment, governance, collateral valuation program, third-party risk management, valuation review function, credit risk review function, and training program.
The FFIEC clarified that the statement of principles should not be interpreted as new guidance to supervised institutions nor an increased focus on supervised institutions’ appraisal practices but to provide transparency into the examination process.
The full statement can be found here.